When
using real estate to draw analogies with domain name values one
needs to distinguish between commercial and residential property.
The former presents a better analogy for a domain name that is
suitable for commerce, while the latter is superior when considering
domain names for personal use.
In
commercial real estate markets values are primarily driven by
occupancy rates and lease prices, say, per square foot. Thus,
given an estimate of these two quantities for a given property,
its market value can be easily quantified. Moreover, if the ongoing
lease rate is $30 per square foot, no rational tenant will pay
$50 per square foot for a comparable property. Furthermore, even
when the property is undeveloped, but is within a commercial zoning
designation, value is still primarily driven by the cash flows
the property is expected to generate. Nevertheless, different
potential buyers may value it differently because of their different
projections of the revenue, construction cost estimates, and risk.
Thus, value is easily quantifiable for developed as well as undeveloped
commercial real estate.
On the other hand, although value estimates of residential real
estate are also driven by sales of comparable property, a buyer’s
assessment of value is much more subjective, as there are no cash
flows to estimate. Moreover, although, in principal, one can use
residential lease rates to infer property value, these two rates
are often out of whack. Thus, the frequently made statement that
the market “price is what the buyer is willing to pay” can be
appropriate only for residential real estate with unquantifiable
cash flows.
Consequently, if a domain name is more suitable to be used as
a commercial site, its value is primarily driven by quantifiable
cash flows. On the other hand, if it is more suitable for personal
use, its market price may be driven by the “what the buyer is
willing to pay” principal. One should keep in mind that the intrinsic
value of an asset is based on the asset’s best use. Thus, if a
buyer wants to use a commerce-viable domain name as a personal
website, either the buyer is paying too much or has a personal
valuation that is different than the market’s.
Hence, only for personal domain names the “price is what the buyer
is willing to pay” principal should be applied, as benefits of
ownership are very subjective and thus, their value to the seller
is not readily quantifiable.
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