Remember Price Rule #1:
PRICE RULE #1: The price you get for your property will be directly related to the number of buyers interested in, and competing for it.
It is stating the obvious that for a property to sell it has to have at least one buyer willing to put their signature on a contract. And the more interested buyers there are, the better the final selling price will be.
Some owners find the concept of the market determining the sale price quite difficult to cope with.
“Why don’t these people understand that my house is worth much more than they’re offering? After all, it’s got…”
“But it cost me $X to build. Surely they can appreciate what’s gone into it?”
The bottom line here: buyers don’t care about what price the seller wants, or what their house cost to build. They are comparing with other properties currently on the market, and those recently sold. Armed with that information they are assessing what a reasonable market price is for your property. The last thing they want is to pay more than market price. Their bank will feel the same once a valuer has given it the valuation report. Even if a buyer has signed the contract for a high price, if it doesn’t meet the bank’s valuation it will likely fall over on the finance condition because the value doesn’t stack up.
And more often than not these days, the buyers have researched the market and know it better than the seller.
The following elements are those that are considered necessary to achieve a “market price” in a property sale.
- The sale occurs in a marketplace of willing buyers, who are…
- competing for properties for sale from willing sellers…
- after proper marketing…
- with the Contract entered into in an arm’s length transaction, and…
- each party acting with knowledge, prudently, and without compulsion.
If these five elements are satisfied, then we have by definition a sale of “market value”. The purest form of this is the auction, which is why banks consider auction results to best represent the market value of a property.
It is important to understand that the marketplace of buyers, not the sellers, will determine the final price. Sure, the seller has to agree and negotiations are involved. The final deal has to be a mutual agreement. Hopefully it is seen as a win/win for both parties.
A key factor that limits the market price is the valuation to fulfill the “finance condition”. Almost all buyers need finance, and the mortgage lender will engage a professional valuer to provide an independent valuation of the property. If a seller is demanding $700,000 but the valuation only comes in at $600,000 guess what? The lender may not lend enough and the contract might crash on the finance condition. (Unless, that is, the buyers can find the difference from their own funds, or take out mortgage insurance, which may increase the borrowing limit from 80% to 95% of the valuation.)
By marketing the owner’s property effectively, and negotiating with buyers, the real estate agent will seek to achieve the best possible market price that a buyer is willing to pay and that will stack up with the bank.
The following factors do not determine the price a property will sell for:
- What the owner thinks it should sell for
- What it cost to build
- What the husband, wife, mother-in-law or best mate thinks it’s worth
- What is owing on the mortgage
- What the agent tells you he or she thinks you’ll get for it
- Sentimental attachment
On the other hand, the following factors will impact on the final market price your house will sell for:
- What other comparable properties in the local area have sold for in recent times
- Prices of comparable properties currently on the market
- What buyers think it’s worth (compared to others on the market)
- What a professional valuer might value it at for mortgage lending criteria
- The size of the house and allotment, its features, age and condition, and location
- Economic conditions, especially interest rates
What is the difference between a Valuation and a Market Appraisal?
A “valuation” is an assessment of the value of a property prepared by a registered Valuer, who has completed relevant university studies, and is certified in valuation.
A “market appraisal” is undertaken by a real estate agent or salesperson based on research into sales of similar properties in the area in the last six months, prices of comparable properties currently on the market, and an assessment of market appeal of the property. This is called a “Comparative Market Analysis”.
Valuations tend to be conservative because of the requirement of the valuer to use prudence and because the mortgage lender wants to know what price the property will sell for quickly if they need to get their money back.
A market appraisal of price should, I believe, specify a range. This is because the real estate agent is not psychic and cannot know precisely what the property will sell for. The estimated sale price range should be between 5% and 10%. As a rule, less expensive properties are easier to compare and the estimated sale range should be closer to 5%. In a market that’s rising or falling, the range might need to be higher. For example:
Unit: Estimated sale price between $325,000 and $340,000 (5% range)
House: Estimated sale price between $680,000 and $740,000 (9% range)
The Comparative Market Analysis
Agents should provide the seller with analysis supporting their estimated sale price. Known as a “Comparative Market Analysis” (CMA), this report must include information about at least three comparable properties within five kilometres that have sold in the last six months. When the agent presents you with a Listing Authority Form to authorise your property to be sold by that agent, the form normally attaches a CMA, showing details of the comparable properties that form the basis for the estimated likely sale price range.
Most CMAs include comparable properties currently on the market with an indication of how long those properties have been on the market, and at what price. If houses haven’t sold for a while it’s a safe bet they’re overpriced.
The Real Estate Institute of Queensland, which sets industry standards, recommends that CMAs include:
- three or more recent sales of comparable properties;
- any recent sales known but not yet recorded;
- a list of comparable properties in the location that are currently on the market;
- a report on current market conditions in the location including:
- average time a property is on the market before sold
- selling price compared to listing price (i.e. Vendor discount on sale)
- any market conditions that could impact the sale
Comparable properties are normally those that:
- Have the same number of bedrooms and bathrooms and car lockups
- Are on a similar size block
- Are of a similar age and style of home
- Have a similar quality of fitout or amenities such as pool or ducted air conditioning
- Are in a similar type of location (eg busy street or quiet street).
When I do a CMA I normally start with a radius search within 1 Km to compare houses in the same street or nearby streets, because location is an important determinant of value. Comparing properties isn’t always straight forward, because they can be very different, particularly at the more expensive end. Even similar houses in the same street can have very different values. One might be low down and back onto a busy road while another further up the street might be situated high at the end of a cul-de-sac with lovely views.
If a house is of an unusual design, or expensive, there may not be any similar properties nearby that have sold in the last six months. In such cases, the agent will generally try to find comparable properties further away, or properties of a lower or higher value, providing an explanation why they have sold for more or less than your property is likely to sell for.
Should I go with the agent giving the most optimistic sale price estimate?
It is a natural reaction for a seller to lean favourably towards an agent that tells them they’ll get a higher price than what other agents have suggested. After all, why would they list with an agent that was more pessimistic?
Unfortunately, some agents try to “buy listings” by telling sellers that there home is worth much more than what the market will realistically pay. They do this knowing that once they have the listing and the property gets much lower offers, they will break the news that—surprise, surprise—the market isn’t what they had expected. Unfortunately, they say, this means the sellers will have to lower their price if they want to sell. It is generally an offence to mislead sellers by exaggerating the likely sale price of their property, but it is a hard case to prove.
So don’t choose your agent based solely what they tell you your property might sell for. At the end of the day, nobody can tell you that with any certainty, and it is more important you use an agent who is good at marketing and will work hard.
You should ensure that the appraisals provided by agents you interview include evidence to support their estimate of sale price. Study the comparable properties they have used in the CMA and view photos of these properties online. How comparable are they? Listing websites such as realestate.com.au and domain.com.au keep listings of sold properties so the properties in the CMA should still be available to examine.
Select an agent who has supported the estimate of sale price with a detailed analysis of the market. Those agents will be more likely to get you a better price because when they negotiate they’ll be able to show buyers the evidence supporting the price being sought.
Note that the estimated sale price in the appraisal is not necessarily the listing price. The listing price is the price that is published as part of the “pricing strategy” (see Chapter 4).
In some cases there will be no listed price, for example if the property is to sell by auction, or by negotiation.