Can Value in Real Estate be created, artificially?

In our last post – “Valuation of Real Estate: How can you value your RealT?” we touched upon the parameters one should look for while valuing a Real Estate property. Today let’s discuss if it’s possible to create the value artificially?

Creating Value – What it means?

Creating value in its generic terms means – artificially manipulating the price of an asset.

Take for example:

•  “Black Tickets”: You went to watch your favorite movie, say Iron Man, in the nearby theatre. Due to unavailability of seats, you are denied the tickets. But then an agent comes to you, offering tickets for the movie at a premium of 25%: He has created the value artificially.
• “Polished Antique”: You found an antique while roaming in the fields. It resembles nothing, but a broken stone. You go to market to sell it & you will not even receive peanuts in its exchange. But the moment you have polished it and packaged it nicely, you will get jaw-dropping quotes for the same piece. Here you have created the value artificially.

So to put in very nominal terms, creating value is nothing but adding & utilizing factors that affect the ultimate value of the asset.

Artificial Value in Real Estate

In our last post we mentioned the parameters that affect the value of Real Estate:

Now if one wants to create value artificially, he will definitely have to manipulate the above factors for the same. Let’s see how:

  

Parameter	How to Manipulate?
Utility	Play with the buyer’s psychology. If the buyer is interested in making money out of this property, show him the channels. Project your property as a great prospect deal for a Hotel or Hostel. If he is just looking for a comfortable stay, show him the prospects of luxurious property. Once you have convinced the buyer on this, you have created the value!
Demand & Supply	These are the parameters which builders manipulate the most. Demand is manipulated by quoting unreasonably high pieces. By doing so, builder creates an impression of high prices in the region. Moreover builders posts high bids for their properties on the internet, impersonating themselves as buyers to create artificial demand. Supply is manipulated by incorrectly projecting the number of units remaining in a project.
Transaction	Manipulation in this aspect depends on the network you have. If you have a well-established network of brokers and agents, you can ease out the transaction and hence create value in the deal.
Psyche	This is as simple as “polishing the antique”. You polish, renovate and beautify your property and charge as much as 25% more on an investment of 10%!!

Closing Remarks: Listed above are some of the ways in which a person can create the value in Real Estate, artificially. But it’s better not to underestimate the cognizance of buyer! ;-)

------ Thanks for reading RealT Horizon J ------

Valuation of Real Estate: How can you value your Real Estate Asset?

While laying down on the couch on this lazy Sunday evening, a thought stuck to us: Is there any defined way to value our Realties? Of course there are few in the form of Govt. DLC rates & CMP (current market prices) that gives some indication of the possible value of our real estate properties, but still we miss out many important aspects if we go by these rates. Let’s go back to the basics and first try to slice the term ‘value in real estate’ to finer levels.

What is ‘Value in Real Estate’?

To state in layman terms, value in real estate is created if any of the following dimensions gains weight.

Let’s have a look at these aspects in finer details.

Utility 

Any asset/object is worthless if it doesn’t create utility for the owner. If real estate property, howsoever costly it may be, is unable to create its worth and use for the owner, then its utility decreases. We hope the following figure can help in explaining this further:

In above case, the utility of cookies decreased with the increase in number of cookies. Same is the case with real estate utility. If the property can’t be utilized to its full value, its utility decreases.

Supply 

Just compare the price of a commodity (like salt) which is abundantly available to a commodity (like petroleum) which is scarce! Same holds true for Real Estate in the way that properties in an area where there are several options is cheap as compared to the one where no properties are available.

Demand 

Similar to the above concept of Supply. If a property is in high demand, it is valued more & vice-versa.

Transaction 

Suppose you have bought the bicycle - Litespeed Blade (£25,317)

Just imagine how difficult will it be for you to resell it or make its transactions! Same goes with Real Estate; you invest in some property like this and get stuck to it for your lifetime: literally no value.

