What are price guides for real estate and how do I understand them?
IF you’ve been serious about house hunting you’ve probably also been seriously disappointed by a price guide.
Your heart soars as you see a home advertised with a price that actually sits within your budget.
But then you are left disappointed as your dream home goes for much more than you anticipated.
To overcome such pain it’s important to know what price guides actually are, what affects them and how to get a more accurate picture of the value of a property.
We spoke to Michelle May, Principal of Michelle May Buyers Agents, on what you can be doing to be a step ahead when it comes to price guides.
What actually is the price guide based on?
Price guides are based on recent comparable sales.
The vendor and the agent look at this to determine how much they think the property is worth or sell for.
Comparable sales should be recent meaning ideally sold in the same market conditions and ideally no older than 3 months.
Is it an accurate guide generally?
It depends on the individual agent. Some agents will typically underquote and some will estimate correctly.
Buyers should be aware that a 10 per cent leeway on the price is allowed by the Office of Fair Trading in NSW.
If an agent quotes $900,000 what they’re really saying is the range is between $900,000-$990,000.
If you have a budget of $900,000 you should not be looking at a property at that quoted price.
In a low stock, high demand market other buyer competition may cause that property to be sold for more than $990,000.
There may also be a lag between the agent doing their comparable sales and the property coming on the market – sometimes this is months during which the market may have moved up or down.
A lot can change in the property market in a very short amount of time.
Whilst sales agents should update their comparable sales to reflect a more accurate guide once the property comes on the market, if there haven’t been any recent sales in the area this may not reflect the current market value accurately.
How should people be getting a better picture of the true price guide?
They should be looking a sold properties to determine if the property for sale is within their budget.
By starting with the buyers budget and working backwards (i.e. what sold recently in their budget and how does it compare to the property currently for sale) the recent sales may be a better indicator of what a property is worth compared to the price guide given by an agent.
What are the main factors that affect a property’s price guide?
When an agent is putting a guide together he or she considers the best and highest use, level of finish, aspect, location, scarcity and other such factors, in conjunction with recent sales in the area.
What is underquoting?
Underquoting is when a property is deliberately estimated to be more than 10 per cent below its true value based on comparable sales.
A property guided $1.8 million in 2023 when it was last sold for $1.8 million in 2019 is an example of blatant underquoting when recent sales of this type of property are around $2.2 million or more.
Though underquoting is a part of the real estate market, it’s important to keep in mind that if a property sells for more than the price guide it’s not necessarily a case of underquoting.
In a rising, tightly held market people are quite often prepared to pay more for a property just to get their foot on the property ladder.
If you want to put in an offer before auction, what is your advice?
It’s essential to understand the vendor and the agent’s motivation to work out what they will accept.
Buyers need to be very sure their offer will be accepted prior to making the offer, and understand all the parts of the process.
A couple of questions they need to know the answers to prior to moving forward:
What is the agent’s process once the offer is made?
How many other buyers are involved?
Will the offer amount be disclosed to the other buyers?
How much time will the other buyers have to make a counter offer?
Will the initiator get a last right of refusal?
If an offer is rejected, it may hurt the buyers chances at auction as by law the agent has to adjust the guide to the level of the rejected offer, thereby alerting other buyers there is other interest and usually leaving little firing power at the auction for the buyer who made the offer in the first place.
A pre-auction offer needs to be at a level where the buyer places a seed of doubt in the vendors AND agent’s mind IF they could achieve this price at auction, so it is important to do your research.
To give an example a property with a price guide of $850,000 receives an offer of $880,000 from a buyer.
We know from recent sales data that a similar apartment in the same complex sold for $920,000 in May, with more recent sales in the area sitting around $925,000.
In this case the offer of $880,000 was not accepted as the vendor reasonably believed they could do better at auction.
This spring, what type of properties generally are selling above price guide?
Properties in low supply and high demand such as renovated houses with three or more bedrooms and two bathrooms combined with off street parking and a family friendly floor plan are very scarce at the moment which means there will be a lot of competition for them this spring.
And what type of properties could you expect to sell at a lower price?
Low quality, high supply properties such as apartments in high density areas.
Where there is oversupply there’s more room for negotiation which means these properties will typically sell at a lower price.