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What is that property really worth ??
by Peter I. Phippen.
An Australian property investment magazine ran a story some time ago entitled "Sell
It Yourself and Save". The article detailed a problem that has and probably
always will prevail in the property industry - just what is a property really worth?
It is an understandable question asked by everyone looking at property, including buyers
and sellers, and landlords and tenants, and one which can really only be answered by a
true property professional - not someone with a vested interest in securing your business,
but a totally independent property consultant with your best interests at heart.
A property consultant is a multi-skilled person, usually with both real estate
agents/brokers and valuers/appraisers qualifications, with a broad experience in the
valuation of property, the various methods of leasing and sale, and property marketing
techniques.
Property consultants also have an understanding of the basic psychology and philosophy of
real estate agency practise, and, most importantly, they have the ability to negotiate at
all levels to assist their clients with their dealings with buyers, sellers, and
landlords, their agent/broker, and tenants.
Every potential seller and lessor of real estate has experienced the phenomenon of
receiving conflicting "values" and marketing advice from real estate
agents/brokers, and every purchaser has been swamped with a plethora of advertisements
claiming "Bargain Buy - Way Below Value", and other such loose and usually
unsubstantiated claims.
The aforementioned article listed a prime example. Three agents were called in by a
potential vendor to estimate the likely sale price of a property. The agents quoted
values ranging from $205,000 to $215,000 - not all that far apart, but considerably more
than a figure of $165,000 obtained by the owner of a near identical neighbouring property
some months earlier in an identical market.
The son of the deceased owner (looking after the sale on behalf of the family) was
predicably confused, so he decided to place "Private Sale" advertisements in the
local papers asking $220,000 for the property - slightly in excess of the highest agent's
estimate.
The result? He was swamped by more than 15 interested parties who obviously deemed
the asking price to be low by comparison with what they had seen elsewhere. A couple
of weeks later the private seller sold the property for just over $240,000!
This is not a unique example, but I believe it is a case of "more good luck than good
management." An experienced professional agent/broker utilising a comprehensive
marketing campaign should have produced a similar result - probably a better one.
But the fact remains that theoretically the property had escalated in "value" on
paper from $165,000 to over $240,000 in less than a year - an impossible increase of over
45% in a very flat market. You cannot blame the owner for being a little perplexed
and then deciding to take a different course of action than normal.
Over the past two decades I have seen similar situations occur all too often - otherwise
intelligent people in a quandary over the true value of a property, and the best method of
marketing, usually as a result of confusing if not conflicting advice from local property
"professionals".
More often in these enlightened yet difficult times, Solicitors / Lawyers and Accountants
/ Financial Planners are being asked for advice, by both buyers and sellers. But in
many cases these specialist professionals are also somewhat confused by the conflicting
information presented. This is understandable - they are experts in the law and tax
minimisation - they are not valuers/appraisers, and they are not necessarily experienced
in the machinations of property trading.
Increasingly legal and financial advisers are taking a more professional approach
themselves and are calling in independent experts - experienced property consultants - to
undertake a comprehensive analysis of the market and an assessment of the current market
value of their client's property, or the property their client is considering buying or
leasing.
A property consultant instructed to determine a realistic assessment of value undertakes a
detailed range of tasks. The first is an inspection of the property, noting it's
position and location, specifically with regard the proximity to services, facilities and
amenities, any detrimental features, views from the property, the character of the
surrounding neighbourhood, the popularity of the suburb, land size and topography, and
many other considerations all of which have an impact on the value and marketability of a
property.
Then the size and condition of the improvements (i.e the buildings, etc.) is examined, the
suitability to modern usage assessed, areas requiring attention, repair and/or
refurbishment noted, and a variety of other matters that will similarly affect the
value. If structural or other problems are revealed or even suspected during the
consultants inspection, a report is obtained from a suitably qualified professional to
determine the degree of seriousness, and give an estimate of the cost of attending to the
works deemed essential.
