If you’re looking at buying a property, knowing how to estimate value is a critical skill to have. Not only can it help you avoid paying too much, but it can also help you to identify potential bargains.
Estimating property value – an invaluable skill
Whether you’re looking to purchase a home or investment property, or whether you’re buying at auction or direct, there’s no way to estimate the exact amount that the property will sell for. However, having an idea what it’s value should be will help you both in deciding whether to proceed with trying to buy it, and also in the buying process.
While there are several ways of determining a property’s value, this guide looks at one of the popular ways of property valuation; by market value. Market value is the final price paid to a seller and it is derived from analysing the price of similar properties in the market, and can differ considerably from the “listed” price of the property. Going by the simple definition, if you are going to use the market value method to estimate the value of a property, you will use the values of similar properties to gauge the value of the one you’re looking at. Below are the steps you should take to estimate the value of a property, followed by common mistakes people make when making an estimate:
1. Research the neighbourhood
You should start your research by focusing on the neighbourhood surrounding the property you are interested in. The radius you look at should largely depend on the population density in the area. For urban areas, 1km is a good rule of thumb, however it may be even less if the population density is particularly high such as in inner Melbourne or Sydney. If the property is in a rural area, you may need to stretch your radius out to 50km or more to find a good sampling of similar properties. The important thing to remember is that we just want to look at sales made within the last 6 months, as the more recent a sale is the more relevant it is for comparison.
2. Focus on properties with similar features
The comparison will only be helpful if you are looking at properties which are similar to the one you’re looking at purchasing. In this regard, the areas to look at are;
• The total area covered by the property – look at the property’s dimensions internal and external, and more specifically compare the room sizes and outdoor covered area.
• Neighbouring community facilities – consider the distance to, and availability of facilities like schools, hospitals, the main roads and other transport options. Work only with properties that are at a similar distance from these facilities as the property you are interested in. If you followed step one and are looking in a similar neighbourhood, they should be similar anyway.
• Interior setup – do comparisons with houses that have similar interior provisions such as the number of bedrooms, bathrooms, living areas and less focused on spaces such as separate laundries and butlers pantries.
• Exterior provisions – these are also crucial and include things like a garage, decking, patios etc. These should be similar to what your prospective property has.
• Parking – parking is considered a huge plus for most Australian buyers, so make sure the properties you compare against have similar parking provisions.
• The condition of the comparative houses – age, quality and design all determine if a property is similar to the one you are seeking to buy.
Domain and Real Estate are generally the easiest places to find this kind of information, and will usually include a number of photos and even floorplans for the properties along with the sale price.
3. Do a proper feature by feature comparison to create a shortlist
Once you have the general idea of the properties similar to the one you intend to purchase, you should carry out a feature by feature comparison. At each point, you decide whether the features of your desired property or those of the comparative ones are superior. This helps you get a fair picture of the value of the prospective property.
4. Stay updated on market dynamics
It’s important that you’ve got your finger on the pulse for the current situation and changes in the market. Particularly in the fervent Australian market, you will need to stay up to date with current sale prices and adjust your estimates accordingly. If you’ve been in the market for a while, you may find the prices of 6 months ago are not relevant anymore. As such, you should try to review sales results as often as possible either online or in the papers, and where possible attend live auctions and open house inspections to get a gauge on demand levels in the current market.
5. Other factors to keep in mind
Having done your comparison and keeping an eye on market trends, there are several metrics in the property market that can help your estimation. These either give an indication of the direction of demand, or the general trajectory of prices in the market. The three main metrics to look at include;
• Days on Market – often abbreviated as DOM, this is a figure that indicates the average number of days a property has been on the market before it is sold. They are counted from
the date of listing to the sale date.
• The rate of clearance – this is a percentage of houses sold before, during and after auctions. It serves as a reliable indicator of the demand in the property market.
• The median price – this is a number usually specific to local areas which gives an indication of the average value of a house in a certain area, including those being purchased off the plan.
You should avoid using any of these metrics exclusively as an indicator of the current situation in the market, especially given the data can often be over a month old. However, when considered alongside other metrics and also in line with your comparisons, they can be quite useful.
Common mistakes related to property estimates
Here are a few of the common pitfalls people fall into when making property valuations:
• Failing to keep track of real market conditions at the present moment. It may cost you great opportunities while leaving you with limited chance for getting good value for houses you are purchasing. It could also lead to offering or paying significantly more than you need to.
• Not recognising emotional attachment from the seller. This can affect sellers who are looking to sell their property and end up giving it a higher price tag than the actual worth of the house. Not having completed proper comparisons or following the market can lead to the buyer missing this and paying too much.
• Comparing prices with houses that are still in the market and not yet sold. It’s important to use actual sale prices for comparison, not the “listed” prices as these can often be misleading.
• Relying on the real estate agents information or falling prey to their pressure tactics such as issuing competing bids. Real Estate agents can smell a sucker a mile away and will capitalise on their lack of research by convincing them a properties value is much higher than it is. Remember, most real estate agents rely on commission for the bulk of their earnings, so regardless of how nice they may seem, their main goal is getting the buyer to pay as much as possible.
• Failure to compare similar properties – we’ve already mentioned it above, but failure to compare similar properties is the number one cause of inaccurate evaluations and can lead to your estimate being too high or too low, both of which can have significant negative ramifications for you.
• Using unreliable information sources mostly based on sensationalism and not facts and figures. Make sure that wherever you get your information from is as unbias and accurate as possible.
Summary
While it might seem like a lot of work to put together a decent estimate on a property’s value, it’s important to remember the property purchase will often be the highest value transaction you ever make. With this in mind there are often thousands or hundreds of thousands of dollars that could potentially be saved by taking the time and being diligent with your estimate.
If you’re currently in the market to buy or refinance a property, Loantree can help. Our experienced home loan experts specialise in helping everyday Australians get the best value loans on the market. Buying a home? Click here. If you’re refinancing, click here.