How to determine a property's true value: Patrick Bright

"How much should I pay?" is probably one of the most difficult questions for investors and in particular home buyers to answer. Everyone wants to get the best deal when they buy. But how do you know what a good deal is? Before you can decide whether you're getting a bargain or not you need to do some research to work out the market value of the property. Comparative market analysis is extremely powerful when you're trying to negotiate the best-possible price.

Inspect 100 comparable homes

When I started in real estate as a selling agent I didn't really have a clue what homes in the area were worth. The owner of the real estate office said to me, "Patrick, you need to learn what the market value is of homes in the area. I want you to go out and see as many properties as you can in the next few weeks". He told me I had to inspect each home and document all its relevant features. I decided that I was going to inspect 100 properties and so I pretended to be a home buyer for about four weeks. I covered four or five suburbs, looked at a little over 100 properties and took notes on each one. I wrote down the asking price and what I thought they were worth and followed them up after they'd been sold. I attended lots of auctions as well. By the end of that month I had a pretty good idea of what the market was doing and how much property in the area was worth.

"Go out and learn what the market value is" was the best damn advice I was ever given to assess value, and it's the best damn advice I can give you. It's the best way for you to learn what properties are worth. If I, or one of my team, is looking for a property for a client we still do the legwork and inspect around 100 properties. I've purchased properties all over Sydney, in different states of Australia and across all price ranges, and I always stick to this formula. You could drop me anywhere in the world, give me enough time to inspect 100 properties, and I can assure you that I won't be paying retail when I buy.

Set aside some time and start inspecting properties in your top three suburbs that match your wish list. A comparative market analysis compares homes that are similar in size, configuration, condition, and location. They have to be in your price range too. Remember, you're looking to compare apples with apples.

I find a lot of people are looking over such a wide area and range of homes and they think they understand market prices. They don't! You've got to focus on properties that are as close as possible to your wish list because there's no point in looking at $850,000 homes if your price range only goes up to $650,000. If a three-bedroom townhouse is on your wish list, that's what you're looking for. Not two-bedroom cottages or four-bedroom apartments.

Why do I suggest that you have to look at 100 properties? Well, if you only inspect 50 you're probably not well enough informed. From my experience 100 properties is enough for the average person to be on the ball about comparable prices. If you looked at 150 I don't think you would be that much better informed.

There's no denying it, inspecting 100 properties is a lot of work. If you make a concerted effort you can probably complete it in six to eight weeks (less than two months).

You've got to be disciplined and stick with it because inevitably you'll fall in love with the twentieth property you look at. Remember, in the early stages you're looking for research purposes, not to buy (we'll get to the buying stage later). If you go ahead and buy now then you can't be sure you're paying the right price or that you have seen enough to know what's really out there that may be suitable because you haven't looked at enough comparables to determine fair market value.

So don't stop until you've seen 100 homes. As you view each home make a note of the important features and put your price on the property. When you follow up with the selling agent to see how much it sold for you can see how accurate your valuations are. Over time you'll develop a gut feel for what property in your search area and price range is worth.

After you've inspected 100 homes you'll have gathered a lot of local knowledge that will help you value homes in your chosen area. For example, small differences in location can create significant differences in price. Every suburb has several streets where the price for a very similar home can differ by as much as 10% or even 20%. Sometimes these streets are cut in two by a suburb boundary line or a main road. People will pay substantially more to live in a property 100 metres up the road in order to have a more prestigious post code or street address.

Sometimes the price difference happens for a number of not so obvious reasons. For example, one side of the road provides greater access to schools, local shops, the bus stop, etc. How are you going to know about this type of important area-specific information before you buy unless you do your research and become an area expert yourself (or hire an experienced buyer's agent like me)?

You'll know as much as the selling agents

A lot of people assume real estate agents are experts in valuation. They're not. They generally know the values in their particular service area because they sell a lot of property there but that doesn't necessarily mean that they know prices in every area and every price bracket.

Selling agents are scattered all over town, but each one only services a small area, which is usually about a three to four-kilometre radius – five kilometres at best – from their office. So if you take an agent from the inner Sydney suburb of say Surry Hills, and put them over the other side of the Harbour Bridge just 10 minutes drive and eight kilometres away in harbourside Mosman, do you think they know what the current home prices are there? They haven't got a clue. They are what I call an "out-of-area agent" and can often be the best agents to negotiate with as they're much easier to influence. I'll talk more on that later.

Selling agents also list properties for sale in a wide price range. Recently when I was looking at a property I met the agent as he was running from one open inspection to another. He had his name on properties from $400,000 up to $3 million. Is he an expert at valuing $400,000 properties? Probably not. Is he an expert at $3 million properties? Probably not.

Selling agents are what I call "price-guide generalists". That's often why many want to auction properties, as they don't know what the property is really worth. Ever been to an open home and said to an agent “what are the owners looking for?” The answer is often quite non-committal. They'll say something like buyer feedback is between $500,000 and $600,000 or bidding is expected to start from $550,000, and it sells for $700,000. Or you read in the paper that the property was passed in below what they were quoting you or sold for $80,000 above reserve. Yes they might be underquoting to you however its often partly because the agent was guessing a bit and so was the vendor, and the vendor was relying on the agent for feedback and a price guide when setting the reserve.

However, if you're inspecting only three-bedroom townhouses in the $600,000 to $750,000 price range, you will become an expert on that particular type of property in that area at that time. If you inspect 100 comparable homes you will know as much, if not more, than most of the selling agents in the area on your preferred type of property.

As I go through properties I get a lot of the selling agents asking me, "Patrick, what do you think this is worth? Is it priced right?" And why do they ask me? Because they know I'm looking at dozens and dozens of properties that compare to the one they're selling and I know what the current fair market value is.

Knowledge is power

Your comparable market analysis is a huge asset when it comes to negotiating a price for your home. Knowledge is power, so become knowledgeable. When you've done your research you'll be able to assess the fair market value and know how much you should pay to get a good deal. You'll also know what a sensible maximum bid is at auction. When a selling agent tells you they think a home is worth some outrageous price you can tell them "Good luck".

I see people pay over and above fair market value all the time. If you've done your research it won't happen to you. People also often buy well below fair market value and you'll be able to spot the bargains too, provided you've done your research.

Patrick Bright is a real estate author and founder of Sydney-based buyer’s agency EPS Property Search. Bright has purchased over $500 million worth of real estate for clients. His best-selling titles include The Insider’s Guide to Buying Real Estate, The Insider’s Guide to Saving Thousands at Auction and The Insider’s Guide to Profitable Property Investing. This is an excerpt from The Insider’s Guide to Buying Real Estate, second edition