Given the relative illiquidity of real estate, there is huge room to get your property transaction right or wrong. My hope is for all of you to get maximum value whether you’re buying or selling.
There are many variables that determine the current and future value of a property. These include, but are not limited to location, marketing prowess, seasonality, condition, curb appeal, surrounding noise, interest rates, job environment, tax laws, housing laws, and demographic trends.
But all of these variables are derivative variables that leave a lot of wiggle room for price interpretation. A property is only as valuable as what someone is willing to pay. Therefore, I’ve come up with a new property leading indicator that if used properly, could save and make you a lot of money down the road.
Introducing The FS20 Property Indicator
Every real estate buyer by now should be using technology to look for homes online. My favorite platform is Redfin because they have a mission of lowering transaction costs. But they also have the best user interface and the most up-to-date information compared to Zillow in my opinion.
If you plan to buy property, then you have already made a bet that real estate values will go up in your neighborhood. If you think real estate prices are going to go down, then obviously buying is out of the question.
But what is the best indicator that will give you the most confidence to buy property? After giving things much thought, I think it is the FS20 Property Indicator.
The FS20 Property Indicator goes off when a home’s final sales prices is at least 20% higher than the online estimate in the neighborhood you want to buy.
The higher the final sales price in comparison to the online estimate, the stronger the demand. Up to a 20% price differential can account for things such as online data error and not taking into account the proper condition of the home. Further, some homeowners are willing to fudge their home’s features to try and improve their online home estimate.
Although online real estate firms like Redfin and Zillow use their thousands of data points to create property price estimates and forecasts, when a final sales price is at least 20% higher, it is clear Redfin and Zillow have not properly caught up to the real-time demand that is surging ahead.
But for savvy buyers, you can capture this window of opportunity and make offers based on median or average price points for the neighborhood before the new data starts pushing the overall median or average price points higher.
Let’s look at two examples where the FS20 Property Indicator hits.
Example #1: 331 Vicente, SF, CA
331 Vicente is a lovely remodeled, three-bedroom, three-bathroom, 2,400 sqft home in San Francisco’s West Portal district. The home is an easy 5-minute walk to the MUNI station, which will bring you downtown in about 20-25 minutes.
In your property hunt process, it is imperative to always make a calculated forecast on what the house will ultimately sell for and then compare your forecast to the final selling price.
You can’t rely solely on the online estimates since online estimates are often wrong. Instead, you’ve got to rely on your eyes! The closer you can get to guessing regularly the final selling price, the more confidence you will have with your property investing acumen.
Given the neighborhood and high quality of the remodel two years prior to sale, one could make a reasonable assumption that 331 Vicente should trade for about $1,000/sqft, or $2.4 million.
Once you hit $1,000/sqft in San Francisco, you’ve reached the “mass luxury” segment of the residential property market. 10+ years ago, only properties on the north side of the city like Pacific Heights would command $1,000/sqft or more.
The real estate agents were smart and listed the house for $1.995 million ($831/sqft) to attract the largest amount of potential buyers to the property.
If the property sold for between $2.1 million – $2.4 million, the vast majority of observers would see this as a reasonable transaction. Yes, San Francisco real estate is expensive.
Now it’s up to you to take a reasonable guess at what the house ultimately sold for. Got it? You can now scroll below after taking in the kitchen remodel.
The house ended up selling for a whopping $2.9 million! That’s $762,800 or 36% above Redfin’s estimate, and $600,000 higher than a reasonable final guesstimate price. The FS20 Property Indicator is going off!
Despite Redfin’s allegedly sophisticated pricing algorithms, we could simply say Redfin’s estimate in this instance was really bad. However, as I know the San Francisco market well, I believe getting $1,208/sqft on a 3,014 sqft lot with no view is an extraordinarily high price for the West Portal neighborhood (District 4).
The data below from MLS and Compass Brokerage has the average price/sqft at $824 for the West Portal neighborhood (D4).
Below is a chart that highlights where Redfin estimated 331 Vicente at a reasonable $2,137,200 and where it finally sold. At $2,900,000, this is also about $500,000 more or 20% higher than what I would have guessed it would have sold for.
Absent the later discovery of some unusual financial reason that justifies this price, it is clear from this example that the demand for the West Portal neighborhood has ticked up faster than what Redfin and rabid market observers like myself have realized.
Therefore, an enlightened buyer should consider looking in the West Portal neighborhood ASAP for similarly remodeled homes in similar locations close to the average price/sqft of $824 and bid accordingly. A homebuyer could potentially bid up to $1,000 – $1,100/sqft for a similar property knowing that she has a $100 – $200/sqft buffer in case of a decline thanks to 331 Vicente.
The data that comes out from the Multiple Listing Service is always lagging. Hawk-eye buyers have about a 1-2 month window to take advantage of the lagging data before the new data feeds into the system and prices recalibrate.
But even when this $2.9 million price point gets entered, it may not significantly move the needle because it would be just one sale out of perhaps 15 – 20 for the previous quarter.
Therefore, buyers will likely have a 1-4 month window to take advantage and bid with confidence before the computers and people reset the true value of the neighborhood.
Use the MLS data as ammo to offer prices closer to the average, while knowing that the real trend is pushing prices higher!
