Hello, everybody. It's Sam from Financial Samurai. And in this episode, I'm going to talk about a new property leading indicator that should give buyers confidence to buy. And I call it the FS20 property indicator. Not that original of a name, sorry. But I think the concept itself is quite original.

And this is something that I think every property buyer, prospective property buyer, should think about when they're about to buy, because property prices have risen so aggressively in many parts of the country and the world since about 2010, 2012 period. So given real estate is relatively eliquid, there's huge room to get your property transaction right or wrong.

So my hope is for all of you to get maximum value, whether you're buying or selling. But the FS20 indicator is more for folks who are going to be buying. So let me share with you some thoughts about what this indicator does. So FS stands for Financial Samurai. 20 stands for 20%.

The FS20 property indicator goes off when a home's final sales price is at least 20% higher than the online estimate in the neighborhood you want to buy. So by now, 2019, everybody should be leveraging technology and the internet to find properties, to analyze properties, and to make offers. Zillow and Redfin, they were both founded in 2004.

So in the first 5, 10 years, they weren't that accurate, I would say. Their databases were still being formed. But now, 15 years later, their estimates are about as good as they've ever been. They probably are as good as they've ever been, right? They're publicly traded companies. They have to improve their algorithms to stay competitive and to stay relevant, or else their shareholders will revolt.

So technology is key in your property hunt. And the FS20 property indicator is key when you're analyzing any property, because there are a lot of indicators out there on things you should follow to decide whether the property price is going to go up in the future or down. So some indicators include interest rates.

If interest rates go down, like they are right now, property prices should go up, given it brings in more demand and more affordability. But you don't know exactly how much a property will appreciate or how much a property is worth for every 25 basis point drop in interest rate.

It's just a derivative indicator that you can make educated guesses on. You just don't quite know. Other indicators include economic health, inflation, laws, the presidency, trade wars. There's a whole bunch of different things, and obviously the job market. But the FS20 indicator is very interesting, and it's very pertinent, because I think the best indicator for what a property is worth is a comparable sale.

So if a house you want to buy sells for, let's say, a million dollars, and then the neighboring house goes up for sale a month later, chances are very high that if the two houses are quite similar in terms of the quality of the build and the plot of land and so forth, that other house is going to be worth at least a million dollars as well.

It's just a month later. So a comparable sales price is the number one indicator for what a property is worth. And so when a home's final sales price is at least 20% higher than the online estimate in the neighborhood you want to buy, that is a high, high quality indicator that there is demand for property in that neighborhood and that prices are likely going up.

Now, why do I use 20% as the price differential? The reason why is that Redfin and Zillow and any other online property estimator, they aren't perfect yet, even after 15 years of operation. Even after thousands and thousands, probably tens of thousands of homes being sold and inputted in their database and engineers and all these people working on their algorithms and estimates, they're not perfectly accurate.

I don't think Zillow-- Zillow has a lot of problems, in my opinion. I've looked at many properties on Zillow. I'm like, wow, you're way off. Whereas Redfin, I think, is a little bit better. I think it's much better, actually. I don't know why, but they're much better. The user interface is better.

So that's the company that I use. And so it is very common to see price fluctuations of between 10%, I think, plus or minus, in terms of what an online estimate calculates and what you believe the property is worth and what it actually finally sells for. Because there's a lot of things that are not captured by online estimates.

Sometimes you might have remodeled a kitchen, right? And the kitchen might cost $50,000. But unless the homeowner updates that data, the algorithms online aren't going to capture that information. You might have some unwarranted space that's 30% of the size of your livable space. And that's pretty valuable if you want to create a band down there, create a man cave or a woman cave, or whatever you want to do.

Elsewhere, you might have a plot of land that shows up great in terms of size online, but only maybe 25%, 30% of that space, that plot of land is flat and usable. So therefore, online estimates could overvalue your property as well. So whatever the case may be, there's always errors within plus or minus 10%.

There's also errors plus or minus 15%. But once you get to a sales price above 20% of the online estimate, I think it's a real signal that demand is really there. And what's interesting is that you have to be diligent in using the FS20 property indicator. So you've got to be on the ball.

As soon as a property sells, you need to do your analysis. Because what happens is all the data that comes out from the MLS is lagging data. And given the data is lagging, you have an opportunity. So this is how it works, folks. You see a sale that is just huge.

Let's say it's 25% above the Redfin estimate. You go back and you compare that price per square foot to the average price per square foot of the lagging data, according to MLS. So in a post that I write, I highlight two examples. And one example, let's say it's sold for $1,200 a square foot for this particular house.

But the average price per square foot from the lagging data from months ago, for the past three months when there were 15 sales or whatever the case may be, was only around $950. So you have that spread there where you can go and bid with confidence. Any similar type of property, like the home that's sold for $1,200 a square foot, you can bid with confidence at the average price per square foot or a little bit higher to be very competitive.

Depends on how much you want that house. But it's only after about one to four months where the data will start reflecting the most recent blockbuster sale. And then by that time, the property market will move up and reflect the new average price per square foot data, or it'll go down if a lot of these homes are selling below the online estimates.

So you've got to be really, really on the ball and use this window of opportunity with the FS20 property indicator to snag your property for a great price before the world wakes up and realizes that the market has moved much higher or much lower. I just want to point out that everybody must not only analyze the numbers online, but they also have to kick the sheetrock and go visit these properties to make sure the numbers are congruent with what you see with your own eyes.

A lot of the stuff, again, is just a lot of smoke and mirrors online in terms of marketing and pictures and stuff like that. It's only after you do the numbers and you go to the open house or a private showing and you compare the numbers with what you see and how you feel.

That's going to give you a great indicator. And one exercise I want everyone to do when buying or selling a house is to go visit a property without knowing the price, walk through the property thoroughly, and then guess what the list price is, and then guess what the final sales price will be.

And the more you can guess that list price and final sales price accurately to within a 1% to 2% margin, the better you're investing acumen in real estate. This is really important. And it's a really fun exercise. So bring your friend, bring your wife, your husband, your kids, whatever, and just play the guessing game.

It is just so fun. And it just also allows you to think analytically about property and also make a case of why you think property should be priced the way it is. If you want to see two concrete examples of the FS20 property indicator at work, go check out the post.

It's called A New Property Leading Indicator That Gives Buyers Confidence. Enjoy, and just remember, please, please, please, do your due diligence before you buy any property, because a property can do well for you and your wealth long term. And it can also crush you. So do your due diligence and be very meticulous in your analysis, because it's very important now after such a great run in real estate.