Accurately assessing market value is essential when buying a property. It ensures you either don’t overpay for a home or can quickly spot an excellent opportunity so you can proceed with confidence in negotiations.
As a buyers’ agents I like to adopt three approaches to help determine market value and our offer price:
- Comparable sales – This is the primary method of assessment. This approach uses recent completed sales in the locality which are good comparisons to our subject property. By comparing the features of the sales to those of our property, an indication of value is revealed.
- Cost to create – This describes what it costs the seller to get the property to its current state. So, it’ll be what they paid for the home plus the cost of any improvements they’ve carries out. This isn’t necessarily reflective of market value, but it often provides some understanding of the seller’s mindset and what they want to achieve from the sale.
- Replacement cost – This approach is simply the cost of the land plus the cost of rebuilding any improvement on it. This explains why high-end, fully completed homes are selling so well at present, because their replacement cost is greater than their purchase price due to the high cost of construction at present.
While all these approaches can work in unison to help us define our offers and negotiations, there’s no denying the comparable sales approach is the most accurate for assessing market value.
Market value is the figure the property should trade for on the open market given appropriate advertising and exposure and with both the buyer and seller eager to trade and fully informed about the property’s beneficial and detrimental elements.
It’s a foundational number when it comes to property as it is the figure banks will base their lending approval on.
In conducting a comparable sales approach to valuation, we want to conclude whether various characteristics of the sales are similar, inferior or superior in comparison to the subject property.
To help do this accurately, we look at a property across its two main components. These are its land component, and then the improvements which encompasses the house, landscaping, pool and any other works carried out on that site.
Assessing land value
For part one of this discussion, I want to focus on the essential comparison characteristics when assessing the value of land.
These comparison characteristics can be applied whether the land is vacant or has a home on it.
There are six characteristics I use in the land comparison process:
- Size – How big is the site in square metres in comparison to the sales. It’s important here to remember the value per square metre of land isn’t linear. If you sell a 400 square site for $400,000, it doesn’t mean an 800 square metre site is worth $800,000. As land size increases, the rate per square metre tends to decrease.
- Shape – Typically the most desirable sites are of conventional rectangular or square shape. So, in metres, a 10 x 40 dimension normally define a 400 square metre site, 15 x 40 for 600 square metres, and a 20 x 40 for 800 square metres. Irregular shaped sites – such as triangles or trapezoids – tend to attract less buyer interest and are generally inferior as compared to regular shaped lots of the same size.
- Slope – The slope of the land effects build cost, house design and street appeal. Tiered houses that cater to their slope can have less useable yard space or trouble achieving a seamless indoor/outdoor flow. Land that slopes up and away from the road has more street appeal than land falling away from its road front too.
- Dimensions – While similar to “shape”, this element plays more broadly to buyer appeal. For example, it’s safe to say that blocks with wider street frontage can often yield a bit more. So, a 20 x 30 block can be a bit more appealing than a 15 x 40 block. Also, a longer frontage to the prevailing views or natural light might also play a role in value.
- Soil type – This isn’t as important to a completed home value as it is to a vacant lot value. That said, soil type will be relevant if the home lends itself to an extension or substantial renovation. You must know if you’re on clay, or a reactive soil that could cause foundational shifts.
- Current market – Finally, you must be aware of market conditions as at the time the comparable sale transacted. For example, a property that sold in late January 2022 will be a very different proposition to one that sold in March 2022 simply because of the interest rate rises last year. Of course, you should always seek comparables that have occurred as recently as possible. Reflecting on very recent sales help you assess your property’s value under the most current market conditions.
Assessing value accurately takes skill and experience, but it’s the foundation of proceeding with confidence into the sales process.
Adopting these five factors in land comparisons will go a long way toward answering the value question. The second half of the equation is assessing the added value of improvement – a subject I look forward to tackling in my next article.