- Locating the right comparable sales and applying them correctly is key
- There are core elements for selecting the correct comparable evidence
- When markets are rising, multiple variable must be factored in to avoid overpaying
When it come to accurately assessing the price of a property, there’s little doubt a mix of science, experience and intuition is essential.
And the foundation for finding the magic figure is the comparable sales you use, and interpreting that evidence properly.
On episode 81 of our Property Planner, Buyer and Professor podcast, my co-hosts and I delved into the process of adopting the right sales and applying the information effectively.
The discussion helped us define the elements key to getting an accurate measure of what to pay for a potential purchase.
1. Recent sales
It’s imperative the sales evidence you use reflect current market conditions. Therefore, reliable calculations can only be carried out with sales that’ve occurred as recently as possible.
I’ve already written extensively about the dangers of dated comparables. One of the biggest challenges buyers’ agents face is ensuring we assess price based on what’s happening now, not what happened six months ago.
A quick look at CoreLogic data reveals that in Melbourne, for example, prices have increased by almost nine per cent since the start of the year. And that’s just the big picture number.
Break that into suburb-level results and it’s likely you’ll see wildly different variations. My experience tells me some suburbs will have had double-digit gains over the past six months. That’s a lot of price movement in a short space of time.
For me, the best sales to use would be no more than six weeks old. Sales up to three months old can be useful, but you must make allowances for shifts in your market. Any sales that are further back should be treated with extreme caution or ignored altogether.
2. Highly comparable
When running comps they must be as similar as possible in a physical and planning sense to the property you’re pricing.
This takes in a range of characteristics. My co-host Peter Koulizos outlined in our podcast the way that bedroom numbers, house size, land size, age of dwelling, and extent of ancillary improvements all play a part. We also discussed how position in relation to walkable amenities – and even negatives such as main road frontages – play a role.
I pointed out that orientation is another essential consideration. A north-facing backyard could see a 20 per cent premium in value over and above the same property with a south-facing yard.
And then there are things like town planning advantages and restrictions. Zoning and designations affect what you can do with a property. Heritage limitations could impact how much improvement or demolition you can carry out. Even the width of an allotment’s frontage could determine its valuable long-term redevelopment potential.
Restrictions are a serious consideration too. A restrictive covenant, an easement or even a local planning approval nearby that impacts the enjoyment of the property (both short term and long term) needs to be understood.
This is all to say, try and make sure you are comparing like with like. If your comparable sales vary from your subject property in any way, you need to take this into account in your analysis. The wider the variances, the more difficult it is to be accurate in your price assessment.
3. Sales proximity
You know what I mean here – it’s ‘Location! Location! Location!’
Using comparable sales that aren’t within close proximity of your subject property creates huge errors in comparison. Sometimes one street and another street being just 100 metres apart can result in many multiples of value difference.
Using comparables in close proximity means they have the same access to services and facilities as your subject. You’ll be in the same school catchment, have similar public transport options and will be within equivalent distance of employment hubs.
Unlike a bad paint job or messy yard, location can’t be altered.
Keep your sales close, so your value assessment can be accurate.
4. Market reliability
Properties are traded between people for a variety of reasons, and sometimes their motivations may cause them to pay more or accept less than would be considered reasonable in a market.
To get a true feel for price, make sure your sales evidence is what’s referred to as an ‘arm’s length’ transaction.
This is where the process has been open and transparent with no special interest premium allowed for by either the buyer or seller in the negotiation.
For example, sales between family members, such as from a parent to their kids, are notoriously unreliable. There are also instances where properties are sold due to duress or stress. Divorce or death, for example, can see sellers willing to offload a home for less.
The flip side is true too. A sale to a neighbour is a red flag on reliability to me. Perhaps the neighbour was happy to pay a premium in order to amalgamate the properties and create a development site?
Try and find out the story behind the sale to ensure you have reliable market evidence.
5. The secret sauce is… experience
Unfortunately, this one is difficult for the average buyer to overcome.
It’s impossible to overstate the importance of looking at who’s analysing the evidence and drawing conclusions.
You must be unemotional in your comparison. A hard task if you’ve fallen in love with a listing.
Also – experience gives you a ‘sixth sense’ about a property. Buyers’ agents working day-in day-out in their specialty areas are constantly tuned into the market. They will likely know about every comparable in an area – both completed contracts and those still proceeding.
They also be aware of listings about to come onto the market and the level of interest certain properties garner in a suburb. They have attended auctions and seen first-hand the levels of supply and demand.
They will understand the prospects for growth, and the potential for rental if it’s an investment. They will comprehend what buyer demographic will be attracted to the property. They will have a grasp of future local infrastructure and likely developments in a suburb that might impact local properties in both positive and negative ways.
All of these things are being weighed in their minds when they are assessing an appropriate price to pay for a home.
Best of all, when markets are rising fast, they will have an opinion on whether you should pay a premium over and above perceived ‘market value’. In short, they can tell you when to stretch your limit, and when to walk away.
Don’t get caught out by using bad evidence or relying on lousy advice. Ensure you gather the right information to be certain you make the correct decision on how much to pay for your next property.