Detailed inquiries are made with local authorities during the course of the consultants
research. This could determine a variety of issues that can affect the client's
situation. The inquiries may divulge that a client's intended course of action is
prohibited, or considerably curtailed, and it is clearly essential to find this out prior
to making any binding decision or commitment to buy or lease.
By way of example, an old corner store or similar property could be marketed as a
"commercial" property, but investigation could reveal that the property has what
is known as "existing use rights" - this allows the present commercial
operation, but any change of use (to what the client intended) may be specifically
prohibited.
This situation is of no use to a purchaser looking for an office, a tenant looking for
business premises, or an investor who would find the appeal of such a premises severely
limited and thus the likelihood of a quick letting at premium rental an impossibility, let
alone the investors main aim, achieving above average and expeditious capital growth in
value.
Future proposals potentially affecting the property may also be divulged, e.g. a new
freeway to pass nearby, and this information will have an affect on the value of the
property. Obviously this is of more relevance to a purchaser or tenant - a vendor or
landlord usually doesn't want to know the negatives, but if it has a dramatic negative
influence, the affectation will have to be acknowledged as the source of any reduction in
value.
However some proposals add value. The imminent re-zoning of the land in question, or
adjacent lands, may have a positive influence, and a seller could benefit considerably
from this knowledge. Too often an ill-informed vendor sells quickly for what they
perceive to be a fair figure, only to come by some time later to see a large block of
apartments going up on their old home site. A little professional research and they
probably could have increased their return considerably.
Another factor looked at seriously these days is potential for refurbishment. A
classic old but solid Federation home in a prime location could have a considerable
potential for refurbishment, in the process creating a much greater value.
But on the other hand, in cases where the property has a Heritage listing, with the
attached special (and usually restrictive) approval requirements for even the most basic
of works, a negative influence on value may result. In it's present state, the value
of such a property could be influenced in either direction depending on the result of the
consultants inquiries.
Re-development potential is a vital consideration. In well established suburbs close
to most major Australian cities, development of new apartments, town houses, condominiums
and villa homes is an area showing exceptional growth.
The inherent future development potential of a property will, in almost every case,
automatically add to the present market value.
A property consultant would also look at the existing market - demand for and supply of
property of a similar type in the area; economic factors actually or potentially
influencing property; present and likely future interest rates; anything and
everything that is pertinent and likely to influence a property's value, including some
future event like an Olympic Games, and the post-Games market impact.
Additionally the historical market in the relevant area is overviewed and compared with
the present situation and the property in question.
As well, some comment on the likely future market direction is included. Property
consultants do not have crystal balls, but they do have some idea of what is realistically
expected in the foreseeable future.
Naturally they will always qualify any predictions, but a little qualified guidance from
an expert is a lot better than groundless promises from an ill-informed operator with more
than likely their own best interests at heart.
Finally, after determining a realistic market value based on all of the research
undertaken, the professional property consultant would make recommendations, including :
* For vendor and landlord clients, what to do to achieve the assessed figure, as well as
suggestions on how to improve the property to achieve an even higher figure, if the
potential to do so is there;
*For purchaser and tenant clients requiring a determination of a reasonable price to pay
for a property that they are thinking of buying or leasing, the property consultant would
provide a realistic figure, then make recommendations to assist the client with their
preferred course of action - to acquire the property at the lowest possible price.
Naturally this assumes that the client still wants the property once they have their
consultant's report, which is not always the case. If some inherent problem or restriction
has surfaced during the research the client's interest may have disappeared, or their view
and course of action changed considerably, thankfully before they committed to a property
that did not meet their needs.
And in such cases the client, for a relatively small outlay, has been saved from
potentially considerable losses, if not total financial ruin.
With a consultant's report to hand, if a client is inexperienced with negotiation, they
are well advised at this point to instruct their consultant to undertake, or at least
assist, with this phase of the property transfer process. An experienced negotiator can
usually achieve a far superior result than would otherwise be possible.
It might take a bit longer, but the result invariably is translated into many, many more
dollars in the client's pocket than would have been the case if they'd gone it alone.
