Purchase with Penny

View Original

Property Reports are worthless; and here’s proof!

As useless as a white crayon in fact

Unsure what to pay for a property? You are not alone

Often I hear buyers talk about a property they missed out on. They didn't think it was worth what it sold for, but they could have afforded it. 90% of the time, these buyers have a level of regret as they are still searching months later. Or worse, in a market like we are now in, the prices shift upwards and they end up priced out completely.

The issue is many buyers are unsure how to value property

Once you finally find a property that you love and want to buy, there are a lot of moving pieces that need to fit together in a short period of time.

  • Contract review by a solicitor/ conveyancer

  • Negotiating any specific terms of the contract e.g. Inclusions, settlement date

  • Building or strata report and what this means for the value

  • Due diligence on neighbouring properties

  • Due diligence on local infrastructure

  • Your bank finance being in order

  • Not to mention, what are you prepared to pay for the property (which has to cross over the point the vendor is prepared to sell for & be higher than any other buyer who is also putting in an offer)

I get it, I do this all the time, a lot of things to work out. Wouldn’t it just be easy if there was an automated report you could download that would tell you what to pay?

Do not rely on a "Property Report"!!!

These are issued by banks, or perhaps even your mortgage broker and I am yet to ever see a property report that provided useful and accurate information.

  1. These reports are based on very limited data points (size of property, address, last sold price & market movement), and quite often that data is not accurate.

  2. The range they provide is often very broad, sometimes even more than 10% which does not help you narrow down a price.

  3. They do not factor in the condition of the property e.g. The data doesn't know if the property is a renovator's delight or has had a complete makeover.

  4. The data does not capture elements of uniqueness to property e.g. abundant natural light, architectural design, rear lane access, future development potential.

  5. The report does not factor in whether the property is being sold off the market without competition, pre-market with limited competition, or on market with several competing parties.

  6. Your bank does not rely on its own "Property Reports" when they issue a formal bank valuation, and so neither should you.

Case study: 25 Wilson St Newtown

Below are four different results obtained from free property reports, for the same property

The property went to auction on the same day I did these reports, with 10 registered bidders.

The property sold for $2,120,000.

In short, these "Property Reports" are not worth the paper they are written on, and you are only doing yourself an injustice if you are using the price they provide to inform you of what the property is worth.

The highest range still fell $62,000 short.

The average estimated selling price of all four was $1,909,995 which fell a whopping $210,000 short!!!

This is a 10% inaccuracy.

Why do banks offer property reports then?

This is a great question that not many people stop to think about. They do it only to capture your information as a prospective home loan customer (home loans are a bank’s most profitable product if you weren’t aware.) They use the report to get your information, understand if you are a serious buyer and estimate what your budget might be based on the property value.

The bank wants you to feel like they are giving you something for free, some value. In fact, the data you are giving them is worth a lot more than their useless property report.

Do your own research

  1. Use recent (less than 3 months) sales to look for comparable properties that have sold. For apartments, look for other units that sold in the same complex, or for a house look for other homes on the same street.

  2. Consider if these other properties are inferior or superior.

  3. Remember you haven't read the building or strata report for previous sale properties, so the purchase price may have been impacted (positively or negatively) by this.

  4. If prices are undisclosed you can also put in a call to the selling agent and ask them to give you an indication of what it sold for.

  5. Target a sample size of at least 10, ideally 20, comparable properties and look at a weighted average median sale price based on price per sqm.

  6. Consider what direction the market is moving.

  7. Consider how unique your requirements are - if you are very specific about a lot of things, and this property ticks all those boxes, then you should be willing to pay a little more as it is likely very difficult to replicate this property.

  8. The advertised price guide tells you one thing - the property is unlikely to sell below that price. That is the only thing the price guide is useful for. Nothing else.

Remember though, you will never be objective or unbiased in working out the value of a property you have a vested interest in and/or are trying to buy. This is where seeking advice from a subjective party can be a huge benefit.

Speak to a professional

  • Speak to a local buyer's agent and consider engaging their service to help you negotiate the purchase. This will provide you with high-quality data analysis, combined with the local knowledge of the property & the selling agent to ensure that you are in the best possible position to purchase.

  • Speak to a local real estate agent that you have built a good relationship with (ideally not someone from the same office as the selling agent), and ask their advice on what the property might sell for. You may even find the agent had appraised the property to try and win the listing. Selling agents can be very helpful to buyers, especially if they know once you buy you will likely be selling a property.

Aside from the mathematics of what to pay - I think the most important questions buyers can ask themselves are:

  • What can I afford to pay for this property? (Everyone has a different risk appetite on what % of their income makes up mortgage repayments, so work this out based on your comfort level)

  • If I don't buy this property, and I still haven't bought six months from now, what does that mean for me?