There is a two step process that I encourage everybody to use when they are figuring out how to estimate property value. Most buyers stop at step one – if they even get that far! However, step two is critical in a changing market, whether prices are going up or down. Get these two steps right and you’ll be able to move onto step three, which is to confidently decide how much you’re prepared to pay.
Step 1 – Comparative Sales Process
The comparative sales process is the most commonly used method to estimate property value. This entails looking at recently sold properties and comparing them to the property you’re looking at buying.
To be really useful, these need to be located in the same suburb and very recently sold. Of course, it’s not always possible to find directly comparable properties, so sometimes you’ll need to look further afield. Perhaps there is a neighbouring suburb with similar properties at a similar price point. You might note that they’re inferior or superior based on the desirability of the specific location.
You might also have to look further back in time, which creates a problem if prices have been moving rapidly. How much more or less is a property worth today if it was sold 6 months ago?
Step 2 – Index for market movement
What we do at Good Deeds is index for market movement. If the market is fairly stable, we don’t tend to adjust prices if they’ve been sold within the last few months, however in a rapidly rising or falling market, even one month can make a big difference.
Our price research process has evolved and matured over many years. I used to try to track price movement by suburb, but median prices are notoriously unreliable. If you’ve listened to enough of our podcast episodes, you’ll know why that is. In a rising market, we create a monthly index for units, dwellings and houses using CoreLogic data for the whole of Sydney. In a falling market, however, there are certain types of property that fall in value quicker than others, so we lean on our market knowledge to assess which recent sales this principle should apply to.
In a nutshell, that’s how to estimate property value by adjusting past sales, but that’s not where it stops.
Step 3 – Decide how much to pay
When we identify a property for our clients to buy, we are typically evaluating a great asset. Let’s call them A-grade properties, which are generally going to be more competitive than B and C-grade property.
There will be times when a premium needs to be paid in order to secure such a property and it’s our job to quantify that premium. At Good Deeds we track our market estimates and the ultimate sale prices, regardless of whether our clients buy them or someone else did. In this way we can measure the strength of the market and the average premium the market is pricing in for A-grade assets. Now, this is quite scientific compared to what the average buyer is going to do, but it is critical data that helps our clients decide how much is too much.
When that market was red hot in 2021, that average premium got to be as high as 13%. Now the market has slowed in 2022, it’s down to 3%. If we are preparing to go to auction for an A-grade property that is scarce and absolutely suits our clients’ needs, that’s when we would encourage them to consider adding on an appropriate premium. But it’s important to know how to estimate property value first, so you have a basis for calculating that additional percentage.
In a rising market, this process means effectively prepaying for a couple of months of growth. I stress, however, that you have to assess the property on its own merits, regardless of your needs. You don’t want to be paying a premium for a B or C-grade asset, because when the market turns, as it will, you don’t want to be stuck with something that you paid too much for and will be hard to sell. We have to be very strategic about which properties we choose to be the highest bidder for.
Working out how to estimate property value is an important part of the due diligence process, however there is a lot more that needs to be covered off if you want to ensure that you’re not over-paying for the wrong property. If you’ve found a property that you want to buy, find out how we can guide you through the entire evaluation and negotiation process.
This is a conversation I’d love to encourage you to join. We need to be talking more about truth, transparency and trust in the property industry. Reach out to me on Facebook or Linked In and leave a comment.