This is the quintessential favourite question for many property owners and buyers and real estate experts alike, and a question which depending on who you talk to, has lots of different answers with potentially huge variations on the values.
All owners of course value or see their property through a set of different eyes to what an independent third person does. This is called the "endowment effect" and is the reason everyone perceives their own pet dog, football team, choice of restaurants/ wines etc. as "special" and the best. Clearly everyone has a view on these matters, and this is always subjective, as it is with the value of a property. Fortunately, some methodology can be applied to assist in determining value.
TYPICAL METHODS CENTRE ON SOME OF THE FOLLOWING:
1) Comparable sales evidence (make sure "apples for apples" comparisons). This is actually the most reliable as long as the sales evidence is recent, and similar in its comparison. Also it is essential that the market has not changed since the comparative sale occurred. NOTE: Scarcity or uniqueness or what we call "WOW FACTOR" can add 10-20% in some cases to what seems reasonable market value. Sometimes, "BRAND SPANKING NEW" achieves the same outcome.
I often smile how some owners will see sales evidence compared to how some buyers see the same properties. Each sees "comparable" properties to suit their own arguments. The main areas to compare are land size, land location, frontage, elevation, views, high side or low side of the road can matter, front or rear, even the direction that the block faces. Then the next most significant determination is the quality and value of the improvements, i.e. the house. Owners rarely allow enough depreciation of dwellings once they are ten or more years old, and buyers usually depreciate them too much.
2) Land value plus improvements- Owners don’t realize that once a house is built on a block, the property is no longer a "house plus a block" but a going concern. It is often the case that vacant land sells for a premium of up to 10% more than what would be paid for an old house on it. This is because the only purpose for a vacant block is to build on, whereas once a house is built, it is unlikely that the property will ever be used as a building block again for 20-40 years, so the buyer is one that wants that exact house and the improvements that come with the block.
3) Comparing to asking prices of similar properties- The worst and most unreliable method as asking prices often have no correlation to sale prices or market value. We have seen homes come on the market for $8.8M and then sell for $6M, we have seen homes take 2 years to sell, and we have seen buyers offer 30% below asking prices. Really asking prices are irrelevant to market value. Sellers and buyers should ignore them. Asking price really means "Wish for price". More and more you are seeing property come to market without a price, as agents and owners realise the value of having buyers focus on the home, not the price.
OTHER SOURCES OF OPINIONS OF VALUE FOR A BUYER OR A SELLER:
1) Neighbours- I believe one of the worse sources of reliability. There is enormous self interest in "wanting" the value to be more. Not reliable or impartial at all.
2) Other agents- As above. Many agents will "bag" other agent listings, especially if there is resentment that they think they should have won the listing or strong competition between some agencies. Often, the "expert" agents have not seen the property in question.
3) Valuers- Can be reliable, often at the conservative end of the scale, and rightly so.
4) The selling agent- Can be biased, have emotional investment in the valuation of the property. Will certainly be able to justify her opinion as to value if any good as an agent.
5) A specific buyer- Only qualified to what she will pay, not indicative of market value. Some buyers are really way off, we often see buyers make offers 10-20% below what we sell them for. We refer to these buyers as "bargain hunters" and are often making low ball offers on properties. I have never met a seller that wants to sell to a bargain hunter. We can pick these buyers by the type of questions they ask. They are more interested in "the deal" than in the home. We find many buyers are 6-12 months behind in their understanding of values, as they pay too much attention to graphs and old sales evidence from a year or so ago, and do not update based on recent market activity. Also, we have sold properties for $500,000 more, or 15% more than a specific buyer was adamant that a particular property was worth on a given day, proving no one buyer (or seller for that matter) determines market value.
6) The seller- Can be biased as they are emotionally attached to the home. Often they will rate erroneous and subjective factors in determining value such as their wants, needs, or even a wish for price that they had in mind. They often perceive certain improvements as adding a lot more value than what it actually does to a buyer.
7) Mates/ friends of seller- As for neighbours. We find in some instances that the friends that are trying to provide support, and may have watched a few too many Foxtel episodes of "How to make a $1M property sell for $1.5M" have strong views of value that do not match current market conditions. The active local agents will always have the up to the minute feel of the market and often be 3-6 months ahead of the papers and graphs on the official websites.
WHAT IS CURRENT FAIR MARKET VALUE?
After the property has been tested in the market for a reasonable amount of time (I think 45-60 days is plenty) and buyers have had a chance to see the property, it should sell. If it doesn’t then there are only a few reasons.
1) Agent is not doing her job.
2) Poor marketing (refer to 1).
3) Price is wrong.
4) Wrong or poor location (refer to 3).
5) Poor market (refer to 1) and 3).
6) Seller is not motivated to sell or unwilling to meet the market.
7) Absorption rate (Too high a supply for the current demand on that particular property type and market segment).
8) Demand for that specific market segment slow at moment. (Some price segments move through different phases through an economic cycle)
Ultimately, the property is worth what a willing buyer is prepared to pay at a given moment, and able to fund ***, persuaded by a competent and skilled negotiator. After having exposure to a fair pool of buyers, that result is called "fair market value". ***NOTE: offers made by buyers that do not have the ability or capacity to fund in this tight market are not indicative of market value.