When purchasing a property, it is important to note that the listed price is not necessarily the true value of the property. In many cases, the selling agent can list the property above or below the intrinsic value of the property. Additionally, properties don’t always sell for what they are worth. Sometimes, it might be an off-market deal that is picked up for a bargain or a property at an auction where a home buyer pays over the odds. There are numerous circumstances where the price of the property has discrepancies with its true value.
As an investor, getting the most value for your money is one of the top priorities. Sometimes, this can even mean paying above the listed price. To get the most value an investor needs to be able to value a property. A successful investor can identify the value of a property and if the deal stacks up numerically. While it is important to know the value of a property before purchasing it. Understanding how to accurately value a property can be fundamental to dictating whether a property is worth the asking price.
There are multiple ways to value a property and identify what a property may be worth. Using multiple property resources, it is even easier today for investors to generate accurate property values. One way of doing this is to use a resource that generates a property price estimate. These estimates are based on the median sales price of that particular property type and configuration in an area. For example, a three-bedroom house may be valued at 500k in a suburb and therefore the price estimate will calculate a value around this number. Now, of course, not all properties in a suburb are worth the same despite having the same configuration. Numerous other variables such as condition, lot size, and locality all play a role. Hence why this method may only give a rough indication of the estimated price.
Alternatively, another and more accurate method is to look at comparable sales. These are properties sold in a similar location in a similar condition previously. This is generally a greater reflection of the true value of the property as closer comparisons can be made. When using this method more than one variable can be compared allowing for a more accurate valuation. For example, within the last month, there may have been three sales that are quite similar to the listed property. The sales prices of these properties can be averaged out to generate a valuation. By then comparing this value to the listed property the investor can determine if the property is listed above or below its true value.
Why is there a Discrepancy?
Sometimes a property may be listed over the median suburb price or more than comparable sales for a particular reason. The market could be moving quickly, and this has seen an increase in property values. Alternatively, the property could have some kind of added value which would in turn demand a premium. This can also work in the other direction, with some properties being listed well below a buyer’s expectation. The property could be in poor condition, have structural issues or there is an extremely motivated seller. Each property deal needs to be looked at on a case-by-case basis. This allows the investor to determine the intentions of the seller and the quality of the property. It will also paint a picture of how they may negotiate a deal and if the property meets the investment parameters numerically.
Understanding how to value a property is essential in becoming a seasoned property investor. It will also play a critical role in risk mitigation by preventing investors from over-capitalising their purchases. Property investing is a numbers game and being able to purchase quality properties at the right price will build the foundation for long-term success.