How to establish the "market value" of a property

Hi all,

I'm currently undertaking some due diligence on some properties, and part of this requires that I establish their "market value", so I know the maximum price I will pay for them. I had a look through SS and couldn't see any threads specifically related to this topic. So I have a few questions.

Question 1.
How do you obtain your recent comparable sales data:
- ask the agent for a comparable sales listing
- purchase a comparable sales report from RPData (or subscribe)
- purchase a comparable sales report from Residex (or subscribe)
- purchase a comparable sales report from APM (or subscribe)
- purchase or use the free findmeahome.com.au service
- look at the local sales listing at the bottom of realestate.com.au;
- look in the Domain section of the paper every weekend, and keep a record;
- a combination of the above?
- another method?

Question 2.
If you purchase a report from one partilcular data provider, why do you use this one over the others? (for example, cheaper, better quality data etc).

Question 3.
Once you have obtained comparable listings, what do you do (if anything) to to account for the differences between your property of interest and the comparable property? i.e. the land size of your property might be smaller/larger; located in a more/less desirable area; have a larger/smaller house, be newer/older than the comparable listing.

So for example, you may use the land as the reference point, add or subtract $X depending on if it is located in a more desirable area, and so on.

Question 4.
If you find a property that is advertised significantly under market value, what due diligence would you undertake to ensure that this is a genuine bargain, rather than being sold at a low price because there is something significantly wrong with either the property (e.g. major structural issues) or the location (e.g. neighbours from hell, unfavourable development in the pipe line).

OK, I think that's all for now! :)

Thanks in advance for your replies!

Cheers

Lisa
 
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Myself and a few other brokers who contribute here are happy to provide free Residex reports to clients. :)

The price estimates may not always be accurate, but there are several different metrics published in these reports. If you try to understand what the data is saying, and apply it to your own knowledge of the area, it can be very useful.

Any property report should be viewed as a resource, not a definitive answer.
 
Propertunity said:
Sounds like you want us to write your PHD for you Lisa :p;).....no deal.
and btw, there are plenty of threads in here on this topic.

Hi propertunity.... my PhD is not on property investing, it is on understanding the DIY investor - two completely different concepts. This information is purely for me! :)

Propertunity said:
Perhaps use the google search feature to find them rather than the search function of the SS forum.

Thanks for the tip. I have had a look at a number of these threads, but the onces I have seen don't specifically answer my questions above. Happy to be corrected though.
 
Myself and a few other brokers who contribute here are happy to provide free Residex reports to clients. :)

Yes, at $65 a pop for an individual Residex report, the money can add up if you are looking at a number of properties or areas! Thanks for the offer PT Bear. I have used brokers in the past to obtain RP Data reports, however, I think there are only so many requests that you can reasonably make before you wear out their hospitality!

I can subscribe to RP Data for a cheaper annual rate, so I might look into that.
 
*Bump* IMO knowing the market value of a property is just as important as location and timing. As such, I would think that most property investors would have a specific process that they use to establish the fair market value of a property.

While this might be an instinctive skill, based on several years of experience, for those just beginning (like me), I think it takes a little more thought work, hence my questions above.
 
Truthfully, I rely on my own knowledge of an area alot. I spend a good protion of my time on the internet trolling what is available in my favourite areas, their asking rates and if I can find (which is quite often) the price they actually sold at. I have on occaision looked at RPdata as well, but use this information more as a check on my own research. I always err on the side of conservative. I also chat to the local REA's and see what they think about particular values (their advice is always bias, but helpful none the less).
 
*Bump* IMO knowing the market value of a property is just as important as location and timing. As such, I would think that most property investors would have a specific process that they use to establish the fair market value of a property.
How do you define market value ?

Value to you ?
Value to the vendor ?
Your lenders valuation (or their mortgage insurers) ?
What a valuer would estimate ?

They are all different values... sometimes wildly.... and they all change on a monthly(?) basis....


While this might be an instinctive skill, based on several years of experience, for those just beginning (like me), I think it takes a little more thought work, hence my questions above.
Instinct, knowing your market, years of observation & research works for many here.

The comparable sales reports are a vague guesses based on last quarters averages - they may be a rough starting point for someone who knows v. little about the local market. A month spent doing inspections, talking to agents about recent sales, and watching prices will achieve a lot more.

All houses are different - block size, main/quiet roads, bedroom sizes, layout, kitchen/bathroom quality. Comparable sales are v. rough estimates... as you mention there are specific attributes of each house that appeal to or detract from the averages.

Market value is usually defined as a price agreed by a willing but not desperate seller & buyer. Some here talk about buying below market value - presumably they find a desperate seller.
 
Thanks for your replies Rugrat and Keith.

keithj said:
How do you define market value ?

Good point. I didn't think of it in that way. I guess there are lots of different ways of looking at it. Ideally, it would be great if your own valuation worked out at around the same price as a valuer would estimate it.

keithj said:
Instinct, knowing your market, years of observation & research works for many here.

