The Meaning of Intrinsic Value in Real Estate - "What's It Worth"?

The Meaning of Intrinsic Value in Real Estate - "What's It Worth"?

 

In residential real estate, one of the most important factors is valuation.  What is a property worth?  Seems simple, right?  Just see what has sold in the neighborhood and you should get a pretty good idea, yes? Just get an appraisal, correct?  Well, the valuation of residential real estate is not quite that simple.

 

In the mix of residential real estate valuation is a huge principle called "intrinsic value".  Huge enough that you can sometimes call it the "elephant in the room".  What I mean by that is that it is an enormously heavy factor that is not a tangible, scientific approach to valuation that you can put on paper.

 

Have you ever heard the phrase "a property is only worth what a buyer is willing to pay for it".  Well, there is so much truth in that phrase, yet most people consider it to be cliche'.  But I'm here to tell you now, that it is the most powerful factor in residential real estate, yet at the same time, the least talked about.  So I'm going to bring the dirty little secret out of the closet and talk about it!  And I'm going to explain exactly why it's so important.

 

What causes a home to sell at, above, or below list price?  INTRINSIC VALUE

So you're probably saying "Whachu-talkin'-bout, Ralph?!"  What's "Intrinsic Value?"

The best description I can provide of Instrinsic Value is:  What the property means to the buyer.  WHY the property holds strong positive or negative value to a certain buyer.

 

We can all talk "comps", or comparable sales in the neighborhood, all day long.  But intrinsic value trumps all.  We've all seen a sale occur where it was surprising about the actual sale price, yes?  A property in which you were surprised it sold for the price it did?  Well, that was intrinsic value reigning supreme once again.

To make this crystal clear, I'm going to cite some examples of intrinsic value, and how it is something unknown to many people other than the buyer:

 

1. Parents of young children are looking for a new home.  The current one they are in has become too small for them as their family continues to grow.  Education for thier children is critical to the parents, but financially things are becoming a little tight.  So they've decided to not continue their children's enrollment in the super-expensive private schools, and start to look for a new home in which their children can enroll in one of the most highly rated public schools or charter schools around.  They find the perfect home located in the boundaries of one of these schools.  The home is listed for $450,000.  There are multiple offers on the property.  It appears that the offer amount it is going to take to win this house is about $480,000.  This is $30,000 over asking.  Most homes of the same format in the area are selling for approximately $450,000 to $460,000.  Sounds like quite a bit over asking to win this house right?  But the buyers decide to proceed anyway.  Even though they are using a loan, and realize that it may not appraise with their lender, they are perfectly prepared to bring in the extra cash for any gap if it gets right down to it.  Here's why:  The children are going to be in the elementary level school for the next 6 years.  The cost of putting their children in private school per year is $32,000.  By purchasing this home, not only will they be saving that $32,000 per year, but they have the right sized home in the boundaries of one of the most highly acclaimed public schools in the area.  Not only that, but they no longer have to make the morning and afternoon commute to the private school, which will save them a daily commute time in rush-hour traffic by one hour per day.  So in this instance, paying $30,000 over asking is well worth it because it not only makes sense mathematically for these buyers, but logistically they are so much better off that it makes the $30,000 over asking seem like a no-brainer compared to how much they will save.

2. A middle aged couple living in a condo have an elderly mother who lives on her own.  She is getting up there in years, and they are seeing signs that the mother is going to need some assistance with living.  They are faced with either placing the mother into assisted living (which the mother is opposed to), or having the mother live with them.  Well, the one-bedroom condo the currently live in simply won't work, and they can't afford to buy a home on their own.  However, the mother owns the home outright and their is enough equity to put down on a house and the couple can qualify for a loan of up to $450,000.  So the mother agrees to sell her home and work with her daughter and son-in-law on finding a single family home with a guest house that is absolutely perfect for the Mom.  They find the perfect home.  It is located in the neighborhood that the mother already lives in, is right next to her place of worship, her favorite grocery store, it has a large lot perfect for gardening which both the daughter and son-in-law love.  There are multiple offers.  It appears that it will take an offer of about $50,000 over asking to win this house.  Both the mother and couple agree to purchase it for $50,000 over asking.  Why?  Because for this particular set of buyers, this home is so perfect for their life logistics, and it will actually LOWER the couples monthly mortgage payment from what they are paying now on their condo, that it will make mathematical sense even at the selling price they have to pay, to be able to be comfortable with the expenses they will pay in caring for Mom at home.


