4 steps to value property
Want to know how to value property? When dealing in real estate, knowledge is king. Lack of knowledge will cost you money because your inexperience will encourage you to pay more than the property is worth.
Here is how to value property:
- Ring local real estate agents
- Check comparable sales
- Get the REALas price prediction
- Speak with neighbours
In January a Sydney-sider was transferred to start work in Melbourne at the end of the month. He had three children of school age and wanted a property that would be close to schools and public transport. Traditionally in January everyone is on holidays. It is not a time when people are usually thinking of selling the family home. This meant the client’s choice was always going to be limited. However, I received a call saying that he had found the ideal place. I agreed to meet him at the property, with a nagging sensation that I had heard the address before. Not only had I heard it before, but the property had been on the market for ages. It had been auctioned unsuccessfully three times and was riddled with damp. Subsequently it was demolished.
To find out what a property is worth, you need to do some homework, to get as much knowledge as you can – both on the property and on yourself. It is amazing how many people look at two or three similar properties, come to a conclusion that they think the property is worth ‘X’ and decide that they will pay ‘Y’. How can they be so wrong?
I received a phone call one Monday morning from a client who had gone for a drive on the weekend to a popular seaside area. He came across a property that had superb water views, was only five years old and didn’t need any work. He spoke directly with the owner and found out the asking price. Although quite prepared to pay this price, he decided to call me first.
After I had inspected the property and looked up the comparable sales figures, I discovered it was hugely overpriced! No property in that area had sold for even half the asking price. It wasn’t a big block of land and it wasn’t right on the beach. Needless to say, a big mistake was averted.
To find out what a property is really worth, you must do some research. In any research that you carry out, do not rely on the real estate agent’s representation. They may not always tell you the truth! They will say, “One sold around the corner for $… and another one sold for $… and we are expecting interest over $400,000.” In fact, the properties may not be comparable; they may not even have sold. Some agents will tell you what you want to hear to put a positive spin on your questions or concerns. It is important to do your own investigations.
I was asked to attend an auction for a block of land in one of Melbourne’s eastern suburbs. Research before the auction indicated that $850,000 was a realistic valuation. This research also allowed me to form the view that my client was the only interested party, so I arranged my bidding accordingly. The property was advertised at $680,000 plus.
The auctioneer opened the bidding on behalf of the vendor, having stated that all vendor bids would be declared and that the public could thus bid with complete confidence because bidding would be transparent. However, a dummy bidder bid against the vendor bids up up to $790,000. I was aware that he was a dummy bidder because he bid even after the auctioneer had taken his bid. He couldn’t quite get his timing of the bids right and stood in the middle of the road like a sore thumb.
I then made a bid of $800,000, making it conditional on the auctioneer and dummy bidder not making any further bids on behalf of the vendor. I also announced to the crowd that if the auctioneer did not accept this condition, the whole auction would be a farce; I would leave and suggested that others should do the same. The property was passed in to me at $800,000 and, as there was no real underbidder, my client bought the property for that price. This was $50,000 less than he had been prepared to pay, all because there were no other genuine bidders.
Doing your home work on a property and working out what it is worth involves four main steps; ringing several other estate agents, checking comparable sales, getting the REALas prediction and speaking with neighbours.
Here are 4 steps to value property:
1. Ring local real estate agents
First, ring estate agents in the immediate area. One or two of them will probably have missed out on getting the listing for this property and will tell you its problems, warts and all. Most importantly, by ringing other agents in the area you can find out whether another property, similar to or perhaps even better than this one, may be coming onto the market in the near future.
2. Check comparable sales
The next important step is to check comparable sales. This can be done either through council records, by accessing sold prices on the Internet, asking local valuers or sometimes, if you are in doubt, by employing a valuer to give you a ‘market opinion’ of the property. Five hundred dollars spent on a valuation could save you $50,000.
A car dealer needed to expand his panel beating shop and, because of council restrictions on permits, was limited in his choice of suitable properties. Another car dealer, a good friend of his, said ‘I have the perfect property for you.’ Because permits are hard to value and not easily accessible to comparable situations, I suggested to the client that he obtain an independent, sworn valuation because of the complexity of the issues and also to put an arm’s length between himself and his friend. The asking price was $3.6m; the independent valuation came in at $2.25-2.5 million. When in doubt, get a professional opinion.
3. Get the REALas price prediction
Third, check REALas.com – a free web site that helps home buyers and property investors find out the real price for their next home.
The REALas price prediction is calculated using a proprietary algorithm developed with RMIT University, property buyers and real estate experts.
REALas predicts on approximately 90% of properties listed for sale in Australia. Currently, REALas doesn’t provide predictions on sale prices for land, new builds or blocks of apartments.
How accurate are REALas price predictions?
REALas provides Australia’s most accurate price predictions on properties listed for sale, including auctions and private sales.*
Nationally, on average REALas has predicted within 5% of the sale price over the 12 month period beginning Sep 16 to Aug 17.
Read more about the science behind REALas.
*Based on market analysis that shows REALas had the lowest mean difference between the predicted price and the sold price, when compared against a number of free price prediction services. This was for approximately 5,000 listed properties with available sales data during Aug & Sept 2017. This comparison was validated by PricewaterhouseCoopers.
REALas price predictions are a guide of potential sale price. REALas price predictions are not a bank valuation. No property has been inspected for this purpose.
4. Speak with neighbours
Fourth, and most importantly, speak with the neighbours. See what issues there are with the house. Is there a problem with the fence? Is there a plumbing issue? Are the neighbours planning to build a two-storey extension that will take away all your natural northern light? You don’t want to live next to a building site for the next 12 months. Are there rumours of other development in the street?
It is particularly important to see who the neighbours are when buying a unit. For example, if you are buying a unit in a nice quiet building, you don’t want a family of 15 living next door. Go and look at the building so that you get a good idea of what sort of environment you are actually going to be living in. Neighbours can tell you what the body corporate is like. This allows you to find out whether there are issues with the body corporate, not just what the agent might be telling you. Are painting levies needed? Is there one tenant or owner who is particularly difficult? You don’t want to find yourself saddled with problems like this.
Talking to the neighbours also allows you to find out who they are. Are they going to be pleasant neighbours? Difficult? Helpful? They will usually tell you why the vendors are selling, another important point to consider when buying property. For example, is it a forced sale, caused by divorce or bank mortgage? Have the vendors bought another property, so that they have a date they have to work to?
How much the owners have invested in advertising the property is usually a good guide to why they are selling. If the advertisements are small or there are none at all, the vendors may just be putting their toes in the water; they probably don’t want to meet the market at market value. For example, many people put their properties up for sale with the idea that, ‘If someone is prepared to pay me 15 per cent more than it’s worth, I’ll sell.’ You don’t want to be the bunny who comes along and pays 15 per cent more than the property is worth. So check how much effort the vendors are putting into selling.
Our clients wanted to buy a substantial bayside property with a 50-square home, a swimming pool and tennis court. Negotiations began with the vendors. However, when we inspected the property, the beds weren’t made, there were dishes on the table, the dog had made a mess of the garden. After three weeks of negotiations, the vendors decided to withdraw the property. Had it ever really been for sale?
If you encounter a similar situation, ask if there is a signed authority to sell from the vendor, or ask the agent to produce the vendor’s statement before you have a second look.
– David Morrell