In this 10 minute read, you'll understand more about quoted prices and uncover how to select comparable sales to get a better sense of what a property may sell for.
Real Estate Agents must prepare a Statement of Information (SOI) for residential property located in the Melbourne metropolitan area. The SOI includes the agent’s estimate of the selling price the property could achieve in the market.
This is designed to assist the consumer (the buyer) to make decisions on whether the price is in their budget.
You’ll find it attached to each online property listing and it should look like the template below:
An agent's estimated selling price must:
be reasonable, and
take into account the sale prices of the 3 properties they consider most comparable to the property for sale.
It is an offence to underquote the estimated selling price.
Consumer Affairs Victoria can investigate and penalise agents found to have underquoted.
The statement of information should give a very good sense of what a property might sell for.
Here’s why it rarely does, especially in our market right now.
Comparable sales cited often aren’t, well, comparable.
I’m sorry to say it but I see so many properties where the ‘comparable’ properties cited are nothing like the one being sold.
The intention is that the 3 comparable properties should be objectively comparable.
The reality is that 3 agents could find 3 different combinations of properties to justifiably support their selling range.
Further, comparable sales in the SOI can be up to 6 months old.
In today's market, comparable sales that are more than 6 weeks old are out of dale and require the consumer to update for the market movements since the sale.
Agents must also update the advertised price in the SOI if the estimated selling price changes during the sales campaign. This can be triggered by:
the seller's auction reserve price or asking price
a price in a written offer already rejected by the seller on the basis it is too low; or
the agent's current estimate of the likely selling price i.e. from more recent comparable sales
Keep an eye on the SOI as it can give you insights into the vendor’s and the agent’s price expectations for the property.
I can hear you asking: if the SOI doesn’t always have the best comparable sales then how on earth can you know what a property will sell for?
We do our own research and so should you.
Here’s the framework:
1. Aim for quality and quantity
The more comparable sales you can find, the better.
I dump them all in an excel spreadsheet (once an accountant, always an accountant!) and list their key points of similarity and difference to the target property.
2. Make adjustments
In your spreadsheet, make adjustments for land size, location, condition, and recency.
For land size you want to remove the dwelling value of comparable sales and divide the remaining value by the land area to get a $/m2. You can then apply this to the target property.
Really unpack the location of the comparable sales. Even in the same street, an identical house on the north-facing side can generate a price up to 20% above those on the opposite side. Similarly, look at what’s next door and down the street. Is there a train station or the beach within easy walking distance? Or is the house on a train line? Is there a block of flats overlooking? Or a freeway or main road nearby? It all must be factored in.
In normal conditions, sales up to 6 months old can be used. In today’s market which has been growing between 1-2% a month (much higher in some suburbs) you must adjust for market movement since the sale.
It’s eye-watering, I know.
Like fish, the fresher the sale the better, especially in a hot market.
3. Triangulate
Now you’ve gathered your comparable sales you have a good feel for the high and low range the property is likely to sell for.
Let me put this in context with a quick case study to share the start of a comparable sales analysis.
Case study: 11 Balmer Street, Brunswick
Style: Block fronted detached Victorian
Land: 653m2
Orientation: West (with ROW running the northern boundary)
Floorplan: original front four rooms and functional rear 90s extension
Condition: fair with need for renovation.
This property was auctioned on 12 June 2021. It wasn’t one I was targeting for a client but it was one I was very interested in as it was very scarce indeed.
Here’s its SOI.
Note the SOI was updated on 10 June 2021 (two day before auction). If I’d been pursuing this property I would know the reason for the update and what content was updated. I won’t speculate here.
All three properties cited as comparable sales in the SOI were recently renovated and on substantially less land.
One of these was not the same style, another was in a neighbouring suburb and the sale was 6 months old.
Using renovated homes as comparable sales to unrenovated properties is problematic.
Prices do not reflect the value of a renovation and the renovation itself can be polarising particularly when the vendors’ renovation choices do not have universal appeal.
A blank canvas with large potential is valued highly by buyers because they are not paying for improvements that might not suit them.
So where does that leave us?
Find as many recent, comparable sales as you can.
A recent sale that I found more helpful in the analysis was a property at 25 Victoria Grove, Brunswick. It sold 3 weeks ago for $1.7m.
It is a block-fronted Victorian in a similar condition but on a smaller block.
Being unrenovated meant we didn't have the complexity of valuing a renovation, leaving the main adjustment to price for the larger land size.
Here I remove a dwelling value of $0.5m from the sale price $1.7m to get to the pure land value $1.2m. I then divide $1.2m by the land size of 471m2 to get a $/m2 which I applied to the land size of our property 653m2 to get to $1.7m. Add back the dwelling value of $0.5m and we have $2.2m.
The property sold at auction (3 bidders) for $2.35m.
Our analysis is still 8% off!
Whilst I think our analysis is a very good start, we have only one comparable sale. In reality, you need several more (quantity) high quality comparable property sales to better triangulate the price.
Here’s my hypothesis about how this property attracted a premium and it comes down to two factors: scarcity and improvement potential.
This block size was atypical to the extreme. In Brunswick there are 5,935 houses, of which only 351 (or 6%) have land size greater than 600m2.
Compare this to other suburbs and you start to see just how rare (scarce) this land size is.
In neighbouring Brunswick West, 16% of homes are on land over 600m2 and in Kew it’s a whopping 58%.
You can logically expect this property to attract a premium because it’s so scarce in supply.
If you want to live in Brunswick you typically get a smaller block.
If you want a larger block you’re going to have to pay a premium because there are so few that come up for sale and they come up less frequently.
A larger block with a period Victorian home on it? Even more scarce.
The position of the house to the front of the block also meant there were so many options to improve and extend the house and add some spectacular landscaping for an impressive family home.
And we can’t ignore the potential for development.
You might already know how much I love Melbourne’s period homes and neighbourhoods.
My heart literally breaks when I write this but there’s no denying - subject to council planning approval - the owner of this property could be looking to subdivide and build a new dwelling to the back of the block.
In summary, scarcity and improvement potential were the probable kickers driving the price for this property.
Now if you’ve got this far (bravo!) and you’re freaking out because you’re not a numbers person, don’t worry.
Just get someone who is (a numbers person) to help you.
It doesn’t take more than a few hours and is a key step in your preparation for auction.
Even better, engage us to crunch the numbers and present the results to you in a straightforward and easy-to-digest format.
That's what we do for our clients, day in, day out.