How to Determine Market Value of a Property?

Updated: Mar 12

How do you determine the value of the property

How much should you offer for a property?

Before a property buyer can answer this, they need to know 1 critical number - How much is the property worth in the property market.

Any serious buyer should always know what the property is worth, before you consider making an offer. An offer that is too high, could mean you are overpaying, while a low-ball offer might get you a good deal on very very rare occasions, it can be seen as a rude and insulting offer, and lowers your credibility.

Determining the market value of a property is a blend of art and science, and the value of a property can be different even when the properties are next to each other.

So, let's start from the basics.

What is the Value of a property? What is a property worth?

The value of a property in the property market is how much the property can be sold for. It is how much an average buyer is willing to pay for the property. A real estate agent can usually give you an idea of what the property is worth, but.. how accurate this number is, would depend on a few other factors, which we will discuss later.

Now, you might have heard of property valuation. It sounds similar, with similar processes, but that is quite a different thing.

The value of a property provided by a real estate agent is called a Market Appraisal. It is what property buyers are willing to pay for the property. While a Property Valuation is a value used by financial institution and the legal professions. This value MUST be provided by a licenced valuer.

How is Market Appraisal done?

Determining the value of a property is a blend of science and art. The more experience the agent is, and the more knowledge the agent has in the area, will help him/her give you a more accurate Market Appraisal. It is important to get an independent agent, as non-independent agents would usually have a hidden agenda in mind, which we we discuss later.

How do you determine the Value of a Property?

This step by step guide will help you understand the process of assessing the property value.

  1. Know the property you are assessing. Find out as much details and characteristics as you can about the property.

  2. Look for other similar properties being sold in the area.

  3. Look for SOLD properties in the area. Again, find out as much details and characteristics as you can about those properties.

  4. Have a good understanding of the demographics of the people living in the area.

  5. Have a good understanding of the buyers of those properties in the area.

How to determine an more accurate value for the property?

This next step, is going to make a big difference, to the whole process. And this is something which most buyers would struggle with, if they had not done enough homework. This is also one critical step which most so-called "Buyers Agents" with hidden agenda would not do for you. And you will know why, once you understand the process. So, here it goes...

Now that we know what other properties are sold for in the area, you need to:

  1. Put yourself in other property buyers' shoes (Ok, you might not know them, and they might stink, but you still have to do this. There is no escaping this step, if you want to get an accurate valuation.)

  2. Ask yourself this fundamental question:

How much would you pay for the property, if you were them.

The answer to this one question is very important as this allows you to understand what your competitors are willing to pay for the property. And what they will pay varies depending on the market cycle, market timing, their plans and intentions. Determining this can be an easy task, if you know what you are looking for, and there is no 1 right answer to it. It depends on many other factors, such as:

  1. Demographics of the residents in the area.

  2. Characteristics of the location of the property in the area.

  3. Characteristics of the property itself.

  4. Buyer demographics.

  5. Intent of the potential buyers.

  6. Future market trend for the area.

  7. Other factors specific to that property.

  8. Timing of the property market, and cycle.

Most property buyers and junior real estate agents would struggle with this critical step as it requires a good understanding of demographics, demand, supply, potential, which only an experienced real estate agent can.

How accurate are those free Market Value websites?

Now, you might have come across websites which claims to provide an accurate value of a property. Are these online valuation websites really accurate?

If you have read and understood the process above, you would realise, determining the market value of a property in the property market is quite an involved process. It is a combination of:

  1. science;

  2. maths;

  3. the real estate agent's understanding of the property; and

  4. the real estate agent's experience in the property industry.

The two steps are easy. It involves averaging the sold prices for the properties in the area. While the last two steps to refine the number, involves a good understanding, appreciation of the property, and ultimately the agent's experience in the real estate industry, to fine tune this number.

The first half can usually be done easily. With enough data, a person with elementary Excel spreadsheet knowledge would be able to do it within minutes.

The critical second half is where the fun begins. You need to invest hours and even days to understand the area, understand the property, buy data and information, to get answers to the questions. Then, blend the answers to the number derived in the first half. As you would have realised, it could be days before you derive at a number, and this is a art which probably no machines can do.

