When planning to buy a home, coming up with the right price to offer and pay can seem like a very difficult and emotional process. There is a good deal of data to sift through and you might feel a little lost and nervous. However, with some careful investigation and calculations, you can come up with a reliable estimate of your potential home’s fair market value.
With the following steps, you should come up with the right price you’ll be confident to pay for a home.
1. Do a free online search for recently sold homes in the area.
Going online for a free search is a good first step to take before making any phone calls or visits to local real estate offices. That way, you can get an idea of how much and what information is available for you. Websites such as realestate.com.au and domain.com.au are very good starting points. There are other websites which provide estimated market values for homes, but we do find them to be inaccurate in many cases because the estimates are normally base on an algorithm and they don’t truly compare homes for their attributes, or they are using outdated or incorrect data.
2. Pay for a subscription to a real estate portal.
Applications and portals such as RP Data keep records of property sales, and here you can usually find a decisive record of what you’re after. You can get a list of data with the details of each property in the search area, including selling price, date of sale, land size, number of bedrooms, bathrooms and car spaces. You’ll need all of this information, and more, to make an educated estimate on the market price for your potential home.
3. Contact a local real estate agent.
Real estate agents will have plenty of experience in the area your searching and will be aware of recent sales, even if their office didn’t make the sale. Contact their office and see if any agents are willing to talk about recent sales. Remember to get all the necessary information about the sale, including at least the selling price, date of sale, land size, number of bedrooms, bathrooms and car spaces, and other attributes such as pool, quality of build, etc. The data and information you now have should give you an educated observation of real sales data in the local market, since real estate value is by and large based on location. However, very seldom has a home exactly like the one you have your eyes set on sold very recently, so some adjustments will need to be made.
4. Make a spreadsheet on your computer.
You’ll have to organise a lot of information once you get a list of recent sales, and the most efficient way to do this is with a spreadsheet. Make a list of the information you have gathered and then start by plugging in your future home’s information, but leave the estimated price blank for now. If you’re unaware of the land size of the home, it will be in the contract of sale.
5. Look for homes that have sold within the last six months.
When you’ve acquired the necessary information about sales in the area, you have to start sorting the properties. Start by rejecting any sales that took place over six months ago. The real estate market changes quickly, and sales more than six months old could be too old to be useful. Only use older sales if you can’t find any data on a more recent comparable sale.
6. Find at least three homes like the one you’re interested in.
After finding the most up to date sales that have transacted in the area, you can start assessing the information to find comparable properties. Remember that you probably won’t find properties exactly like the one you want to buy. The aim is to find properties that are most alike. Using the following criteria, find comparable properties to get a sense of what your preferred home might sell for. Then plug them into your spreadsheet to compare them to your prospective home.
- Land size
- Number of bedrooms and bathrooms. Also include whether these are full bathrooms, with a shower and toilet, or half, with just a toilet.
- Number of car spaces
- Location – busy or quiet street.
- Home style, age of house and property condition
- Types of amenities such as decks, pool, landscaping, view.
7. Adjust the sales price if necessary.
This is where a fair amount of estimation comes in. Since it’s unlikely that all of the homes you’ll put on your list will be identical, you’ll have to make them fit to yours and adjust the potential purchase price accordingly. Adjusting the market price can be a difficult process. It would be beneficial to get some help from a professional who is experienced in the real estate market. They will know the value of certain specifications for properties. For example, say you find a house that is exactly like the one you want to buy that sold for $2,000,000, except it has two bathrooms and the one you want has one, try to estimate what it would have sold for without that extra bathroom.
8. Use the adjusted sales prices of comparable prices to estimate your preferred home’s market value.
Once you’ve adjusted the sales price of comparable homes, you should be able to make an educated guess on your potential home’s market price. For example, if you chose 4 homes and they had sales prices of $2,400,000, $2,480,000, $2,550,000, and $2,570,000, you can make a sound estimate that the house should sell somewhere between $2,400,000 and $2,570,000. Note: When coming up with adjusted sales prices, only use the data of homes that have actually sold, not ones that are currently on the market. The quoted or asking price of a home that is on the market doesn’t tell you anything; sellers can quote in a number of ways and it doesn’t mean that what they’re quoting will be the final sale price. Use only prices that houses have actually sold for. This will be a far better indicator of the market value of the area you want to buy into.
9. Think outside the box.
If adjusting the prices of comparable properties seems too imprecise, you may have to think outside the box. There are other ways to look at the value of a property, which we at Future Habitat look at as well. Here’s a sneak peek into one of the ways we think outside the box when determining a fair value for a home: You could also figure out how much comparable homes have sold for, based on their land size and work out the price of comparable homes per square metre. Find nearby properties that are similar to your potential home and calculate the average price per square metre, then apply that to the property you’re interested in. This will give you only a rough idea of the market value. You will also need to do use other methods to get a more reasonable figure. We use three other methods to complement this one.
10. Use the market value to determine your purchase price.
After you’ve determine the expected market price of the home you want to buy, you should use this as a basis of the price you offer or are prepared to bid to at auction, if the property must go to auction. Try not to add too much money to this number because over paying can get you into all sorts of strife in the short term, including potentially getting a valuation from your lender less than you paid, which may result in a rejection on your finance.