How do you determine the true current value of an apartment??

You are about to make what is probably the single largest cash investment of your life (so far) and you're admitting that:
1. You dont have a clue if you're paying the right price
2. The only evidence you have is that an individual who WORKS FOT THE SELLER told you it's a good deal

Are you f'n kidding?

Now that I'm done laughing, I can give you some simple advice:
1. Do NOT buy that apartment (yet)
2. Sign up for Streeteasy and start checking RECENT comparable sales prices (closed prices), for apartments as close to the one you are considering in terms of area, size, building, condition, features, etc
3. Once you are a veritable EXPERT in what those kinds of place are NOW (last few months) selling for, make an offer that you feel is competitive, taking into account that we are in a DEPRECIATING market.

Good luck.

dk370, many people on this discussion board believe that the current value of Manhattan apartments is approximately in line with their 2004 values -- and likely to fall quite a lot more.

Run, don't walk, away!

[Also, if you get a Streeteasy membership you can see sales price information on apartments that sold in the building, going quite a lot of years back.]

be nice w34---the bulk of re buyers have always operated similarly--given the 06 comp it seems you have bid too high--and that you are all cash has huge value in this market--i would strongly reconsider--good deals are coming at 04-05 prices--and a better renovated, higher floor should have sold for a good deal more (certainly in 06 at or near the peak of the market) than you are considering paying right now

and dont worry about your broker--you are an all cash buyer in a market where there are few buyers period--you are a gem--this broker should show you as many apts as you need to see to be comfortable with what you are paying--and use streeteasy extensively to advocate for yourself--its easy

1. The fact that the BROKER felt it was a good deal is irrelevant, and may in fact be a bad sign revealing you to be a naive buyer. Just like some other professions , they are only lying when you can see their lips moving. A good deal for a broker is any deal that makes it through closing. It has NOTHING to do with the price you've agreed to pay.

2. See the seller's reaction when you try to retract your offer based on the comps ( which you should have seen prior to making your offer). If you haven't given a large deposit there may be a chance of revising the deal.

3. How many comparable places have you seen? If you've fallen head over heels in love with this place, all hope of a wise decision is lost.

4. If this is a co-op you may still hope for board rejection.

But NYC10023 who bought in 2006 posted that the recent appraisal on her apartment came in 20% ABOVE her 2006 price, not lower.

What West34 said!

You are making the largest financial decision of your life. Don't you think you should do some homework and thoroughly educate yourself in your market niche (for example, 1-bdrm "jr. fours" between 59th St and 90th St east of Third Avenue of at least 750 sq/ft in doorman building). How can you have made bids without knowing what the place was worth? Comps in the building are crucial and streeteasy makes that all visible for $10/mo. Comps in the area are very helpful too and streeteasy searches can be key.

Brokers are among the least reliable sources of information. Their profession is replete with conflicts of interest. And while you probably don't realize this, "your broker" technically works for the seller and does not owe you a fiduciary duty. They can be of value, but not in helping you know if your deal is a good one. That is your job.

Based on your post, I just don't think you are ready to bid on places, let alone enter into contract on one. There's a lot more work you should do first.

I have a bridge for sale - interested? I promise - it is a really good deal.

don't listen to ph41.... she has a vested interest in not seeing 2001 prices.. me I have a vested interest in seeing 2001 prices.. so don't listen to me either...

your broker couldn't give a unicorn poop if it went to 1991, 1981 or 1881 prices... she NEEDS MONEY NOW!!!!!! Did she also mention how well hung you are?

DK370,

I'm working off comps somewhere between 2004 and 2005 prices.That said, there are lots of extenuating circumstances. What are other similar apt going for in the immediate neighborhood where you're buying? Are there any other comps from this particular building? Has this unit been renovated where the others have not? Is there a difference in view?

Good luck in your search!

dk370,
put you wallet away and get out your computer. luck is the residue of design. educate yourself first and rely on your own judgement. As for your the broker....
The difference between bullshit and a lie is significant. Bullshit is much worse and that's what you got.
With a lie, the teller is aware of the 'truth' and is attempting to mislead you but, ultimatly the truth is a known quantity. With bullshit the teller does not care if the bullshit is true or not, it's just bullshit aimed at manipulating you.
Liars I can tolerate, bullshiters must be vanquished!

falcogold1: there is an irony in explaining to someone what bullshit is by lifting someone else's thoughts on the subject and posting them as your own: http://press.princeton.edu/titles/7929.html

Thank you all for your input. Although a bit on the sarcastic side at times, all your points were well taken.
I am a member on streeteasy, I have researched comparables, and seen several other places.
Aside from my own judgment, and the very subjective broker input, how else can I determine the apartment value.
Is an appraisal a way of doing this? If so, how would I go about getting an accurate one?
dk370

Use the cap rate method. This is an absolute valuation method rather than using comps. The problem with comps is they don't tell you if the entire mkt is over or under valued. Figure out what the apt would rent for, multiply this number times 12 to get an annual rent number. Then divide this number by your mortgage rate - inflation rate. This will give u an upper bound for what the apartment is worth. Annual Rent / (mortgage rate - inf rate) = apt value.

