What’s the correct price for a property?

The Australian winter months of June, July and August have seen a significant slow down in the property market. Auction rates have declined in Sydney and Melbourne to around 60 per cent as the market is running out of steam.

I believe the mood of the market has changed. With the looming Federal election this coming weekend, many buyers have been fence-sitting, waiting for a sign in the sky to see which way things will turn out. My prediction is that the sky won’t fall in and life will continue … but, we are likely to see property prices go sideways for the rest of the year as the pendulum swings back in favour of buyers. The onset of the spring selling season will see many more listings flood the market, which means more competition amongst vendors.

Spring is the major selling season of the year. The change in air temperature, fresh budding leaves, wattle blooms and the longer days bring an expectation of new beginnings. Vendors like to sell in spring because the presentation of gardens and natural light can be magnified and settlement can take place in plenty of time for Christmas.

Under-quoting is continuing to be an issue for many buyers. This is where a selling agent quotes a property price of say “offers over AUD$600,000 (US$535,090)” but the actual value and realistic selling price is more likely to be $710,000. My team has seen countless examples of this practice over the last seven months. It’s partly a reflection of the under-supplied market, but sometimes it’s a reflection of poor agent practice. The catch phrase for this outdated tactic is “quote them low and watch them go!” Like bees to a honey pot the buyers swarm around the perception of a bargain only to be disappointed again.

What is the correct price for a property? In simple terms the answer is what a buyer is willing to pay (but not forced to pay) in a transaction with a willing seller (who is not forced to sell). Each individual buyer places a different intrinsic value on the features of a property. Buyers will generally pay more for a harbour/ beach view, a large yard, big balcony, north facing aspect, high ceilings, double lock up garage or a double brick home. It is these individual preferences that make pricing property an interesting science. There is no exact formula for determining value. However, there are several guiding principles that are used and in fact regulated by law.

A selling agent must provide comparable sales as evidence for a vendor in listing a property. They must aim to give a range 10 per cent below and above the estimated selling price. Section 72 of the Property Stock and Business Agents Act 2002 requires that:

“False representation to prospective buyer
(1) A real estate agent acting pursuant to an agency agreement for the sale of residential property or the employee of such an agent must not, by a statement made in the course of marketing the property, falsely understate the estimated selling price of the property.”

We recently shortlisted a quality two-bed unit ( two baths and one car) in Ultimo where the agent quoted over $550,000. It ended up selling for $705,000. We represented an investor client at auction in Potts Point for a simple one-bed/one-bath apartment that was quoted as around $400,000. This unit ended up selling for $477,000 after spirited bidding from several parties. In Greenwich we sourced a new listing where the agent was quoting between $1.0m to $1.1m for the entire campaign, yet on auction day it achieved $1.34m.

These examples reinforce the need for significant market research prior to making offers or attending auctions. (Note that we did not buy any of these properties for clients as they went just above our independent appraisal range).

Below are seven key items that a sales agent must consider when advising a prospective seller on value.

• Comparable sales – Recent sales for properties with similar number of bedrooms, land size, etc.
  Market conditions – Consider consumer sentiment, macro economic outlook and local market issues.
• Optimum / alternative uses – Assess potential for alternative uses or redevelopment
• Restrictions- are there any easements, covenants and rights of way that impact value?
• Property features – eg zoning, architecture, views, proximity to amenities such as shops, schools, transport, physical condition, size, shape and slope of land.
• Special conditions – check if the sale is subject to extended settlement, tenancy, lease back etc.
• Other relevant facts – this may include method of sale, marketing campaign/ strategy, or specific vendor’s instructions (eg inspections only at night) that can affect value.

Under-quoting creates false expectations for buyers that end up forking out $500 or more for pest and building/ strata reports every time they want to bid at auction. It creates a distrust of real estate agents opinion on values and it wastes the valuable time of property hunters.

So what is the solution? If you spot a gross understatement of value by an agent you can report them to the office of Fair Trading. It would have be a very serious case for them to prosecute (ie say 20 per cent below value).

The best solution is to do your own research thoroughly – attend as many auctions as you can in your chosen area. Study the sales results like a form guide and get a complete picture of the market. Or even better – engage a buyers’ agents to appraise and negotiate for you. They will give you an independent opinion of value with reference to recent sales and local knowledge from our area specialists.

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About the Author:
This article was written by Rich Harvey, founder and CEO of propertybuyer, Sydney & Australia’s leading Buyers Agents. Rich is an economist and was awarded the 2009 National “Buyers Agent Award for Excellence” by the Real Estate Institute of Australia and the 2007 National Telstra Business Award (amongst other awards). www.propertybuyer.com.au