People often express how hard it is for them to estimate the value of a property, yet this is a skill all property investors should really have.
Blogger: Peter Gianoli, general manager, Investor Assist and ABN Realty
Getting property prices right is a high stakes game.
Buyers want bargains yet sellers seek maximum prices. This is a classic problem that will never cease to exist. To ensure you are not selling for too little, or purchasing for too much, you need to be able to estimate the market value of any given property.
The problem in property valuation is that the value of every property is different, and this value changes continuously as sales of similar nearby properties push the potential market price up or down. This is made even more complicated by price anomalies, such as emotive ‘must=have’ purchases, distressed sales, mortgagee-in-possession sales, or sales to loved ones, which are priced far below what a property is really worth. There is a huge range of free property price estimates and reports available on the internet. Just Google "property price reports," and they will pop up. Be warned, however, that while these reports can be useful, many of them are marketed as free to simply get your email address so sales representatives can flood your inbox with numerous emails.
Real estate agents will also eagerly give you a free market appraisal to convince you to use their services. Their report should contain some comparable, recent sales in the area, and in particular, properties that they have sold. Be careful with this information if you are a seller, as most real estate agents will try and seduce you with an inflated appraisal to get your listing and then work on getting you to reduce your asking price. Some of the more professional real estate agents may provide you with a free comparative market analysis, generated by a major property data provider, such as RP Data. Many real estate agents subscribe to these services and pass the information on to their better clients. This comparative market analysis report can provide you with aerial photos, boundary maps, property sale history, and as a consequence, limits the extent to which an incorrect price estimate can be made.
Sworn valuers provide electronic, desktop, drive by, or physical valuations, or a combination of the lot. They are normally used by housing finance lenders, and can cost around $500 per valuation. The higher the loan value compared to purchase price, the more the lender will rely on this sworn valuation. This lender's valuation is something you will pay for as the borrower, but its purpose is to let your bank manager sleep well at night. Over time, a sworn valuation loses its accuracy, as property values are constantly in a state of flux.
You can also buy reports that provide an independent price estimate or value range for a property. These cost around $30 to $75 per report, and are available from major property data providers online. The cost of obtaining a paid property price report for each property you are interested in can quickly mount up. It is better, in fact, to do the initial research yourself. Every investor should always keep track of the current median sales price of properties in the suburbs which they are focusing on. If the property you are considering market value is fairly typical of the suburb, you can apply any percentage of change. Suburb median sales prices are available from real estate institute websites.
The last sales price that a property sold for is an excellent way to determine its current likely value. If the property hasn't been altered or improved significantly since the last sale, then median sales price movements will help you factor in any growth or decline in the property that you are looking at. When you compare prices of recently sold properties, the most relevant attributes for houses are the number of bedrooms, the quality of the house, and the appearance of the house.
I always recommend inspecting the property you are interested in prior to purchasing it, or if this is not possible, checking out the property on Google Street View. Then compile a list of nearby, recently sold houses of a similar size and style. Once you have this list, work out the median house price and assess this median price against the property you are interested in purchasing. If the property you want to purchase has better attributes than the median price then you know you can expect to pay more for it or vice versa. Whilst these estimates are replacements for sworn valuations, the more you do them the more accurate you will become. And what's more, the more accurate you'll become at pricing houses accurately.