The last property I looked at apparently had ‘strong interest’, and the vendor ‘had to sell’.
Well several months have passed now, and you guessed it… still not sold!
It often pays to ‘block out the noise’, and that’s what I thought of writing about in this newsletter.
It reminds me of how often I see buyers fixate on the ‘price guide’ for new listings, but then neglect conducting proper due diligence themselves around what represents fair market value.
The (oversimplified) thought process is that by buying around the middle or lower end of the range they’ve bought well.
But this is silly because some agents quote high, others quote low, and buyers should always conduct their own research to determine where the value really sits.
Rather than fixating on price guides, buyers should think about price and value in the same way valuers do.
Valuers appraise properties for a living. Buyers can learn a lot from how they go about their work.
Valuers use two primary methods for estimating the fair market value for residential properties…
Method 1 – comparable sales
- The comparable sales method compares multiple sold properties against the subject property, in the same way a potential purchaser would. The analysis of the comparable sales makes allowances for such factors as date of sale, location, discernible differences between the properties…
- Ideally valuers find comparable properties which have sold and settled within the past six months, and find some which are superior, some which are inferior, and others which are considered very comparable to the property being appraised.
- As part of this method, valuers might derive a ‘rate per square metre’ of land on an improved basis (e.g. purchase price divided by land area), and then apply a suitable rate for the subject property.
- For example based on the comparable sales data the valuer might believe $7,000 to $7,300 per square metre for the improved site is suitable for the subject property and then that enables them to derive an appropriate figure. If the subject property was on an 810sqm block, then the value estimate might be $7,150 x 810 = $5,791,500.
Method 2 – summation method
- The Summation Method calculates the assessed value of the land, together with the assessed added value of the improvements, plus any ancillary value (e.g. car accommodation, pool/ landscaping, granny flat, etc.) to arrive at an overall market value.
- For example:
- Land value rate of approximately $3,400 to $3,600 per square metre (based on recent land sales); plus
- Living area rate of approximately $6,250 to $6,600 per square metre (based on the cost of construction, together with time, council fees, architects, and other consultants); plus
- Ancillary value (e.g. the additional value ascribed to structures like carports, pool/ landscaping, granny flat, etc.)
By having two methodologies (e.g. the comparable sales approach, together with the summation method), the valuer can essentially ‘sense check’ his or her estimate of value.
The point is, this type of analysis helps potential buyers understand what properties are worth. While still being highly subjective it’s far more scientific and accurate than resting on price guides from agents.
I often encourage clients to attend open homes and auctions, speak to agents, follow relevant sale campaigns through to completion, compile a spreadsheet of verified sales data, etc.
And if they can’t do it themselves then there are certain/ trusted buyers advocates we refer to who can assist.
Buying well is often about finding a great property and paying a fair price for it. That fair price needs to be determined by you (not selling agents).
Best wishes finishing off the year.
Daniel Gold
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The Long Property blog provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing on the blog constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
