Reducing the ‘Fear Factor’ in Property Investing (Part Two)

As a Buyer’s Advocate, I get asked all kinds of property related questions. People lean on my expertise and experience for all manner of things.  One of the most common questions I get asked is about the value of any given property. People like to know whether they are paying too much, offering too little, considering selling for the right figure, getting taken advantage of by a sales agent, or being too emotionally caught up in a purchase… The list goes on.

In many cases I am engaged at this point to ascertain property value and/or commence negotiations for my buyer or seller. Obviously my job is to get the best result for my client and before I can start any kind of negotiation I need to have a really clear understanding of market value, market sentiment, history of the sales campaign, date/timing, interested parties and rental prospects (if applicable to investors).

This process involves a lot of science but it also requires an intimate knowledge of the current market, an intuitive understanding of how the selling agent is operating and what other players are in the game.

Let’s discuss the science component first—this is the ‘black and white’ part for me. I look at what is commonly known in the industry as ‘recent comparable sales’. Recent comparable sales are important to explain because there are clear parameters around what can be defined under this banner. The ‘subject property’ can be compared to other properties which fulfil the following criteria:

1. Same location. This is paramount and in many cases, a comparable location may be restricted to the very same street—or even a specific section of the street. It is not prudent to compare properties which are not in a comparable street.
2. Same size land. In most cases, land appreciates and land holds value. If the subject property is on a smaller or larger allotment, the property is not comparable.
3. Same size dwelling. This includes number of bedrooms, number of living areas, size of outdoor living, etc.
4. Similar rental return (or prospects)
5. Same era/finish/style. Imagine comparing a 1980’s 3BR AV Jennings home to a 3BR restored Edwardian on the same size land in the same street? It just wouldn’t compare. Likewise an original 3BR period home in need of restumping and fit out would not compare.
6. “Recent.” This is a big factor. Bank valuers generally don’t accept sale dates which are greater than 3 months old. In a moving market, this part of the equation is vital.
7. “Sale”. The property has to have sold. It can’t be under contract, subject to finance or advertised for sale. Again, in banking circles, if it hasn’t sold unconditionally, it isn’t a comparable sale property. In some cases valuers only accept settled properties.

So knowing what we have outlined so far, a comparable sale price should be a good indicator for what a property may be worth, however this is never enough information for me and it’s not reliable information on its own.

The next aspects of ascertaining value are the shades of grey and are often the hardest to understand for many people. For example, take Grand Final weekend. Many agents have time off for the game. Many buyers are not going out shopping that weekend. A motivated vendor with a crucial need to sell might not be able to just momentarily ‘switch off’ their campaign however, and in the absence of buyer interest, could feel compelled to take a low offer on their property.  This low sales result doesn’t necessarily mean that an identical property next door could sell for the same price the following Saturday—it just means that on Saturday 1 October, a motivated vendor accepted a low offer in the absence of anything better.

Take another example—market sentiment. We can categorise market sentiment into many different sub-sections, from global outlook, Australian economic outlook, Melbourne activity, interest rate rise/fall trends, media speculation, the list goes on.

A final example; the way in which the sales campaign is being handled can have a dramatic impact on price. If the property is not advertised properly, then the catchment of buyers is diminished and the buyer competition is reduced.

I could write pages and pages—the bottom line is understand more than just comparable sales before you bid.