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Home / Mortgage Advanced / How to Value a Property – A Buyers and Sellers Guide

How to Value a Property – A Buyers and Sellers Guide

A couple doing a house tour with a real estate agent

Whether you’re buying or selling a property, knowing and understanding the value of your property is vital. Calculating the value of your property or one you wish to purchase can be difficult. Determining which factors to take into account is even more so. Do you rely on a real estate agent? Do you look at the local market? Do you hire a professional for property valuation?

Follow our guide to understanding everything about a property’s estimated market value as a buyer and a seller.

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What Is Market Value?

Firstly, let’s establish what market value means. Essentially, it is the negotiated property price between a buyer and seller. It is not the current asking price or most recent offer, but the agreed price. Of course, this isn’t particularly helpful if you’re about to list your property on the market without any idea of the price. Nor is it helpful if you haven’t yet made an offer.

Therefore, buyers and sellers have to work out the estimated value range of the house based on similar properties, nearby sales prices, and property information. From this point, the buyer and seller negotiate to reach the actual market value.

What Is the Median Value of Property in Sydney?

Sydney property values are currently increasing at a rapid rate. According to CoreLogic data, at the start of 2022, property prices have increased 25.48% year on year. The average price of a house in Sydney is currently nearing $3 million.

Why Get a Property Value Estimate?

There are many reasons to get an estimate of your property value. From helping your property search to preparing for selling, estimated values are essential for the home buying and selling process.

  1. Firstly, you should get a clear idea of your home’s market value before putting it up for sale. Aside from giving you a nasty shock, overpricing or underpricing your property can waste time and money throughout the process.
  2. Secondly, the value of your home likely will have changed since you bought it. It should go up in price for many people as you make improvements and the local area is in higher demand. However, you must seek professional advice to know the full extent of your property worth.
  3. As a buyer, having a clear idea of the property value will help you determine your offer. If you’re selling another property to buy a new one, a lower estimate might mean you have to be more frugal with your house hunt. Whereas with a higher estimate, you can flex a bigger budget.
  4. Whether you’re securing a home loan for a new property or refinancing a current property, getting an up to date valuation is essential. Most lenders will arrange their own property valuation, but getting your estimate will help you decide which home loans and lenders are suitable.
  5. Finally, you might wish to establish the market conditions and property worth before making a will. This will help you determine the monetary value of the asset to ensure you distribute your estate fairly.

How Professionals Value a Property

If you seek a professional to value your property, they follow a set number of calculations and rigorous methods to determine the value of Australian property. We’ll briefly cover how a professional investor might calculate the value of your property.

The Capitalisation Rate

Firstly, they will need to assume the capitalisation rate. The capitalisation rate – also known as the cap rate is the net value of appreciation – is applied to the rate of return of the property’s profitability to determine its present value.

The property’s profitability is called the Net Operating Income (NOI). To determine the market value, divide the NOI by the capitalisation rate. So, if we assume a property’s NOI is $1 million over ten years with a capitalisation rate of 14%, the sum would be:

1,000,000 / 0.14 = 7,142,857

The capitalisation rate is determined by one of the following methods:

  1. Build-up method
  2. Market-extraction method
  3. Band-of-investment method

How Buyers and Sellers Value a Real Estate Property

If this is a little technical for the average buyer or seller, there are many easier ways to estimate the property’s value. It’s sensible to work out an estimate to get a head start on buying or selling properties, even if you hire a professional.

Here are some completely free ways to establish an estimate of your property’s market value.

Find Local Sales

The first step you should take is to look at comparable property data in the local area. Generally speaking, you should only look at recent sales (within six months preferably), within 1km or so of your property, and a similar property type.

The easiest way to do this is to search your postcode online and look at recent comparable properties asking and selling prices. Take an average of all the similar property selling prices to get a good idea of what your house could sell for – or how much you should offer on a home you want to buy.

If you’re using a mortgage broker to secure a home loan, there is a good chance they will know the rough estimate of property values in your area. As they regularly work with buyers, lenders, and real estate agents, they are experts. They are willing to help you throughout the home buying journey.

Can You Compare?

It’s no good just looking at the local market. You need to establish that all the properties you are comparing are similar to yours. Check the following:

  1. Do they have a similar number of rooms?
  2. Are the streets similar in appearance?
  3. Are both properties equal distances from public transport and amenities?
  4. Is it a similar size?
  5. Are they both of a similar standard?

