Has anybody else noticed that there is something of an epidemic going around related to valuations, or maybe opinions of valuations? I think it’s really common right now to be having a discussion about the market, or about pricing for a deal, and have that discussion result in a contest to see who can come up with the lowest valuation.
The epidemic that I’m talking about is different than just being realistic about where the market is. The people that I see do this aren’t using comparables to come up with their prices. They aren’t thinking about the attributes of the deal you’re talking about. They just try to come up with the lowest valuation that they can think of, and then throw it out there as if you’re crazy if you disagree.
To be clear, I do think it’s dangerous to be on the wrong side of the pricing trend. You don’t want to constantly have the highest opinion of valuation. If you do, there’s probably something wrong. But you still have to look at every deal and be able to figure out what it’s really worth, not just come up with the lowest price that you can think of.
I see “Buyers” do this a lot, most often to try to make excuses for why they aren’t pulling the trigger on something. I see Brokers do this a lot, probably because they can’t be bothered to actually have an original thought during the course of a day. But every time it happens I just wonder where the valuation is coming from.
There are no prizes awarded for being the most bearish. Put on your thinking cap once in a while.
Are you referring to land transactions? When future revenues/home prices are at the whim of available financing, interest rates, supply, demand, job creation, ghost inventory, etc. it is very difficult to calculate residual value.
Most of the transactions over the past 24 months are speculative at best. They are hoping for future appreciation.
I would bet that very few homebuilders are thrilled with their recent acquisitions if they are building them right now.
I think land transactions never cease to be speculative (regardless of what we might tell ourselves in up markets).
But actually the thing I talk about in the post has happened recently on some commercial deals that I've been looking at.
Also, just to be clear, I have no problem with someone who can explain how they got to the number they are using. I do have a problem with people who substitute low valuations for independent thought.
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i just had a similar conversation a few minutes ago. looking at an NPL and created a valuation which we are basing our bid on. aside from the usual "be careful", the broker i was discussing the deal with was trying to talk the valuation down. until i told him about the comps nearby which were sold by a broker he had just ate lunch with. then it was, well i guess you have it figured out. which i dont, i just think i have a decent idea of whats happening and know how to not overbid.
Yeah, I probably should have mentioned that the unthinking valuation can land on either side of the "real value". It's more about people who just parrot what the prevailing market sentiment is, without thinking on their own.