3. A single male is currently living in a condo that he purchased 4 years ago.  Last year, he was given an opportunity by his employer for a new position that doubled his salary.  However, it required him to work out of another of the company's locations that is 80 miles from his condo.  He accepted the position because the opportunity was so great, and the income was amazing.  Well, after a year of commuting 160 miles a day in traffic, it's getting to be too much to bare.  He starts looking for a new condo that is closer to work.  One day, on his way home from work, he saw an open house sign 2 blocks from his company's location and thought he would check it out.  It's an amazing condo that not only has a bonus room perfect for his office, but it has a very large patio that is perfect for his small dog.  Currently, he has to hire a dog walker because the condo he lives in now has no outdoor living space.  The agent informs him that they are already in counter offers, but that he still has a chance.  His offer would have to be quite aggressive due to the multiple counters.  He runs his numbers and decides to write an offer $45,000 over asking.  Why?  Because the money he will save on gas, a dog-walker, and the overall psychological well-being of not making that nasty commute each day is WELL worth it for him.

 

I could go on and on with more examples like this.  There are other examples I can cite that have absolutely nothing to do with money and perhaps focus more on emotional and/or psychological values.  But the point is, these are scenarios that we do not see nor know about when we see properties sell over asking substantially.  YOU NEVER KNOW the intrinsic values for a particular buyer.  What doesn't appear to make sense to you may make perfect sense to someone else.

Were the buyers in the 3 examples above aware of comps in the neighborhood?  Of course.  But it didn't matter to them because the most important factor was THEIR particular set of instrinsic values.

So the next time you are looking at comparable sales in your neighborhood, and/or looking at purchasing a property with multiple offers, just know that there may be some very strong intrinsic values going on in the background with other buyers.

Don't fool yourself into thinking that you know values well enough to predict a sales price or that Zillow tells you everything you need to know about value.  Neither of those sources stand up to the strength of intrinsic values.

And at the same time, don't be ashamed and/or 2nd-guess yourself when you are considering paying over asking for a home.  Your own set of intrinsic values are unique to your own equation.  Everyone else's mathematical equation is comprised of an entirely different set of values.  Above and beyond that, make SURE that you express your set of intrinsic values to your agent!  If you do not express those values and let them know why they are so important to you, then all they have to work with is comparable sales.  Let your agent be the warrior for your set of values.

In general, don't be afraid in life to be able to make a statement that says "This is what's most important to ME"

Ralph Gorgoglione


Los Angeles Homes For Sale

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Comment balloon 24 commentsRalph Gorgoglione • October 18 2014 08:00AM

Comments

Ralph you make a very strong point. What is important to one person may not be as important to the next. There are features that make or break a sale and are only as key as the meaning of that feature to the decision maker. I understand Intrinsic Value. The 3 Ls do no always give the final word.

Posted by Noah Seidenberg, Chicagoland and Suburbs (800) 858-7917 (Coldwell Banker) over 4 years ago

The gotta have, don't want list. Nothing right or wrong in what you scribble on your sheet when you have a budget and go shopping. Real estate is personal, emotional and all about timing timing timing. Not just the three "L's". Move over... not just the property location as the end all. The lifestyle, events, moods  of the guy and gal signing on the dotted line to buy property. Timing. Just wanting it is not enough sometimes.

Posted by Andrew Mooers | 207.532.6573, Northern Maine Real Estate-Aroostook County Broker (MOOERS REALTY) over 4 years ago

This post is right on in so many ways. I currently have a potential client weighing the possibilities similar to that offered in #1 and is leaning to putting their house on the market to move to a better town and school system so they do not have to pay for private school

Posted by Ed Silva, Central CT Real Estate Broker Serving all equally (RE/MAX Professionals, CT 203-206-0754 ) over 4 years ago

This is an excellent point Ralph.  These buyers have looked at all elements of their lifestyle, and options.  To them, it does make perfect sense.  When there is limited inventory and a buyer is up against the intrinsic choices, it is helpful that they make their purchase based on the overall needs and wants.  Great job explaning the in-depth reasons why some buyers make their move!!  Glad to see this featured.

Posted by Carla Muss-Jacobs, RETIRED (RETIRED / State License is Inactive) over 4 years ago

This is an excellent post, Ralph. It really describes the true nature of value which is so subjective.

Posted by Jane Peters, Los Angeles real estate concierge services (Home Jane Realty) over 4 years ago

There's always so many factors into picking the right home.  I don't believe people should compromise on their top 3 criteria but on some of the lesser ones.  Maybe the view out the kitchen window isn't the greatest, but it's not the next door neighbor's house.  Checks and balances.  

Posted by Kevin Mackessy, Dedicated. Qualified. Local. (Blue Olive Properties, LLC) over 4 years ago

Great post what is most important to a buyer and a seller really mean alot.... The price point one sets on a property means alot as well. Especially those that are unique have many amenities that can make a difference. 

Posted by Laura Filip, What can we do for you today? (Laura Filip Broker , Opening doors for All Seasons of Life ) over 4 years ago

Fabulous post! When we bought our cabin, I over paid market value by 15%....I wanted that home. To me....the value was higher than the appraisal, and I was willing to pay for it. Best thing we ever did.

