How to Value Property Like a Pro - February 2022
When it comes to buying a property – any property – there is one absolute lynchpin figure you must know, and that is its market value.
Market value is not speculation or supposition. It’s not opinion or instinct.
No, market value is a measure based on a defined process, and it’s the key to understanding what you (or anyone else) should pay for the property. It is a baseline metric around which other major decisions will be made.
And while most people feel they can come up with an idea of market value, being as accurate as possible is not easy for those without experience.
Assessing market value
Firstly, the definition of market value is the amount an asset will exchange for on a given date in an arms-length transaction between a willing buyer and willing seller, but neither so eager as to overlook normal and reasonable considerations.
Market value is not the special price a neighbour will pay for an adjacent property. It’s not the discount figure a parent might sell to their children for. It’s not what you might get for the property in 12-months’ time.
Understanding this definition is important because it allows us to remove emotion and special circumstance from the equation, set boundaries on what the figure represents, and look at it all purely as ‘fair market value’.
The tools of valuation
The most important tool in the valuation process is reliable, comparable sales evidence.
You need to collect a cache of property sales (not listings, but actual contracted sales) that describe how much people are paying for properties in your area. When used properly, sales will tell you the components of a property that buyers desire most and least in your market.
You need to find sales that are as similar as possible to the house you are assessing. Think location, land and house size, house age, accommodation type and other important characteristics that you’d normally pay attention to when choosing a home.
Professional valuers will rely on sales that are no more than three months old, and I would suggest you do the same when markets are rising quickly. The more recent the sale, the more indicative it is of the current market.
Also seek properties in the same position and location. Any sale within about a 500-metre radius of your subject property should be looked at, but whittle the list down to only the most relevant (i.e., similar) sales among that group.
Now it’s time to compare the sales you have to the home you’re valuing.
To do this, try and understand the attributes of the subject property and compare those to the sales.
Assuming it’s a house, I like to think of the process in terms of its three primary components.
Firstly, there’s the land. How big is the site and where is it positioned? What’s the shape, slope and topography? What’s its aspect and outlook? What are all the positive and negative elements that will influence value one way or the other? Compare these things the same elements in each of your sales and ask whether the land component of your property is overall better, worse or similar to each sale.
Then look at the main structure. Again, break the subject property down into all its value-influencing attributes. How big is the house in square metres and how many bedrooms does it have? What’s the floor plan like, and is it practical? Is it in good condition or does it need repair and renovation? Does it have covered outdoor space? Would it appeal to a large section of the buying public? Compare these to the houses in your sales.
Finally, consider any other site, or ‘ancillary’, improvements. Is there fencing, landscaping, driveway, pool, tennis court and sheds etc.? What is the useability and condition of each? Again, it’s time to compare to the sales.
You will now be able to form a picture about sales that are overall superior, inferior or similar to your property. Use a logical approach to rank where your property sits in the range of sale prices you’ve been comparing to.
Sounds easy… what can go wrong?
Yes, the process of assessing value appears simple, but in truth there’s a lot that can go badly.
Unless you have plenty of experience in a particular property market, it’s difficult to judge what attributes people value most in a given location. For example, some suburbs will pay more for a house with a pool, while others find them a negative due to maintenance and running costs. Unless you know intimately what a local buyer wants, it’s easy to overvalue or undervalue some property components.
The other issue for people who aren’t working in an area consistently is the quality of the comparable sales they unearth. Buyers’ agents, for example, will know not just the sale price, but the background behind the sale. Was it a divorce situation where the home sold quickly at a discount? Could other assets not listed on the contract have been included in the sale? Was it to an out-of-town buyer who paid too much because they didn’t know the area?
All these things are important pieces of knowledge than can affect your eventual assessment.
Finally, there’s the emotion factor. When you’re assessing value, its near impossible to put your emotions to the side and take an impartial view of the property you want to buy.
This is where your buyers’ agent will shine. Our unemotional opinion will keep you financially safe because bad emotional decisions are common among buyers and can be very expensive.
So, my advice – get a professional to help. Use a buyers’ agent to not only assist in sourcing your next purchase but also rely on their skill and experience to help you accurately assess market value and provide reasonably guidance on what you should pay for your next home.
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