The 7 dangers of overvaluing property this spring: Tim Godden

GUEST OBSERVER

As national property prices continue to climb in most capital cities – by more than nine percent in Melbourne and Sydney – we encourage buyers and sellers to get serious about the property valuation process as seasonal transactions gather pace.

The Spring season historically attracts a flurry of activity. As prices increase alongside competition, sellers need to be confident in the true value of a property to attract appropriate buyers, while buyers need to ensure emotions are not driving purchasing decisions and risking finances.

Here are the seven dangers of overvaluing property that buyers and sellers must be aware of:

Potential to miss out on initial buyer interest

If a seller’s asking price is too high, in most instances a property will sit on the market, while more appropriately priced properties are sold. As a result, a seller may drop their asking price but in doing so, risks losing the initial round of buyer interest - often strong when a new property is listed.

Remember, the longer a property is on the market, the more difficult it can be to stimulate interest. The cost to advertise a property for an extended period can also compromise gains made from a sale.

Over-confident agents can over-promise on price

Sellers need to be confident in their choice of real estate agent, as agents have been known to overvalue a property to win business. While this is not characteristic of most agents, I encourage sellers to request and check an agent’s sales history, and compare this with median sales prices of properties sold in the area.

Sellers should always consider a valuation from more than one real estate or valuation agent, and I advise buyers to do the same before making Farey & Co, as this will assist in sales negotiations.

Websites such as realestate.com.au also provide sales prices of recently sold properties nationally.

Lender valuation doesn’t always match market price

Most banks or lenders independently value a property before granting a loan. Buyers need to be mindful that the value set by lenders is often lower than the market value, usually to protect the lender from potential risks should the buyer struggle to meet loan repayments.

If there is a difference on price, this may jeopardise the loan approval process and require the buyer to pay a larger deposit. When applying for finance, I encourage buyers to save a 20 percent deposit rather than 10 per cent to act as a financial buffer.

Emotional purchases can hurt pockets

Certain buyer demographics, such as owner-occupiers, are known to place a higher price on a property when emotions are involved. Buying a property is a major life investment, but too often I see buyers stretching their finances to secure their dream home. With more than two-thirds of owner-occupied mortgages now held by duel income households, and over 700,000 households at risk of mortgage stress, buyers need to be serious about paying within their means.

Investors not immune to defaults 

Housing loans to Australian investors totaled more than $11.8 billion in July, and the 30-plus day delinquency rate for prime residential mortgage backed securities is reportedly rising.

While there is no need to ring alarm bells, less sophisticated investors risk biting off more than they can chew at a time when interest rates are at record lows. As a general rule, I suggest investors have more than 30 percent in equity before releasing this to purchase another property. Any investor, novice or seasoned, should also engage the help of a trusted property mentor and financial advisor before making investment decisions.

Seasonal competition alters prices

Buyers purchasing property in highly sought after locations and in popular periods such as Spring should expect prices to increase above their market value – especially properties sold at auction, where prices can climb by tens or even hundreds ofthousands. Sellers equally need to be mindful that buyer competition, trendy locations and investor hotspots can come and go. Just because a property is sought after at the time of auction or sales campaign does not mean the property will be valued at the same amount in 12 months’ time. 

Renovations don’t always offer immediate gains

It is not uncommon for property investors to purchase older properties and make cosmetic and structural improvements in the hope of making quick capital gains. While owner-occupiers may undertake renovations to maximise a future sale, short term investors risk losing time and money if they over-estimate a property’s post-renovation value. Before buying, I recommend investors obtain quotes from at least three qualified trades companies to compare costs – once a building inspection is completed – and obtain market intelligence on properties sold in the area to ensure sales history aligns with expectations.

Buyers and sellers need to do their homework to ensure they are confident on the market value of a property, as well as the future demand of property in the location being considered. When completing a suburb profile, buyers should always remember to investigate an area’s historical and projected population growth, established and planned infrastructure, percentage of tenants and owner occupiers, vacancy rates, and median income demographics.

Tim Godden is national director of investor buying service Seekology and can be contacted here.