How to Confidently Price a Property So You Don't Overpay

4 Nov

How to Determine a Property’s Market Value: A Step-by-Step Guide for Buyers

When buying a home or investment property, working out its market value is one of the most critical steps in making an informed decision. Whether you're bidding at auction or negotiating a private sale, understanding a property’s worth can help prevent overpaying, which is especially important for first-time buyers who are often working with limited equity. For instance, overpaying by $25,000 on a $500,000 property could mean an immediate 5% equity loss—a challenging gap to recover at that price point.

In this post, I’ll walk you through a simplified process for estimating a property’s value, focusing on practical advice that will help you avoid common pitfalls.

Step 1: Understand the Property Inside and Out

Before diving into comparable sales or recent market trends, it’s essential to have a clear understanding of the property itself. This means assessing not only its major features but also its potential drawbacks.

For example, in this podcast I looked at a property that has four-bedroom, three-bathroom house in Melbourne’s inner northern suburbs. It has a small car space off a laneway and is situated on a 450-square-metre block. The house is fully renovated, with two bedrooms featuring ensuites and walk-in robes, making it ideal for a family. Key aspects to consider in this scenario include:

Location: Close to shops, schools, restaurants, and transport links, which enhances its appeal.
Build and design quality: The renovation looks fresh, but some rushed landscaping and design choices.
Detractors: The corner location and certain aesthetic details, may affect its desirability.
Unique features: A study (which could be a small bedroom), a separate kids’ retreat, and a well-designed living space opening onto the backyard.

Understanding these pros and cons is crucial, as they significantly affect the price range.

Step 2: Ignore Advertised Price Ranges

A critical tip is to avoid getting anchored by the agent’s price guide. These guides are often set by the vendor and can be misleading. Instead, gather your own evidence to justify a price range. This prevents you from being influenced by a number that may not accurately reflect the property’s value in the current market.

Step 3: Use Comparable Sales Data

When pricing a property, it's essential to focus on sold properties, not ones currently on the market. Properties still for sale can have asking prices that are unrealistic, as a vendor can ask for anything they like—it doesn’t become relevant until a buyer makes an offer.

In this case, I looked at several recently sold properties within the same suburb that shared similar characteristics to the house I’m evaluating. These included:

A slightly smaller but higher-quality renovated home that sold for around $2.5 million.
Another nearby home with less renovation and fewer bedrooms, which went for $2 million.
A superior property with a larger block and additional studio, sold for $2.85 million.

From this, I can estimate that buyer interest in the property I’m evaluating would likely be in the range of $2.6 million to $2.75 million.

Step 4: Check the Property’s History

Looking into the property’s sales history can also be a helpful clue. The house I’m considering was sold recently for $1.25 million in a rundown state. Since then, it’s been fully renovated, which, based on my experience, likely cost around $1 million. This doesn’t give a final figure, but it provides a useful baseline.

If the property is back on the market after a failed campaign, these could be red flags indicating issues with the house or the market.

Step 5: Be Wary of Emotional Purchases

Remember, the final price isn’t always determined by logic alone. Buyers often make emotional decisions, especially in competitive markets or when they fall in love with a property. For instance, a homebuyer might be willing to pay a premium for a family home they’ve become attached to, while a developer would calculate backward from the resale value after renovations.

Step 6: Consider Market Cycles

One last point to bear in mind: property markets are cyclical and can fluctuate quickly, especially in fast-moving urban areas. A few months of property viewing and research might give you a snapshot of the current market, but that doesn’t mean it’s stable. Social media and online property platforms can make market shifts happen even more rapidly.

Final Thoughts

In summary, pricing a property accurately is both an art and a science. It requires careful analysis of the property itself, recent comparable sales, and an understanding of the broader market conditions. It’s not about finding an exact figure but rather establishing a range that you’re comfortable with based on solid evidence.

If you’re a first-time buyer or simply too busy to dedicate the time, working with a property advisor can be a smart move. But if you have the time to immerse yourself in the market, I hope this guide has provided you with the tools to approach property pricing more confidently.