Valuation based on any single metric is guaranteed to be flawed. A metric like cap rate is extremely useful in determining intrinsic value, and might approximate market value at particular points in time but are cap rates driving the market right now? Maybe Yes, maybe no... You'll need a varied tool belt so you can look at many metrics and be flexible based on which buyers are driving the market and how they come up with their decision.

downtownsnob, your simple valuation tool does not work at all. How would you account for tax and maintenance in your cap rate?

Re: downtownsnob, your simple valuation tool does not work at all. How would you account for tax and maintenance in your cap rate?

I was thinking the same thing.

As an investor, my NET INCOME is the annual rent minus the maint (which includes taxes). So if I can rent out my studio for $1500/mo, but the maint is $600, my annual net income is $900 x 12 = $10,800 and assuming a cap rate of 5% (seems reasonable for now), that means the property is now "worth" $216,000.

If I dont factor in the maint, then I get $360,000, which is clearly very wrong.

How about this:

Apartment Value =

+ Annual Rent
- maintenance
- taxes
- other annual fees to coop/condo (e.g. rental fee)
- utilities owner pays for
- other owner expenses
= Net Income
/ (real interest rate = actual rate less inflation)
= VALUE

Now kids, everyone do it for your own place and lets compare results to recent comps!

I just did the calculation for my apartment, and the value ends up 4-7% under latest comps. Very interesting!

I just did the calculation for my apartment, and the value ends up 4-7% under latest comps. Very interesting!
but does this work historically?

"West34

Apartment Value =

+ Annual Rent
- maintenance
- taxes
- other annual fees to coop/condo (e.g. rental fee)
- utilities owner pays for
- other owner expenses
= Net Income
/ (real interest rate = actual rate less inflation)
= VALUE "

Sorry West34 but your approach is just way too logical. ;)

well, 2 years ago the comps would have been 25-30% higher to buy and 20-25% higher to rent, so the differential would have been higher, more like 10-15% under the "value" with a 5% cap rate.

Yeah, no kidding -- And I forget the following factors at the end:

"Irrational Exhuberance Inflator Factor" = 1.25 (only for sellers)
"Bearish Deflator Factor" = .75 (only for buyers )

But it's pretty interesting if you play around with the numbers you see how sensitive the valuation becomes to small differences in the cap rate --

at 5% my place is worth $216,000
at 4% it's worth $270,000 (current comps!)
at 3% it's worth $360,000

So the question is what is the real return/cap rate right now? So many arguments here have been over whether we will go back to mid 1990s levels (10%+ I think) or hang around 5%.....?????

well, 2 years ago the comps would have been 25-30% higher to buy and 20-25% higher to rent, so the differential would have been higher, more like 10-15% under the "value" with a 5% cap rate.

Speaks to my argument, This cap rate stuff is just a model that speaks to one's idea of intrinsic value..akin to fundamental analysis. To suggest this is what market value should be is..well "arrogant".

An apartment is worth what someone will pay for it.

To properly see what someone in the market would pay for it, you must remove yourself completely from the buying equation - see Werner Heisenberg for more information on not tainting the experiment by being involved yourself.

Let the market do its work, another buyer will come in at some price, and then you bid $1 more, knowing you got it for exactly what it was worth plus a dollar to win it.

In mortgage backed some bonds defy easy comparison, traders rely on no less than four different methods of valuation with regards to one specific type. You have to be flexible.

dk370:

If I were you, the first thing I would do is read kylewest's first post in the "My Changing Impression of Sellers" thread. That was probably the best advice that anyone could ever hope to receive.

By all means, get smart on SE. It can never hurt to know the comps, and it can never hurt to be as intelligent as possible on "true current value".

But if you truly love that apartment you mentioned, then by all means buy it. Maybe it's worth more to you than to anybody else. In that case, maybe it's worth more to you than 2003, 2004, 2006 or even 2007 prices. Call everyone insane, or the very opposite. But make your own decision, not other people's.

Re: But if you truly love that apartment you mentioned, then by all means buy it. Maybe it's worth more to you than to anybody else.

In other words, just throw your money away. What the hell, it's only $25,000, $50,000, $100,000. Drop in the bucket, pocket change. Who cares if you can have a bigger, better place for the same money next year. Who cares if you lose your 20% down payment in one year and end up under water. Go head, follow their advice. In fact, asking how to value an apartment is really dumb. Use the other half of your brain and just do what feels right. Yup, that's the way.

