How do you know how much to pay for a piece of property? Do you have a method, or do you go by your gut? Oftentimes, it’s not as simple as finding out the psf data of deals done in the same project or in neighbouring projects. From unit to unit, from project to project, and area to area, there can be big differences in terms of facing, view, facilities, fittings etc. To make things worse, a lot of these criteria are subjective. So how do you determine how much is a fair price?
Here’s the step-by-step of how I generally do it:
1. First determine what is your base price. Basically the question to ask here is this: if I were to buy a property in this general area, how much would I pay per square foot? Alternatively, if you don’t really have an answer to that question, you can take a sampling of the psf prices of similar units in the same area. Doing this will help you establish a benchmark for the subsequent step.
2. Make a list of items and allocate values to each of them according to how important they are to you or how great it would be if they were available. These could be qualities that you require as basic amenities or extras that give you value. Determine how much it would detract from the value if it is not available and how much value it would add if it’s available and high quality. You could then determine a value for each item based on a sliding scale. Example 1: If my benchmark is LH99 and has an average age of 5 years, perhaps I would then determine that according to my value system, every 5 years older, I deduct $25 psf for expected renovation expenses. For a 15-year old property, I would then deduct $50 psf for age. On the other hand, I may be inclined to offer $25 psf more for a new property. Example 2: Basic amenities like gym, clubhouse, pool are usually a little more one-sided as they are expected to be there. For these items, I might deduct $50 psf if they are not there (in the case of apartments), and maybe only add $15 psf if they were spectacular.
3. Take the base figure, put in deductions and bonus from step 2 to get your offer price.
As you can probably tell, the item list for step 2 is very subjective since people will attach different values to the items according to their own mental map. It may also be very different according to whether they are buying the property for investment purposes or for own stay.
Below is an example of my calculation of an offer I made recently. Ultimately it didn’t go through, but I cannot justify paying anything more. You’ll find that it happens a lot, since owners tend to over-estimate the value of their property, or the buyer doesn’t value it as highly.
|Benchmark Price||1,400||FH condos in the vicinity|
|Age||(150)||26 yo, renovated 7 yrs ago|
|Amenities||(200)||None, walkup apartment|
|Transport||100||Near to future MRT, bus-stop|
|Rent Readiness||(50)||Needs some work|
|Neighbourhood||100||Near to food and supermarket|
Just an additional point to think about: Freehold or leasehold? You can refer to Nat’s piece on this. The main thing I want to point out is that there really is not much practical difference between the two in the beginning. The turning point really only starts to show at year 20 and really speeds up after year 30. The main reason is that people will find it more and more difficult to find funding for old LH99 properties. Banks require at least 30 years left on the property at the end of the mortgage period. Adding a mortgage term of 30 – 35 years to that means that at age 34, the property is starting to get unmortgageable (if there’s such a word, but you get my point). As such, you may want to deduct much more for lease run-out on older properties than a new one.
It’s definitely not an exact science, and a lot will depend on how much you value certain qualities of the place, but it’s one way to “standardize” your thinking and to create a structure so you can justify your offer to buy a piece of property, at least to yourself or to anyone who cares to listen.
Related post: How much should you pay? The sequel…
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