Example #2: 30 Fanning Way
30 Fanning Way is a quaint two-bedroom, one-bathroom, 1,288 sqft single family home in San Francisco’s Golden Gate Height’s district.
What I like about 30 Fanning Way is that it has views of the ocean. I am a firm believer that homes with ocean views in San Francisco have the greatest pricing upside potential over the next 10+ years.
Besides having an ocean view, the home has an oversized lot of 5,584 sqft, which is slightly more than double the standard 2,500 sqft lot in San Francisco. Unfortunately, at least half the lot is on an unusable hill.
The knocks on the house are that it’s not very big inside and the kitchen and bathroom were probably remodeled 20+ years ago. If your family has more than one kid, living in the house may be tight, especially if you have guests.
Given we know that Golden Gate Heights (District 2) has an average selling price of $932/sqft according to the latest MLS data, we can estimate that 30 Fanning Way is worth about $1.2 million at 1,288 sqft. The condition of the house is average.
But given the oversized lot (not all flat) and views, 30 Fanning Way should trade at a premium. Also, smaller homes tend to trade for higher price/sqft. Therefore, let’s bump up the estimated price per square foot to $1,100, or an 18% premium to the average price/sqft of the district of $932/sqft.
At $1,100/sqft, we can value 30 Fanning Way at $1,416,800. Kind of expensive for only a 1,288 sqft house, but the price sounds about right. Let’s just round up to $1,500,000, or $1,164/sqft. What’s an extra $83,200 between friends?
Now it’s up to you to make an educated guess on this cozy little home. Again, if you are a buyer in the neighborhood, you should not only do these type of calculations but go visit the house in person to make sure your estimates make sense.
Got a list price and final sales price in mind? Time to scroll down to see what happened.
The selling agent decided to price the home at a peculiar $1,168,000 or an attractive $906/sqft, $26/sqft below the average.
Is my $1,500,000 estimate, or $322,000 over its $1,168,000 list price really achievable for a house this size and in this condition?
Well, you can bet your buns of steel it is! The house sold for an incredible $1,855,000, or 59% over asking a month later!
Now let’s take a look at what Redfin had as its estimate for the house. Ah Hah! Redfin estimated the house was worth $1,506,719, or $1,164/sqft, similar to my aggressive estimate.
If the house had sold for $1,506,719, most people in the know would have thought that’s a little high, but within the ballpark. But to sell for $1,855,000, or $1,440/sqft is a new record high for the Golden Gates Heights neighborhood.
The final sales price was 23% higher than the online estimate, therefore, the FS20 Property Indictor has also gone off.
It would have been one thing if the house was completely brand new with the fanciest kitchen and bathrooms, a hot tub, and panoramic ocean views from two or three floors. But the house has none of that.
Within five or 10 years, the new owners will likely spend at least $60,000 to remodel their kitchen and only bathroom.
If you’ve been looking for a home in the Golden Gate Heights neighborhood, you can now feel more confident bidding for any ocean view home in moderate condition for the average of $932/sqft according to MLS.
You can probably comfortably bid up to $1,000/sqft for a similar type of home, knowing you’ve got a $440/sqft buffer thanks to 30 Fanning Way. And if you’re really bullish, perhaps you can go up to $1,100/sqft to match the online estimates.
I definitely wouldn’t pay a similar record high price as 30 Fanning Way because that would defeat the purpose of the FS20 Property Indicator. You always want to buy property knowing you have some type of price buffer or potential to expand in order to create more value.
Each home is different, so it’s really up to you to decide how much you’re willing to risk.
Always Look For Windows Of Opportunity
You might still be skeptical about online property estimates as am I, but over time, they get better because of more data. Both Zillow and Redfin were founded in 2004, so they’ve had plenty of time to build their databases and improve their pricing algorithms. As publicly traded companies, they must constantly optimize for their shareholders.
Disregarding online property price estimates today is like ignoring Waze or your Google GPS navigation because you think you know a quicker route when driving. You usually end up wrong and wasting unnecessary time.
The large majority of online property estimates are within +/- 10% of the real market estimate. This is why if you follow the FS20 Property Indicator, there leaves little doubt there’s a major uptick in demand and potentially an opportunity to buy a comparable property at a more reasonable price.
For less hot markets such as non-coastal areas, perhaps using an FS10 Property Indicator of 10% instead would be more fitting. However, I wouldn’t recommend going below 10% if you want to gain maximum confidence on a property purchase.
Often times, the profit is made on the purchase and not on the sale. Once you combine FS20 with a strong downpayment, a well-crafted property love letter, and a reputable lender that’s got your back, you’ll likely do much better than those who aren’t as prepared.
Be super vigilant when buying property, especially with debt. A house will likely be your most expensive purchase in your lifetime. It’s worth being extremely meticulous with your analysis.
Check out real estate crowdfunding: If you don’t have the desire or ability to buy physical property, take a look at Fundrise. They are one of the leading real estate crowdfunding platforms open to all investors. You can invest as little as $500 in one of their many eREITs or commercial property investments to gain more surgical real estate exposure around the country. I’ve personally invested $810,000 in real estate crowdfunding to diversify my investments away from SF, Honolulu, and Lake Tahoe property.