Posted by Karen Fiddler, Broker/Owner, Orange County & Lake Arrowhead, CA (949)510-2395 (Karen Parsons-Fiddler, Broker 949-510-2395) over 4 years ago

I agree with the instrinsic value.  This is also where I sometimes feel lost as an agent.  I've never been in a multiple offer sitaution where it was "apparent" what it was going to take to get the house.  There seems a point where it would be obvious that a certain dollar amount will prevail - that obvious point could be thousands over the next highest offer.  I'd prefer not to put my buyers in a situation where they are paying 10% more than they needed to.

Posted by Jim Beitz (Keller Williams Success Realty) over 4 years ago

Ralph -- this is such a smart post and the examples you share solidify your point so well.   Nicely done.  

Posted by Michael Jacobs, Los Angeles Pasadena 818.516.4393 over 4 years ago

We used to call this opportunity cost in economics 101 (back in the college days). 

Posted by David Alan Baker Laveen & South Phoenix Realtor, Your local Expert (Keller Williams Realty Phoenix) over 4 years ago

Ralph Gorgoglione 
WOW! A full and thorough explanation of "intrinsic value" if there ever was one written!  Those Buyers who look at the "bigger picture" are folks who understand the concept of intrinsic value. Thanks!

Have a happy day -
Lynn

Posted by Lynn B. Friedman, Concierge Service for Our Atlanta Sellers & Buyers (Atlanta Homes ODAT Realty Call/Text 404-939-2727 Buckhead - Midtown - Westside -- and more ...) over 4 years ago

Just one of the reasons why I love real estate. It's pure economic supply and demand.  The opposite can be true as well. A home with a funky floorplan can take an intrinsic value hit.

Posted by Christi Hacker, Your Omaha Area Real Estate Specialist (Keller Williams Greater Omaha) over 4 years ago

Ralph Gorgoglione - a beauty is in the eye of beholder! One of my buyers recently paid lot more than asking - appraisal came low and they are fine with paying the difference. One more example!

Posted by Praful Thakkar, Andover, MA: Andover Luxury Homes For Sale (LAER Realty Partners) over 4 years ago

Value in the eyes of a buyer is very personal. It's like someone falling in love with another person and you can't see what they see in them. What's that worth in money? Your guess is as good as mine! But we can't overlook the issue of intrinsic value in real estate because it's "real."

Posted by Nina Hollander, Your Charlotte/Ballantyne/Waxhaw/Fort Mill Realtor (Coldwell Banker Residential Brokerage ) over 4 years ago

Karen Fiddler, Broker/Realtor and I share a common sentiment too...Anything I decide I want comes into crystal clear focus and then into my hands shortly thereafter even if it involves paying more....

Posted by Richie Alan Naggar, agent & author (people first...then business Ran Right Realty ) over 4 years ago

Residential estate definitely has intrinsic value. I've seen this play over and over again, and most recently with a situation like in your second example.

A home fulfills a purchaser's needs, it is not a widget!

Posted by Athina Boukas, Certified Residential Specialist (CRS) (Virginia Capital Realty) over 4 years ago

Ralph, I love your post and it is spot on ...homes having different values that a price can not be put on sometimes!

Posted by Ginny Gorman, Homes for Sale in North Kingstown RI and beyond (RI Real Estate Services ~ 401-529-7849~ RI Waterfront Real Estate) over 4 years ago

Carla Muss-Jacobs, Principal Broker/Owner just re-blogged this which is how I found this blog. Very well written blog. On the money. Thanks for sharing.

Posted by Lanre-"THE REAL ESTATE FARMER" Folayan, I don't make promises.I deliver results.SOLD HOMES (Keller Williams Select Realtors-Buy a home in Washington DC. Sell a home in Washington DC) over 4 years ago

Yup.  We agents and then the appraisers spend hours and hours with spreadsheets and whiz-bang comp sets and we get to a range.

Yet, sometimes, none of that matters because the buyer WANTS it for reasons that can't go into a formula.  Likewise there are also times when a seller WANTS to sell and because of that will let a home be sold for much less, but it meets the seller's needs.

Posted by Claude Labbe, Realty for Your Busy Life (Real Living | At Home) over 4 years ago

I saw that Carla re-blogged your post and wanted to come over to congratulate you on your featured post. Intrinsic value can't be measured in dollars and cents.This is an excellent post and smart Realtors would make this a part of their sales scripts.

Posted by Patricia Feager, MBA, CRS, GRI,MRP, Selling Homes Changing Lives (DFW FINE PROPERTIES) over 4 years ago

Great post Ralph. This is so true...and so many agents to not get this simple concept.

Posted by Jeffrey DiMuria 321.223.6253 Waves Realty, Florida Space Coast Homes (Waves Realty) over 4 years ago

Hi Ralph - I'm so glad I found your post. You've explained well the concept of intrinsic value.

Posted by Lottie Kendall, Helping make your real estate dreams a reality (Compass) over 4 years ago

Thank you for writing this post! Certianly help me understand the chaos we have going on in our market today however, its died down a bit. Thanks Ralph!

Posted by Elly Demir (Greater MSP Homes Team at KW Integrity Lakes) 9 months ago

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