Specialising in one or two markets has its advantages (and that's why buyers agents come in so handy). However, if you are buying in multiple areas, this makes it a little bit more difficult. Ideally, I would have a local buyers agent purchase the property for me every time, however the cost is too prohibitive. Hence, the need to learn it myself.

keithj said:
The comparable sales reports are a vague guesses based on last quarters averages - they may be a rough starting point for someone who knows v. little about the local market

Isn't a comparable sales report simply a list of all the recent sales in the area, of comparable value and type? I'm not sure how this would be based on vague guessing? :confused:

keithj said:
A month spent doing inspections, talking to agents about recent sales, and watching prices will achieve a lot more

OK, thanks. Will take this on board. :) Although in a moving market, one might not have a month to observe?

keithj said:
All houses are different - block size, main/quiet roads, bedroom sizes, layout, kitchen/bathroom quality. Comparable sales are v. rough estimates... as you mention there are specific attributes of each house that appeal to or detract from the averages.

Yes, agree. So, I assume that the "on the ground" experience of going to inspections, talking to agents about recent sales and watching prices will provide me with enough information to ascertain how much I should add or subtract to the average market price based on these variables.

rugrat said:
I spend a good protion of my time on the internet trolling what is available in my favourite areas, their asking rates and if I can find (which is quite often) the price they actually sold at. I have on occaision looked at RPdata as well, but use this information more as a check on my own research. I always err on the side of conservative. I also chat to the local REA's and see what they think about particular values (their advice is always bias, but helpful none the less).

Thanks for your tips rugrat, too. Ringing up agents and asking for the sales price sounds like a cheaper alternative to RP Data. While I do like the idea of talking to agents and getting their opinions on values for particular properties, I find it hard to shake the fact that they are working for the vendor in order to get the best sales price possible.
 
*Bump* IMO knowing the market value of a property is just as important as location and timing. As such, I would think that most property investors would have a specific process that they use to establish the fair market value of a property.

While this might be an instinctive skill, based on several years of experience, for those just beginning (like me), I think it takes a little more thought work, hence my questions above.


Hey Lisa,


I won't go into specifics of my market value method because I disagree it is anywhere near as important as location and/or timing the market.

For example (this is a real life story) I have some Friends who had $125kish to spend on first ip in 2006. Were deciding between Georgetown tassie and Gladstone Qld, choose Gladdy. Within 18 months Georgetown still worth the same and their Gladstone unit bank valued at $240k.

So assuming they that found a property in both towns that were proven by a perfect method of establishing market value ( by a PHD holder for example ;) ) to be $125k, would you rather have got a bargain in "Georgetown" for $120k or "overpaid" in Gladstone at $135K.

Cheers

BT

"It is the starting that stops most people"!

Buy something :)
 
Because every property is different:
  • Be systematic - list all of the properties you are considering and the key characteristics and assign a rating to each
  • For houses, try summing the land and building; for apartments compare with like
  • You only need a valuation range; negotiate from bottom to top - your walk away price.
 
Hey Lisa,

So assuming they that found a property in both towns that were proven by a perfect method of establishing market value ( by a PHD holder for example ;) ) to be $125k, would you rather have got a bargain in "Georgetown" for $120k or "overpaid" in Gladstone at $135K.

Cheers

BT

"It is the starting that stops most people"!

Buy something :)

Hey BT,

Your post made me laugh! Yes, you might be right. ;) Thanks for putting things back in perspective for me. :p

I have a natural tendency to analyse things to the nth degree - must be the natural researcher in me...but that's not going to buy me a property!

Thanks for the gentle shove.

Cheers

Lisa
 
What is value?
How do you measure it?
What affects value?
How does it effect it?
How much does it effect it? And which (if any) the most?
And how do those factors interact?

"market value" & "supply demand" are used often, but the hard questions is what's behind them.
It can as simple or complex as you want it.
 
Because every property is different:
  • Be systematic - list all of the properties you are considering and the key characteristics and assign a rating to each
  • For houses, try summing the land and building; for apartments compare with like
  • You only need a valuation range; negotiate from bottom to top - your walk away price.

Thanks for the summary Paul. I especially liked your comprehensive buying example that you used in your book. Your experience is very evident from the way you went about researching, valuing, and selecting a property, and then how you went about getting to "yes".
 
You're definitely overanalysing here, this is property, not shares. It's not that complicated really, and there's no formula needed to 'calculate' it. Use comparable sales and form your own opinion of value.
 
*Bump* IMO knowing the market value of a property is just as important as location and timing. As such, I would think that most property investors would have a specific process that they use to establish the fair market value of a property.

While this might be an instinctive skill, based on several years of experience, for those just beginning (like me), I think it takes a little more thought work, hence my questions above.

Market Value = Vendors motivation - Buyers expectation.
Find the average base price for the suburb.
Look at comparable lot / house sizes / listing price large vs small lots in area.
Know the suburbs profile/reputation/best street as viewed by locals and by interstate buyers.
Note nearby infrastructure or proposed.
Rental demand within the area.
Look at surrounding properties sales history and features of those properties.
Observe interest rate movement at the time of making offers.
Low ball offers sometimes help gauge sellers motivation.
Is the purchase long term or short term hold.
Look at past and future development applications lodged within the area.
Visit the property morning /day and night to view local traffic and noise conditions.
Chat to neighbors of the existing properties if they are about when you do a drive by. They can be a wealth of information and may even let slip what the owners are hoping to achieve for the property, and or the reason for them selling. Lastly trust your own instinct and understand that buyers remorse often can effect the best of us at some stage of the game. Just be confident in your judgments/DD and the rest will fall into place.
Remember time is CG's friend.
 
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