How to calculate a property's true value

Knowing what drivers affect price and how to identify unique properties will help you understand which properties are worth your investment. 

cate bakos

In an ideal world with a predictable, unemotional set of buyers, a consistent supply of every category of dwelling, and a balanced supply-demand ratio, it’s simple for an aspiring buyer to apply a ‘land plus improvements’ style of rigor to determine the likely selling price of a property. However, even if this is the case (ie. a completely balanced market with consistent supplies of all manner of dwellings), what the buyer then has to figure out is the land value. This is much harder to work through than just applying a suburb average.

Land value varies for many reasons, just to name a few:

- Desirability of the street
- Compromise of the position (e.g. main road, flight path, train line, bad neighbours, unsightly building within visibility, industry nearby or school next door/over the road, cemetery within close proximity, etc.)
- Future planning activity adversely affecting the property (e.g. Likeliness of high density surrounding it, road widening and hence noisy traffic, congested parking if close to amenities with limited parking options)
- Size of the block (interestingly, if the block is either unusually large or unusually small, it’s scarcity value could be higher than a block size which comfortably fits the centre of the bell curve, hence the value per square metre will be skewed also.
- Future development potential. Any buyer who assumes that a 650 square metre non-sub dividable block will have the same value per square meter as a 610 square metre sub-dividable block is mistaken. Developers, builders and land bankers recognise land that can enable profit.

In identifying some of the physical factors that challenge land value being based on a consistent dollar-per-square-metre basis, buyers also need to pay particular attention to the current market conditions and potential rival buyer emotions.

Whenever we appraise a property, we have to consider the competing properties on the market in the same genre (i.e. family homes, single-fronted cottages, ground floor boutique apartments etc.) to apply a weighting to the anticipated buyer numbers. In many cases, we can uncover a micro-drought and we often suggest to an unemotional home buyer or investor that they may be better off waiting until the type of property they are chasing after is on offer in larger numbers. But for those rare properties and limited genre houses, we can’t be so opportunistic about the market conditions. Recognising that a particular type of house may only come up every six months or so can enable a buyer to accept the rate of the day, as opposed to holding out in a moving market some five or six per cent. At the million dollar mark in a market that is tracking at 10 per cent per annum, waiting it out for another opportunity some six months down the track can account for $50,000 in lost opportunity.

Clever buyers understand this and while they may begrudgingly meet the market at auction, they also understand the implication of waiting.

Lastly, applying rigour to understanding the possible value of the dwelling itself is vital. A beautifully specified property with state-of-the-art fixtures and fittings will represent a different value to an equivalent property with a renovator’s ‘fast cosmetic detail’ job done for a sales campaign.

To simply consider land size as the only indicator is fraught with danger and will not give the buyer a clear indication of the correct selling range to prepare for.

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