‘The property down the road is on the market for $750,000 and that property isn’t as good as mine. So my property must be worth around $900,000… do you think we could get that?’
Whilst there is some logic to this argument, it may not be accurate. Firstly, it’s not easy to be objective about one’s own home and secondly, the property down the road hasn’t yet sold so it’s not yet a useful comparison.
A real estate agent will look at ‘comparable sales’ to estimate the sale price of a property. However, with acreage properties it is not always easy to compare apples with apples. We sometimes need to extrapolate to come up with ‘similar sales’. For example, Property 1 may have an extra bedroom but Property 2 has a swimming pool – so we can trade one feature off with another to make a price comparison.
The value of a property is very subjective, so people may have different opinions on how much a property is worth to them. To illustrate, a property located on a busy road may only be worth $400,000 to a family with young children due the traffic noise. But a business owner may pay $550,000 for the same property because it provides extra exposure to passing customers. So a property is worth what someone is prepared to pay!
Market value is defined as:
“the estimated amount for which an asset or liability should exchange between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.” International Valuation Standards Committee (IVSC)
There are three traditional approaches to valuing a property:
- comparison approach
- cost approach (land value + cost of construction)
- income approach (eg. for commercial properties)
A real estate agent is not a registered valuer. A valuer can provide a valuation but a real estate agent can only provide a market appraisal. The difference is, a valuation is a legal document that is defensible in court.
Valuers are usually engaged by a bank to ensure the property is worth more than the bank is lending on the mortgage. Obviously the bank wants to protect themselves if the borrower is unable to repay the debt and the property needs to be sold (mortgagee sale).
Valuers have tertiary qualifications, at least two years of experience, and they are registered with the Valuers Registration Board of Queensland. At the end of the day, both real estate agents and valuers rely on comparable sales to estimate the market value of your home.