Psyche 

The social pride and psychological pleasure is something that no one can monetize. It will be different for each and every individual. Suppose for example, someone will definitely derive immeasurable value by just having the pride of owning the above bicycle.

Let’s demonstrate the entire above concepts using a common example. Suppose you have a family of 2-3 members & have bought the home shown below: (Just an imagination; don’t get carried away! ;-))

Just check its value on different aspects:

Aspect	Reason	Value
Utility	Such a big house for just 3 members!! Under-utilization of resources.	▼
Supply	Definitely, houses of this sort are not available down the street. It is tough to find such houses. They are scarce.	▲
Demand	Demand for such properties depends on buyers, which is generally very less. You will rarely find a buyer looking for such properties.	▼
Transaction	Tough to transact, definitely!	▼
Psyche	Un-measurable; if you can take care of the income tax folks!! ;-)	▲▲▲▲

Closing Thoughts: These are some of the basics that we thought are vital for any Real Estate Valuation. There are few more technical methods which we will try and cover in our forthcoming posts.

------ Thanks for reading RealT Horizon J ------

Channel Partners: An Emerging Trend in Real Estate

In our first post “Understandingthe Reality in RealT”, we mentioned Transaction as an essential part of the 5 step value chain. We further elaborated its details in our following post – “Transacting & Using your RealT”. Today we bring to you a fast emerging trend in the Transaction phase of real estate projects – the introduction of Channel Partners.

The figure below shows exactly where Channel Partners have made their place in the value chain:

   

What are Channel Partners?

Essentially CPs are the agencies that take the responsibility to sell-off whole or part of the realty projects in a pre-agreed upon duration & take their commission/fees in doing so. In this process, they underwrite the properties which are to be sold by them. More on this will get clear in the following discussions.

How are Channel Partners different from Brokers?

Although doing the same work, there is a huge difference between Brokers and Channel Partners.

A Broker acts as a liaison between the Seller & Buyer and in this process he takes his commission from both the parties.

A Channel Partner on the other end underwrites the property to be sold for a particular duration by paying the owner some percentage of its cost (refundable). The CP is then free to use any means of promotion & sale including sub-broking, conducting events, etc. to sell the property. Once the property is sold in the pre-decided duration, the CP gets a handsome cut from its sale, much larger than a broker’s, and gets his underwriting amount back from the builder.

If in case a CP fails to sell the underwritten properties in the specified time duration, he is liable to pay to the builder, an amount that is pre-specified in the agreement between him and Builder.

Why do Builders prefer Channel Partners?

With the evolution of new ways & processes in Real Estate, Builders have quickly adopted the concept of Channel Partners. We were perplexed at first about the acceptance of Channel Partners in this sector but when we looked at its profitability by putting ourselves in the shoes of a Builder, we got all our answers.

Following are some of the benefits that a builder enjoys in partnering with a Channel Partner:

• Immediate funding of Operational Costs: The builder uses the underwriting amount to fund his immediate cash requirements. This is similar to funding by booking amount, the difference being that the percentage of cash is relatively small.
• Guaranteed sell of the property: By partnering with the CPs, the Builder ensures that his property will be sold. He no longer has to worry about the marketing and promotional activities. Even if the CP is unable to sell the property in the specified time, the Builder easily gets the interest amount by penalizing the CP.
• Better than Broking: Using CPs is better than relying on the brokers. This is because of the fact that brokers have no liability to sell the property, whereas CPs have!
• Free Promotion: Suppose that a CP has underwritten 50 units out of total 100 units constructed by the Builder. Now, to sell those 50 units, the CP will carry on promotional activities by conducting events, advertising etc. But in this whole process, the Builder is getting benefit of free publicity of remaining 50 units as they fall under the name of same project.

These and several other benefits have made Channel Partners a hot topic in emerging markets. Also, it is noteworthy that this trend is picking up pace quickly in Tier 2 cities. RealT Horizon is glad that our vision of development in the Tier 2/3 cities is getting much air!

---------- Thanks for reading RealT Horizon J ----------