If you judge your five-bedroom, recently renovated house’s value based on a two-bedroom property that is a little run down, you will get a wildly inaccurate idea.

Superior or Inferior?

This is where it can get challenging to be objective. Emotional attachment to a property can affect how you assess the price of your property.

Once you have a list of three to five comparable properties as a home price guide, try to be honest about which are superior and which inferior. It might be worth asking someone else their opinion if you struggle to be objective. Consider location, land, living area, parking, views, and building quality.

Now, you should have a rough range of the property value to approach a real estate agent.

Market Movements

If your property is in a highly competitive area, you’ll need to adjust for market movements. Property value could change drastically in the three months since the last local home was sold. Make slight adjustments to your estimate based on the market movements.

To establish how in-demand your area is, you should look at auction clearance rates, discounting percentages, and the number of days the average property is on the market. CoreLogic often has the available data, or you can stay up to date with our monthly housing report.

Common Mistakes

If you’re patient and do your research, then you can establish an accurate estimate of your real estate value. However, if you don’t take care, you may seriously over or underestimate the value of your property. This can have significant consequences and might lose large sums of money.

While the above methods work well, if you base your entire valuation on your calculations alone, then it’s at your own risk. To ensure that you make as accurate a valuation as possible, watch out for these common mistakes.

Influenced by the Agent

Typically speaking, the real estate agent works for the seller. If you’re a buyer and trying to determine how much you should offer for a house, the real estate agent might provide advice. If they tell you about other similar recent offers in the area, try not to be swayed by their opinion.

More often than not, they’ll be telling you the truth. However, it’s safer to stick to your research on comparable properties. Plus, you cannot verify that these other offers are made on houses similar to the one you wish to buy.

Are They Truly Comparable?

Another common mistake is to compare properties that are not entirely similar. Make sure that you consider land size, quality of build, and location. This might be difficult in markets with very few sales or unique properties. If you’re in a less densely populated area, you might need to expand your location beyond 1km to find truly comparable properties.

If your property is entirely unique, it might be sensible to seek professional advice rather than rely on your judgement.

Not Being Objective

As we mentioned above, it’s crucial to ignore any emotional attachment you might have to a property. People fall in love with their homes, and it can be hard to recognise their actual value. Similarly, buyers can also fall victim to emotional attachment. If you see a property you love, you might find yourself overpricing it and paying more than you should.

That’s why it’s vital to ask friends their opinions, to remove any overpricing risk. Beyond losing money, it can also have severe consequences with your bank. When they conduct their property valuation, they may not lend you the total agreed amount if they find the worth far below the amount you wish to borrow.

Therefore, unless you have a subject to finance clause in your sales contract, you will have to make up the shortfall out of your own funds.

Research

Without thorough research and understanding of the local market, it can be challenging to get an accurate idea of the property value. We recommend going to as many open houses and auctions as possible to determine how competitive the area is and how your property compares to others in the locality.

In addition, it’s worth remembering that you shouldn’t listen to media hype about a particular hotspot. It’s not always a trustworthy source of information and might exaggerate the situation. Ensure you only look at reliable data based on statistics and facts.

Key Takeaways

When you value your property, there’s always an element of risk. Unless you use a mathematical model and analytics information, there’s always an element of guesswork. However, by ensuring that you make clear, careful comparisons, you should be able to establish a pretty accurate idea of the market value of your property.

Remember to focus on comparable properties and try to be objective. If you have any doubts about your ability to value your home, then it’s best to engage a professional to do the job. However, even if you do, it’s still sensible to gauge your own estimate to get a head start in buying or selling real estate.

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FAQ

How can I increase the value of my house?

Recently renovated, well looked after, and energy-efficient properties are often far superior. If you’re looking to sell, it’s worth spending money upgrading your property and ensuring the home is finished nicely. Small touches like a coat of paint or landscaping in the front yard can go a long way. 

How do you calculate the value of a property?

The best way to determine the value of your property is to assess similar homes in the local area. Ensure that you include houses within 1km of your own, similar build and quality, and the same size. It’s recommended to only look at homes that have sold within six months or less to get an up to date estimate. Then you have your estimated value range.

When you have narrowed down your properties, try to be objective about whether they are superior or inferior to yours.

Why is market value important?

One of the main reasons market value is significant is that it applies concrete worth to an asset. It eliminates estimates or ambiguity. Plus, buyers and sellers often have different valuations of the property’s price.

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