The FS20 property indicator is a way to help you buy a house with more confidence. 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. In fact, Zillow doesn’t even believe in its online estimates, which is why it shut down its iBuying business.
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.
Estimate What The Home Sold For
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.
Related: How To Take Advantage Of Bad Online Real Estate Estimates
Indicator For Growing Real Estate Demand
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. The buyer should find 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. 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 algorithms and people reset the true value of the neighborhood.
Use the MLS data as ammo to offer prices closer to the average. This is despite 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. This is 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.
Time To Guess The Final Selling Price
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.
Final Price Analysis For FS20 Property Indicator
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 $10 in one of their many eREITs or commercial property investments to gain more surgical real estate exposure around the country.
If you’re an accredited investor, check out CrowdStreet. CrowdStreet enables individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I’ve personally invested $810,000 in real estate crowdfunding to diversify my investments away from SF, Honolulu, and Lake Tahoe property. Diversifying my real estate investments and earning income passively is wonderful now that I’m a father of two young kids.
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Redfin has always had better estimates because it actually sells homes. Zillow is an advertising company that happens to show pictures of homes with numbers next to them. Making it easy to see your fantasy football priced home and pretend it’s worth that much is a popular game nowadays.
“Look how much my home is worth!!!”
I like the FS20 signal concept. 10% overage gets you past much of the data variance, 15% is on-track and 20% would certainly be significant in a targeted area. Although I’d probably describe it in reverse i.e. When Redfin & Company are underpricing the actual market by 20%, you should strongly consider buying.
Have you thought about tying FS20 into the Redfin API?
Financial Samurai says
“When Redfin & Company are underpricing the actual market by 20%, you should strongly consider buying.”
This is exactly what the FS20 Property Signal is suggesting.
Good point on Redfin being more accurate b/c they actually allow users to buy and sell homes.
Hmmm…does this work for vacation properties (say at a ski resort)?
The FS20 Property Indicator definitely works. I used the same logic to purchase properties in Seattle back in 2012/13/14 when I was witnessing a similar run up in prices. Now those homes are worth MUCH more and their values have greatly surpassed the original sale prices.
Even better, all of these homes are rentals and I will continue to cash flow even after a 20% drop in rental value.
For the average Joe… Real estate is the best asset class to invest in BY FAR (…although it becomes difficult to scale beyond 10 properties).
Tim O says
$1000+ sq/ft with a postage stamp lot…just damn!
In the metro Atlanta suburbs, $200 will get you a house much nicer and larger with a .50 ac or larger lot (than the two listed above). There are a some close in areas where it hits $400 and very few that go above that (Buckhead/Paces Ferry are the most expensive) – even lake/river lots typically are not more than $300 (depending on which lake/river) and most of the differential is the land cost.
Granted the ATL isn’t SF, but I can retire a LOT sooner (and did) by working/living here where everything is more reasonable. Our tech and film scenes have been doing pretty well the last 10 years too!
I’ve visited SF many times for work and leisure, it is a great city and I was offered a job in Palo Alto in ’97, but even the least expensive homes for a family of 4 within a 30 min drive were a stretch for me. The numbers simply didn’t add up so I passed on the offer. Most of those I knew in Silicon Valley and SF have long since moved. Their money bucket was full enough to provide them a much better lifestyle elsewhere. I don’t know how ‘normal’ people survive there…
Nice write up Sam! I’m also a SF resident and believe I’m quite in tune to the market. While reading this article I blocked my hand to not see the final sales price to see how calibrated I was on the market. I was off by $300K on final sales price on Vicente and $100K off on Fanning. Full disclosure, I actually toured the Vicente property. It’s a great remodel with with higher-end finishes, the final sales price did catch me by surprise. The kicker here is that it will appraise for that amount.
Curious on your take on this property. I have inside information on this one.
Financial Samurai says
On your property you linked, it certainly seems like better value than the two in my post.
But the owner may want to update the kitchen and two bathrooms. And I’m not a fan of living across / near Laguna Honda Blvd with a family. No ocean views either, which would be my main reason for living out there. Total personal preference as I want to buy property with an X factor.
What is this property’s X factor?
It does seem that San Francisco prices have become unrealistic. It is the considered the 2nd most expensive real estate market in the country (right after Manhattan, a different kettle of fish altogether). A lot of this is due to the big tech companies there but if they start economizing, especially by moving some of their operations elsewhere, this could quickly lead to a disaster. In some ways, real estate prices there are something of a disaster already.
Generally, this could indicate a bubble.
Just as you don’t want to buy a lot of stock when the market is running extremely high, you don’t want to invest in a real estate market that is in a bubble. Then again, perhaps it is not in a bubble. Yet as the most expensive real estate in the country (after Manhattan!) it is not something I would be willing to risk unless, maybe, I had to live there to make a lot of money (like at one of those big tech companies).
Yes, I know it is a beautiful city with incredible views and a wonderful climate . . . even so, I’d wait and look for other opportunities elsewhere at the present time.