Now, given that there are over 10.6 million residential properties in Australia (ABS data), I doubt if any free platforms would have the resource to invest in humans to provide the numbers. Remember, the person would have to spend days and years to derive the value for each and every residential property? It would take anyone a few years to put together an accurate value to each and every property in Australia. And, by the time the numbers are published, the numbers would be significantly different, as prices, buyer demographics property market conditions would have changed.

In short, the free market value websites are good to serve as reference, to give you a very rough idea of property prices. And these number have often been proven to be off by hundreds of thousands of dollars. It is not something which real estate professional like good buyers advocates / buyers agents would trust and use.

How accurate are the market appraisals from real estate sales agents?

So, now we know we really need the experience of real estate agents to understand the value of a property. But should we trust the real estate sales agents? What should we know before we decide if we should trust their number?

There is no denying that most real estate sales agents attempt to make a honest attempt to put a value to a house. But we should also understand that many are driven by the need to get a listing. This is one of the critical Key Performance Indicators (KPIs) of most sales real estate agents in the industry. Their performance is determined by the number of new properties they can list in the market. And in order for real estate sales agents to do that, they have to entice property owners to let them list and sell their properties.

What else could be a better incentive than to CONvince home owners that their properties are worth a premium, $200k above everyone else, and to promise property owners that their property can be sold for top dollars if they let them sell it.

With this understanding in mind, you will realise it is very common to get an inflated estimate from the sales agents, especially if they have a vested interest in having an exclusive listing for your properties.

How accurate are the Statement of Information provided by the real estate agents?

Now, on the flip side of the same coin. Now that the sales agent has successfully enticed you and start selling your property, their next job is to list the property openly and generate enough buyers interest in your property. They also have to release what is known as a "Statement of Information" (SOI) which is supposed to declare what your property is worth, and what comparable properties were recently sold, to justify their claim. Or at least, that is the reason why these "Statement of Information" are mandatory.

Now, remember, as a sales agent, they need to generate enough interests in your properties. What other ways are there to generate interest, than to CONvince buyers that your good property can be bought for a low, affordable price? This hopefully will help you understand why some SOIs are a few hundred thousand dollars lower than what the property will be realistically sold for.

This is NOT to say all Statement Of Information are inaccurate. There could be a genuine reason why the property price stated in the SOIs is different. The property might be in a flood zone. It might have some fire damage, or termite infestation, to justify the low price. Or it might have a gold plated toilet, and that in itself is worth $100k over other properties. Without an onsite inspection by an experienced professional, it is, thus, almost impossible to determine what value is realistic.

So, where can we get an accurate idea of the property price?

So, if everyone has a vested interest in providing the property pricing, and everyone has a reason why the property value should be higher or lower than others. How can a novice buyer know what to pay for?

This is where you an independent appraisal of the property will come in handy, if you can afford it. You could consult a genuinely independent Buyers Agent / Buyers Advocate. It could cost you a couple of hundred for the report, and take them a couple of hours to analyse the property, research on the property and compile a Competitive Market Analysis (CMA) report. Or you could engage a licence property valuer for about $600 to have a formal inspection and valuation.

Independent Property Appraisal

We understand the anxiety buyers goes through to try to determine a price for the house. Our low-cost property appraisal service is designed to be a good compromise between a formal valuation from a valuer, and the iffy numbers from the free tools and public domain information. We will review the property, research the property, location, potential and provide you with an accurate price range for the property. History has shown our prices to be within 15% of actual sale prices 98% of the times. We are so confident of our appraisal, that we are willing to give you a money back guarantee. If our appraisal is VERY off the mark, you will receive a full refund. for the report No questions asked.

Property valuations can cost you around $500 whereas market appraisals can be obtained for free from any licensed Real Estate agent. If you believe the agent is honest and reliable, you should be able to organize a free market appraisal.

So, if you’re buying your property or selling your property, consider speaking to one of our senior buyers advocates, to get an independent assessment of the property. Our agency principal, Rayson, has over 20 years of property buying, selling, and investment experience and would be happy to give you a hand.

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