AVM and West34 are both sort of right. Look, if you have a short horizon, then an apt's value in 1, 2, 4 or 6 years may matter a lot to you. If you plan on staying a long while, then the value of the place a year or two into it is pretty irrelevant since you aren't selling. If you buy today and it is worth $50K less next year--or even $100K, does it really matter if you can afford it and will be there a long time? For having spent the money, you'll have the whole RE thing behind you, you'll be settled into your true "home", and you'll have been enjoying it rather than waiting and reading the omens for when the true bottom of the market arrives.

On the other hand, if you really don't have a sense of your job stability, your future space needs, your family situation, AND you cannot financially handle being underwater in the next 5 years or so, then now is an AWFUL time to buy for you. You should rent. Yes, interest rates may tick upward and you may somehow not realize the bottom is passing you, but that changes nothing. If you can't tolerate the risk of buying now, you have no business buying.

But truly, for many people $25-$100K paper loss doesn't matter if they aren't selling. And could I get more later if I wait? Probably. So that's the balance. Wait and be rewarded with more space later. Or buy now and not have to wait, rent, store, look, shop, bid, renovate, etc in the future. For me, as I'm sure with many others, my life is stable, my family needs are known, I have space outside the city and am perfectly happy with what I can afford now inside the city, I have a solid plan for retirements and the cost of what I bought fits comfortably within that plan.

I've said before and I'll repeat: you don't get any extra credit for dying with the most money possible. The trick is to find a sane balance while you are alive. Timing your life according to markets so you can die with the greatest net worth is not how I measure the quality of my life. Rather than chew my nails as I bide time in a rental I never feel at home in while I obsess on the RE market looking for the bottom, I developed a plan, saw what I could comfortably afford, found a fantastic place that thrills me every day I get to live in it, and have put all that waiting behind me. My life isn't on hold waiting for the RE market.

Get caught up in that bear/bull thing and you start to ignore what economists conveniently refer to as "externalities"--here, things such as what is right for YOU in your situation and needs and wants, and preferences.

dk... this is a HUGE investment and it's clear you have no clue ( i say that lovingly). there is no magic formula and if you ask a group of strangers on a blog that proves you should wait.
take everyone's advise and do your homework and please, please, please do not listen to a broker

Do you get a sense someone else might buy it soon? If not, drop your price 15%, you have no competition and let them counter but don't go more than 10% less than what you had on the table now.

"An apartment is worth what someone will pay for it."

That was true for the last ten years. Not now.
"An apartment is worth what someone will and CAN pay for it."

Because while so many bulls think it's "rent value doesn't matter," banks who are asking 40% + down payments do think it matters.

West34. Regarding caprate (and I apologize that I have not read all the various discussions on this), shouldn't it be basically the risk-free rate (i.e., the long term US treasury rate real rate plus inflation) PLUS the risk premium for NYC real estate. Now, if you accept long term rates are 4% currently, then it seems to me that 5% is the MINIMUM caprate for NYC real estate (i.e., 1% risk premium). But, since this is all rule of thumb anyway, I think a more reasonable caprate would be say 7 or 8 % based on say a risk premium of 2.5%, plus treasury rate of say 5.5% (given the money printing on, it isn't unreasonable to think that long term rates will go higher....i know that the "market" is reflecting all info as of today, but in reality a lot of fed games are going on, so I don't feel compelled to accept today's manipulated rates)..

I stand to be corrected....but I don't see why so many people on here seem to use 5% as the upper end cap rate.

To be clear, I meant to say that the long term US treasury rate includes both the risk free real rate and assumed inflation....so the only thing to add on top for the cap rate is the nyc real estate risk premium.

dk370, from what you posted, your offer seems to be too high. Same line, higher floor, and renovated (it sounds like you're thinking about doing some work on the unit you're considering) should trade MUCH HIGHER in 2006 than the unit you're looking at today. Just my opinion given limited info, but it sounds like your bid is WAAAY too high. Further, if a similar unit traded in 2005 for $131K less, you CAN'T pay what you're thinking of paying in this kind of market as an all-cash buyer. I hope I didn't burst your excitement about buying this apartment too much, but I think that's what you've done to yourself right now. You're "excited" about the apartment and purchase, and everyone around you is pushing you to do it. But everyone around you has a vested interest in you paying too high a price. I agree with other comments that look at comparables and price per square foot numbers. I'm guessing, but on a price per sq. ft. basis, your bid will seem ridiculously high for the current market. People are paying less than the last sale per sq. ft., NOT MORE. Don't rush to give away your money. It's not the last apartment out there, and if you walk away, the seller will keep calling you. I just hate to see people get picked off in this market and have bad feelings every time they walk into their home. Good luck!