Financial Samurai says
SF could definitely be in a bubble, no doubt. However, after a 11.5% decline in median prices in 2018, at least a decent amount of the air was let out. Now interest rates have collapsed and there will be ~10,000 new millionaires who get to liquify their tech holdings starting in November 2019 after several IPOs.
With college graduates making $100K, and 30-year-old couples making $400K-$500K looking to buy $1.5M-$2M median priced homes, it’s hard to see housing prices collapse.
I’ve been to so many of the major cities around the world, and SF is BY FAR one of the cheapest cities for real estate based on income levels. Once your city faces an international demand curve, it’s game over for those who’ve been waiting on the sidelines.
See: The Cheapest International City In The World: San Francisco
Yeah I don’t believe San Francisco real estate is in a bubble. A bubble implies that it’s overvalued beyond its intrinsic value. And as Sam said, SF is very cheap compared on the global stage of world class cities. Remember, SF is small (< 1 million residents), landlocked and almost totally built out. And the forces of the tech industry are huge, and will not be going away anytime soon. Sure, other American cities are getting more tech industry, but if you look at the commercial leases in the city, almost all the large office projects are already pre leased by tech firms. S.F. is a magnate for high paying jobs, and companies are, and can afford, to offer the high salaries for specific positions here in the city.
The other thing to keep in mind is that there are usually many more people seeking to buy than to sell in the city. Like Manhattan, London, etc., wealthy people want to secure their home in the city, and will usually trade up or stay put. Unlike boom/bust towns, not a lot of homeowners bolted out of S.F., even during the Great Recession. Sure, home prices fluctuate and will go up/down (especially after the extreme run up in RE prices from 2012). But even over the mid term, SF real estate is pretty blue chip investment. It helps to buy smart (like some of the things Sam mentioned like views, neighborhoods, etc.) But as I recently told a friend of mine, even if you brought the worse deal at the worse time in 2007, you’d still be ahead by now.
Lukas Henne says
Zillow is absolutely horrible and should never be used for any major financial decisions. Their estimate for my condo is $545,000 with an estimated range of $425,000-$812,000 when the identical unit next door just sold for $330,000. How is any of that useful information? Redfin is almost right on the dot at a $335,195 estimate.
Financial Samurai says
Pretty bad. And hopefully, Zillow will take the sale and recalibrate their Zestimates. I have found Redfin to be consistently better than Zillow with their estimates.
See and article I wrote years ago about Zillow: https://www.financialsamurai.com/you-cant-trust-zillow-and-its-estimates/
Best to also check the property record and name of the owner – try to figure out where they lived before. Out of town buyers tend to over bid. Local move-ups more savvy.
Sport of Money says
Sam – a couple of thoughts on this:
(1) I don’t have a lot of experience using Redfin but I constantly use Zillow. Zillow estimates are probably +/- 20% for a variety of reasons. Therefore, I think it is hard to apply your FS20 Property Indicator based on Zillow pricing. They are off to begin with. In your case, you adjust pricing using your own knowledge of the market and then compare that to the final sales price.
(2) I wouldn’t apply PS20 to only one property. I’ve come across properties which transact at unbelievable prices. But most of those are not indicative of the market and are one offs (maybe the renovation is top notch, maybe there is a view which cannot be replicated, maybe a foreign buyer who relied too heavily on a broker without performing due diligence, etc). One transaction does not make a market. Therefore, I would caution putting too much stock on one transaction.
I would look at average days on market for listings (getting shorter), sale price as a percentage of listing pricing (over 100%), and how many people show up to open houses (more and more) as indicators of an upward trending real estate market.
Financial Samurai says
It is exactly b/c you think that Zillow estimates are off by +/- 20% which is why I use the FS20. Once you get a sale 20% above an online estimate, it because a strong indicator that demand is present.
The other indicators are fine, and should be taken into consideration by default. But it is the actual sale of the property that is the greatest indicator of value.
what is your take on someone who is looking to save up in a much cheaper state by taking advantage of geo-arbitrage and then eventually moving to a “desirable” more expensive state later on in life?
Financial Samurai says
Sure. Check out: https://www.financialsamurai.com/real-estate-investing-rule-rent-luxury-buy-utility/
I literally checked the calendar after reading this to make sure you didn’t get me again with an April fools post!
Theres only one thing crazier than paying $3M for a house that would sell for maybe, $200k, in most parts of the country…., And that is coming to the conclusion that we should all go out and buy one for ourselves…!
Just Insane prices.
Serious question, isn’t there a “rule” that says housing prices shouldn’t exceed 28% of an areas median income….?
At $3M, assuming a 5% mortgage rate, wouldn’t this require the median income to be something like $500K…?
Assuming that San Fran’s median income is less than this, shouldn’t your indicator be telling us to not touch real estate with a 10 foot pole….?
Financial Samurai says
What are your thoughts on why someone wouldn’t make at least $500,000-$1 million a year if they buy a $3 million house?
Sounds pretty logical to me. Why not focus on the FS20 property indicator instead of getting caught up about the absolute dollar value of homes Supported by income?
