Real Estate Evaluations

Here are some insights from selling and buying Real Estate for the past 36 years from deep in the Canadian Wilderness to the Southwest USA...Remember we are not talking row houses and you do not need financing. As soon as you need bank financing the rules change and you are no longer in control.

Do you think Real Estate is going to go down in value, only if you overpaid, in the worst case scenario it might stay flat for a period before climbing again.

Competition usually brings the price down; on the other hand if the supply you like is limited the cost is generally higher.  All this is relative because if you like the land or home and the area and if your due diligence for value shows this, you’ll pay the asking price or close to it.  You have then just set the value of this piece of Real Estate.  The selling price that is being asked does not set value, only the price paid, sets value.  The next time Real Estate of the same type gets sold in that area the value you paid will help set the value of the next real estate sale in that area.  This is the way licensed Real Estate appraisers are required to work within their regulated industry.  The more people that like the land or the Real Estate the higher the price will go up.  For example, Rainy Lake, Crane Lake, Vermillion Lake, Lake Minnetonka – there are more people buying Real Estate now then there has been in history. 

The early bird gets the worm.  Don’t get me wrong, due diligence is required, but don’t over analyze.  Someone else will be enjoying your property and you’ll have a real sick feeling in your stomach. 

Why do you think you’ve seen such acceleration in prices on Rainy Lake?  People are recognizing the real value.  Don’t depend on the banks to recognize the real value of the property you want to purchase.  They use licensed appraisers because the lending industry requires this.  The licensed appraiser only uses comparable sales and if there aren’t any, they have to improvise and use a comparable from some other area.  Now the evaluation really gets skewed but they have convinced the lenders this is the only thing they can do.  So the best a licensed appraiser can do is use comparable from recent sales as close to the likeness of your property as possible.  That’s all they look at. The appraiser won’t know what the reasoning was why the purchaser paid what they paid.  All they are interested in is that it was a comparable sale.  Now because of this licensing appraisal practices the next properties sold could be over valued.  How do you know?  You have to evaluate.  You need to get the CRV’s you need to investigate and spend the time to find true value. Real Estate evaluation isn’t rocket science, but you certainly need to know your field.

How much detail is an appraiser for the bank going to get into for an appraisal fee?  No in depth value of the building, infrastructure, or raw real estate.  They don’t even hire a building inspector to do a building inspection let alone any experts to evaluate the property as far as tree value, drainage, sub divisional possibilities or limitations and the effects of near by undeveloped properties.  Who is going to be looking into those probabilities that will have a negative or positive impact as to the future value of your purchase?  If you can afford to buy the property, you can help set the value of the surrounding area of the same type property.

A friend once told me his wife often asks him, “Why do you go out to that land and what do you do out there?”  His reply was, “I just walk around.  It’s so beautiful and I get this real nice feeling knowing it’s ours.”  The long and short of evaluating the amount of money you will pay for a piece of Real Estate boils down to your happiness, where you’re happy to have the land in exchange for money.  Try to think of it in simple terms like this.

The seller wants $40,000.00 for the property.  You go to the bank or under your mattress and you get your $40,000 in cash.  You drive out to the property and park your vehicle, then you pile the $40,000 on the car hood, or maybe you just open your checkbook and set it there.  You take 5-10 minutes and think about the property and the different times you walked through it and around and over it.  There you decide what makes you happier.  What gives you that warm fuzzy feeling?  The $40,000 of dirty old money or the land?  It’s as simple as that, what makes you happy.  Just a word to the wise, you can probably duplicate that $40,000 if you so desire.  But once someone else buys that piece of land or home, it will probably not be available in the time frame you are looking to be happy. 

Consider this:

The property has a certain value to the owner and they weren’t about to sell on the basis of banking criteria values.  Now the bank appraisal value might be 20 – 40 % less than the asking price, but if someone finds real relaxation from an elevated viewshed of distant islands like the owner has experienced and the buyer has been searching for this their entire lives, the property will sell for the asking price.  Would you pay $35,000.00 for a piece of land that someone a few years earlier paid $3000.00 for?  If it’s what you’ve been looking long and hard for you just might.  I know I personally did.  Never let the profit someone else is making determine the value of a parcel of Real Estate.  The profit they are making has nothing to do with the real value of the property.  It is determined by a lot of other criteria but not the seller profit.  People trade money for what they like and want, not the value the bank is willing to borrow you the money for or the profit someone is making.

Just like in a business there are different values.  You have bank value, tax value, book value and asset value.  In real estate you have bank appraisal value.  This is the value the bank is willing to borrow you for the purchase.  In most cases this evaluation process is designed only for banking purposes.  This process really doesn’t look at the evaluations that are important to the purchaser.  Most investors would be happy to pay the bank appraisal price because they know the real values of the property haven’t been considered and the property is worth more.  Remember that we are not talking about residential row house real estate.  We are talking about homes with acreage, lake and river frontage, elevated viewsheds as well as panoramic views.  These properties offer something unique and beneficial to the owner or buyer and you’ll have to pay a premium price for it.  Row house, residential real estate might be okay when you were raising a family and schools and shopping markets needed to be relatively close.  But now its just the two of you and you’re on the sunset slide in your lives and you’ve managed to pay off that row house and you’re looking for a home or second home with some luxuries you’ve come to afford and in an area that creates a relaxed, semi-retired atmosphere, so to speak. Whether it is on a lake or river, elevated with a panoramic view or it is a well treed acreage in a secluded location, it has that certain appeal that gives you the relaxed feeling of almost being on a holiday and it’s the place you are always thinking about when you are not there.  It’s that special piece of Real estate that speaks to you and says, “here is where I need to be at least some of the time”.

Most owners of desirable property know the real assets their property holds versus other properties.  Whether it be in a protected bay, has sunsets and sunrises, has majestic pine trees, sits on a ridge that provides a view, or is a secluded area offering a lot of privacy – their values hold monetary value, the owner knows it and isn’t about to sell without just reward.

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