Is harder to determine in a market where there is little or no information on actual sales prices.
Value in real estate is harder to determine in a market where there is little or no information on actual sales prices. In Vallarta, there is a plan in 2003 for the reporting real estate agencies who are members of the national organization, AMPI, to report actual sales prices within their MLS.
Why is this important? To have a coherent market, there needs to be a system to evaluate value.
The practice of having a real estate appraisal done by a third party is not common in Vallarta or the surrounding bay. A large part of the reason that this is not done is because there are few mortgages on real estate here. A formal appraisal of value has been traditionally done to protect the lender. With the absence of this type of verification in this market, it becomes more important for cooperating agencies to share true sales prices, when they can do so.
Several real estate investment companies have contributed to the following material.
VALUE
Value may be defined as the relationship between an object desired and a potential purchaser. It is the power of a good or service to command other goods or services in exchange. In terms of real estate appraisal, value may be described as the present worth of future benefits arising from the ownership of real property.
To have value in the real estate market, property must have these characteristics:
- Demand. The need or desire for possession or ownership with financial means to satisfy that need.
- Utility. The capacity to satisfy human needs and desires.
- Scarcity. A finite supply.
- Transferability. The relative ease with which ownership rights are transferred from one person to another. Regardless of a property's demand, utility, or scarcity, if title is flawed or there are economic or environmental problems, the property may not be "transferable."
MARKET VALUE.
Generally the goal of an appraiser is to estimate market value, which is: The most probable estimate, in terms of money, which a property will bring if exposed for sale in the open market allowing a reasonable time to find a purchaser who buys with a knowledge of all the uses to which it is adapted and for which it is capable of being used. Market value is referred to as the price at which a willing seller would sell and a willing buyer would buy, both knowing all the facts and neither being abnormally motivated. It is the price typically to be expected if a reasonable time is allowed to find a purchaser, with both seller and buyer being fully informed.
Included in this definition are the following key points:
· Market value is the most probable price a property will bring -- (not the average price or the highest price.)
- Payment must be made in cash or its equivalent.
- Buyer and seller must be unrelated and acting without undue pressure.
- A reasonable length of time must be allowed for the property to be exposed in the open market.
- Both buyer and seller must be well informed of the property's use and potential, including its assets and defects.
Three factors have traditionally made real estate particularly attractive as an investment.
- Real estate offers the potential for appreciation. It has traditionally out performed the various stock market indices. Income generating real estate has held its value and is much less volatile as an investment. Sold, well positioned real estate can be worth more today than 10 years ago, and worth more 10 years from now.
In the past four months, there has been an influx into this area in Mexico of buyers who have made the decision that they want real estate here. For some buyers, the reason has been that they want to invest in real estate here in lieu of investing in stocks.
- The second traditional advantage of real estate has been leverage, which is not as common in this market. Without borrowing, there is no leverage. The power of leverage, or high return has not been a large factor in this market. Leverage adds more risk, with the potential of a higher return. There is less risk, therefore, when there is no mortgage on the property. Traditionally, when there is less risk, there is less return.
- The third attractive feature of real estate has traditionally been its ability to generate income. Some experts call this the “hidden value” in real estate---the income it generates. Other investments have a potential for appreciation, and can provide an income, such as stock dividends. Gold, a popular stock or mutual fund can provide appreciation. You can compare the income that will be generated during the period you are holding the particular investment to others.
The classic rules of buying real estate can be described in the following way. Real estate value is created by:
1. Acquiring the property at a discount.
2. Intense, creative management for income and preservation of the real estate itself.
3. Selling at the right time.
There are real estate investment companies in other countries that are currently looking at buying real estate in Mexico. One of the reasons for their interest here is the high price of real estate in some US cities, and the transitional period that US real estate markets are going through. These companies are looking for motivated sellers, under-valued properties or the potential for income and appreciation through good management.
Since markets are different and conditions change, no specific property type, location or size has to be pre-determined. The key is to buy at the right time at the right price. A classic rule of thumb to avoid overpaying for real estate has been to buy at a price less than it would cost to rebuild, or less than replacement cost. Years ago a Canadian investor taught me that you make money when you buy real estate, not when you sell it.
Growth potential of a market is an important consideration when purchasing real estate as an investment. This fourth element needs to be evaluated when buying real estate for investment.
“Every noble acquisition is attended with its risks; he who fears to encounter the one must not expect to obtain the other.” Pietro Metastasio, 1722
This article is based upon legal opinions, current practices and my personal experiences in the PuertoVallarta-Bahia de Banderas areas. I recommend that each potential buyer conduct his own due diligence and review.