Where do you live and what is the cost of your home?
I have no problem with someone that makes $500K-$1M living in a $3M house; but apparently in San Fran (despite how much they pay) they actually live in the equivalent of a $200K house…! (e.g. drywall is still drywall)
So I guess I’m just wondering if there are enough naive 1-percenters around to keep the house of cards going…
I live on the other coast….in a $700K home that would apparently sell for about $27M in San Fran….
Financial Samurai says
Very cool. But it’s possible SF is at least 10X nicer than your city. So it probably evens out.
You have a link to an example of your $700K/$27M house? Thx!
To make a $200K house worth $3M, I guess San Fran would need to be something like 15X nicer than other places in the country….
Let’s review to see if this is possible,
On the positive side, San Fran has some high paying jobs….(But do they pay enough more to offset a 15X differential?)
On the negative side, San Fran has the highest taxes in the country, very liberal policies on creating magnets for homeless, etc…, and probably most importantly, this is where Nancy Pelosi hangs her broom….
So on balance, IMHO, your FS20 Property Indicator needs a little tweaking….
While I may agree with you 100% on the Pelosi/broom comment, I would never use that emotional feeling to influence a rational business decision. The data has been shown that “in general” SF pricing is in line with what local market will bear. What a market somewhere else will bear is irrelevant. Your $200k comparison to somewhere else is meaningless when considering value in SF.
The same analogy can be made when considering long term stock investments. The companies that are “expensive” generally can be the best long term investments. They are expensive because they are good companies with good models and execution.
For example: If your research has convinced you that Amazon for example has a good sustainable model – buy it and hold for long time. You will be rewarded. Who cares if one could have bought it last year for 25% less or 5 years ago for 90% less. That is irrelevant noise.
My take on SF – Income inequality will continue and rich will get richer. The rich apparently want to be in SF. No reason to fight this phenomena – use it for your personal benefit. In other words, cater to the rich.
I think that way of thinking is what this Personal finance blog is all about. Use the data the world provides us for our own benefit.
You wrote “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.”
Well, I disagree, you can be of the opinion that real estate prices are going to go down, but still perfectly reasonably prefer to buy. It happens when expected cash flows (mainly rents and inputed rents) minus price drop is higher than the best (risk adjusted) ROI you can get elsewhere.
Financial Samurai says
Sure, it’s up to the individual if they want to buy something, and often times with leverage and lose money. I want to be selling to such individuals all day long.
Wow Sam. This is why I would never venture on individual real estate purchases for investment on my own because I am way out of my league.
Cool to get a peek inside your thought process.
I do think there are somethings that Zillow does not appropriately account for. My home is always estimated way below market (in my head at least) because I don’t think it adequately prices in some unique features like the 50 ft and 10 ft waterfall in my backyard (plus all the extensive decking I put in since purchasing,etc). I would think a potential buyer would place a premium for something unique like this and I would hope it would far exceed the FS20 #.
I’ve noticed that Redfin and Zillow often differ wildly. In many cases that I’ve observed, Zillow is 20% higher, and is almost always higher than Redfin. If anyone has seen a comparison between the two over a larger data set, please post the link.
Financial Samurai says
Every property is a unique asset. Luckily, it’s easy to check on Zillow and redfin and elsewhere about the property’s estimated value.
Then you can average the estimates or pick one two of the most reasonable after having visited the house, and then deploy FS20.
Anne M says
Thanks for the post, Sam. I love your thoughts on real estate. I have had four real estate transactions last year (3 purchases, 1 sale) and each time I have gotten more and more frugal. I’d love transaction fees to get more competitive and I think there is so much good information that if you are brave and willing to do the leg work, you can save thousands acting as your own broker. I estimate we have saved roughly 80K-100K in fees over 4 years, essentially making the 3rd purchase possible due to the funds I had available. I’m not planning any real estate transactions in the near future but want your community to know there are dollars to be saved/made here.
Excellent analysis! And also highly actionable too. The online estimates are not perfect, but they have definitely gotten better over the past 10 years. There’s lots of room for error under 20%, but I agree, once you get over 20% it is a strong by signal, momentum signal, or irrational exuberance signal.
The purchase price of a comparable property is really the best indicator of what the property is worth. Mortgage interest rates could go down 1%, but what does that exactly mean for the price of property? Yes, probably price it should go up, but what is the magnitude and when?
The purchase price of a comparable property is really the best indicator of what a property is worth. Mortgage interest rates could go down 1%, but what does that exactly mean for the price of property? Yes, probably prices should go up, but what is the magnitude and win?
FS20 Is real time analysis. Thank you!
Very creative and fascinating analysis! Real estate is such a fun topic to follow and study. You clearly follow the SF markets closely to find those examples. Love this post!
T Matthews says
Probably more of a bubble indicator.
But I missed out on the entire real estate run up
Very interesting! Now can someone just do this for the NYC and NY burb areas please?
Financial Samurai says
The FS20 Property Indicator can be used in any city in America. You can do it. I know you can.