In a case not long ago, the price of an exclusive residence in Sydney's Eastern Suburbs
was shaved over a five day period from $4,000,000 (an asking price based on an unrealistic
agent's estimate) to $2,400,000 (less than the market value) for a purchaser client.
In another, vendors with a house on Sydney's North Shore, appraised by agents at between
$900,000 and $1,000,000, achieved over $1,260,000 after obtaining a pre-sale report,
undertaking the few minor and inexpensive repairs recommended (at a cost of under $8,000),
and then letting an experienced and skilled negotiator handle both the appointed selling
agent/broker and the potential purchasers.
In another, a new 5 year lease was negotiated directly with the buildings owner for a
client, for the same small premises they had occupied for over 12 years, with the new
rental being over $16,000 p.a. below what they had been paying.
And finally, in another case, a client with an old commercial building leased a few years
earlier during a quiet market to a Government Department (a prime tenant) for around
$58,000 p.a., obtained a new lease to the same tenant at the assessed market rental value
of just over $80,000 p.a. net.
It should be pointed out that this article is not intended to denigrate real estate agents
or brokers, moreso to educate people thinking of entering into some form of real estate
transaction to assist them in achieving a far better result than probably otherwise
possible.
But it must be remembered that with agents and brokers, just like most of us, the first
and foremost consideration is their own well being. Ask an agent/broker when is the best
time to sell and they'll invariably tell you "now", even in a dead flat market
in the middle of the worst recession ever. Why? Because they want your property to sell -
that's how they feed their family.
Most real estate agents/brokers really do earn their keep. Someone has to spend their
weekends out their in the elements showing property; be available 24 hours a day at the
public's beck and call; collect the rents and go to the Rental Tribunal for those of us
who haven't got the time or who can't bare to face some poor retrenched or insolvent
individual who can no longer pay his rent; or any one of a thousand other tasks.
And for property investors, a good agent or broker is worth their weight in gold. When you
find one, treat them like one of the family. Negotiate realistic fees up front, that's
fair enough and expected, but send them a bottle of Grange when the deal is done.
Recommend them to your friends, but make sure they know where the referral came from. And
don't go back on a deal when you've struck a deal.
Agents and brokers regularly meet and converse with each other. Whilst they do not
disclose the identity of their good clients, anyone who they perceive has done them a
disservice may find their name bandied about as someone to avoid. This may not cause you
to lose too much sleep, but it may result in your name being struck from other
agents/brokers lists of hot buyers, and the "deal of the century" not being
offered to you, or only offered after someone else has bought it - it happens.
Everyone involved in a real estate transaction, including legal and financial advisers,
whether experienced or not, and no matter the class, type or size of the property, are
well advised to give serious consideration to appointing an experienced independent
property consultant, to point them in the right direction, guide their path, and maintain
a buffer zone between themselves and the people they are dealing with - the buyers,
sellers, landlords or tenants, and/or their real estate agent/broker.
The cost of using a property consultant varies, depending on the size and value of the
property, and the scope of the report the client requires. As a guide, a basic assessment
should cost around $500, the actual fee depending on the size or nature of the property; a
more comprehensive report, with a marketing analysis, recommendations, building report,
etc., should cost upwards of $1,000.
Subsequent negotiations and consultations, and other services required by the client, are
charged at hourly rates, usually around $150 - $200 per hour.
However, whatever the cost, it is almost always proven to be the case that the cost of
hiring an independent expert property consultant can make, or save, many times the
expert's fees, and in the case of investment property, make a big difference between an
average investment (or worse) and an astute and profitable investment decision that will
benefit the investor and their family for many years to come.
Copyright 1998
Peter Phippen & Associates
19 Fadden Place Wahroonga NSW 2076 Australia
Phone/Fax: 61 2 9943 0100
Email: phippen@ozemail.com.au
Peter Phippen, Certified Practising Valuer, is an internationally published author and
recognised commentator on the Australian property profession;
he is a Lecturer in Valuation and a property adviser appearing regularly on Australian
television; and
he is Managing Partner of a firm of registered valuers and property consultants based in
Sydney,
N.S.W., Australia.
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