Not to get too philosophical here, but let’s have a conversation on what “value” actually is.
How is value determined?
Is it set? Is it created? Is it negotiated?
There’s no fixed value of real estate, and yet the fluctuations aren’t as pronounced as, say, the stock market. But is “a property worth what somebody is willing to pay for it?” Or is there a better measure of a property’s worth, or relative value?
When I was young and naive (aka “single”), I would launch into these diatribes about how diamonds have no real value, but rather the value is created by society via the norms, pressures, and expectations we all see and feel in day-to-day life, as well as by shrewd marketing on behalf of the diamond consortium.
I used to say, “If all the diamonds in the world were put onto the market at once, would they really have a value?”
What is a diamond anyways? It’s a stone. I know it’s rare, but does something that’s rare automatically have value?
Think about the ever-popular “gold standard” for a moment. How did that come to be? Why was it a gold-rush, and not a gravel-rush? What if there was only as much gravel as there is gold? Would the value be the same?
Is value wholly determined by supply and demand?
If I paid $15,000 for a diamond, I would want to know that I could turn around and sell that diamond for $15,000 to the person standing next to me. Otherwise, it’s not worth $15,000 – it’s worth $8,000, and there’s a $7,000 “idiot premium” for adhering to societal norms and spending money frivolously as some sort of bizarre right of passage, at a time when most people can least afford to spend money on an item of this nature.
So while the cost of that diamond might be $15,000, the value is only $15,000 if I know I can sell it, within a reasonable time period, for that same amount.
Can the same be said for every product in existence?
If you bought a ski jacket from Sporting Life for $600, could you sell it to a guy in the parking lot for $600 ten minutes later?
Okay, so not every product for sale can use the words “value,” “cost,” and “worth” interchangeably.
But when it comes to a fixed asset, the “value” should be what you can get for that asset, and not what you paid for it, what you think you can get for it, or the worst: what you want to get for it.
Let’s go back to the blog post from last Friday about “One Bloor.”
I was complaining that the listing prices of some of these condos currently for sale on MLS (actually up for “assignment” and not sale, but it’s semantics for the purpose of this conversation) are absolutely outrageous when put in context of what else is available on that block, and that maybe, just maybe, the “cool factor” of the building is what is pushing these prices up.
So loop back into today’s conversation about value, and let me ask again: is that premium for living at the “sought-after, anticipated, popular, and cool” One Bloor something tangible? Or is it created?
Is it real?
Can it be further traded on?
Maybe that’s the idea here when it comes to a lot of these condos; the “Greater Fool Theory.”
A magic rock isn’t really “worth” $100, but if you sell it to somebody for $150, then you could argue it is – and more! And once that second person has the magic rock, having paid $150, is it “worth” $150 to them? Is the magic rock’s “value” $150? We logical people would argue, “no,” given it’s a goddam rock, after all. But what if the second owner is able to find a buyer for $200?
If you know where I’m going with this, then you really, really know me.
Let’s talk about “new construction” in the downtown core, and how the prices are set.
You all know that I don’t sell pre-construction condos, and I believe that the industry is corrupt, and today’s buyer is no better off than a guppy swimming in a bowl with piranhas.
“A fool and his money are soon parted.”
“A sucker is born every day.”
But these fools are foolish not only for buying pre-construction condos, at 2015 prices, in 2011, and taking on all the risk and buying an illiquid asset, but also because when it comes time to sell the condo upon completion, the way they go about finding the unit’s “value” is a joke.
You paid $300,000 for the condo in pre-construction in 2011.
Then you paid $22,000 in closing costs to the developer upon completion, and $5,700 in land transfer tax to the government, $3,000 in legal fees, $1,000 per month in occupancy fees for 14 months while the building was being registered, and thus you’re “in” for $344,700.
So what’s your condo “worth?”
Well, what do you want it to be worth?
Today’s buyer simply says, “How much do I want to make on this?” And then proceeds accordingly.
How about $429,900? Sure, that sounds good!
And that is how many of today’s sellers of condos bought in pre-construction determine “value.”
And that is how value in the market, believe it or not, is often set.
Isn’t it the greatest example of the “Greater Fool Theory” you’ve ever seen?
A client sent me a listing the other day for a unit up for sale at Post House Condos – a project delayed by almost three years, but now seems to be a decent place to live. EXCEPT……for the price.
The unit my client sent me was a small, junior-one-bedroom, priced at over $750 per square foot. No parking, no locker. Just the unit – at an astronomical price.
I told my client, “You could buy across the street at Vu for $550/sqft, so let’s pretend we never saw this listing, okay?”
Is there really a difference between Post House and Vu? Post House was finished in 2015, Vu in 2011, and they’re 105 and 112 George Street respectively?
Are the stainless steel appliances any shinier in Post House?
Are the granite counters thicker?
Is there more oxygen in the air? Maybe that’s it…
But my client wanted to know, “How come they’re looking for $750 per square foot? What’s the logic?”
Is it logical for an intelligent person to give a developer $50,000 as a deposit for a condo being bought at 120% of current fair market value, with the promise of building a condo, subject to change, subject to other changes, subject to cancellation, and subject to changing the subject? Maybe my sarcasm killed the point there…
So I explained to my client that the “logic” behind the $750 per square foot was that the owner had paid a massive price in pre-construction, and was now looking to get out, maybe with a profit, maybe not.
Somebody looking for $750 per square foot most likely paid $600 per square foot in pre-construction, years ago, when comparable units were trading at $500 per square foot, and the $750 per square foot represents a break-even, or a pre-determined profit.
And thus, in this wacky demonstration, we arrive at the “value” of this unit.
Because as soon as somebody comes along, and pays $750 per square foot for this unit or another one, a “value” has been established.
That’s far from intrinsic value, but so long as the “Greater Fool Theory” holds, and somebody will always come along and pay MORE than the previous person, then we’ll never find out what the unit is really “worth.”
Disclaimer: I live at Vu Condos on 112 George Street, so call me biased. But it just so happens that this blog, based on this client’s email, was for a unit at Post House across the street from me.
So if a unit is trading at Vu for $550/sqft, how in the world can an identical unit trade at Post House for $750/sqft?
It makes absolutely no sense.
I’m not being biased here, folks. I swear, this is my professional opinion, and perhaps this argument would carry more weight if I didn’t live in the building I was detailing in my blog.
But we’re comparing apples and apples. The gym at Vu is no better or worse than the gym at Post House, and the concierge isn’t any nicer or meaner at either of the buildings.
So how the hell is the “value” of units at Post House $750/sqft?
Stock traders – tell me how you, theoretically, arrive at a price of a stock? Is it the prevailing P/E ratio? If you’re looking at an oil and gas stock, do you say, “Well most oil and gas stocks in today’s market are trading at P/E ratios of 25 – 30, so we can suggest the intrinsic value of Company XYZ is 25 – 30 times its current earnings?”
So can’t we, in real estate, look at the “value” of a square foot within two condominiums, across the street, with the same features and finishes, built within the same 5-year period, offering essentially the same standard of living, and consider those “values” to be the same, or close to it?
“Value” in real estate, as we’re seeing in the above example, or as we saw in Friday’s blog about One Bloor, is often invented, finessed, manipulated, exaggerated, or often justified and validated after being invented…..or exaggerated…..etc.
If somebody sets the price of a magic rock at $100, it’s not worth $100 until a buyer pays that price.
But when somebody sets the price of a square foot of real estate at $750, when it should be $650 or less, and somebody pays that price, and then somebody else pays that price, and then another person after that, like it or not folks, that is the value of that piece of real estate, by definition…