Practical Valuing

This week we have gone practical in the quest for a million dollar good home buying decision. This is a supplementary article to Article 5 on values in The Age, Weekly Review, James Buyer Advocates eight article series – Young Homebuyers Guide.

How do we put a number to our value opinion?

In today’s modern society we need a number to effect an exchange of – well we do in Australia.

A quick summary of last week’s Value concepts

  • People (buyers) have a very wide opinion of value definition
  • Buyers interpret values differently, based on their current and past thoughts/experiences; their agendas and their criteria
  • One value concept is good value for you based on your clearly established financial and emotional outcomes, your thoughts, your agenda reflected in your criteria.

And now onto today – how do we put a number on good value for you?

Well at James, we actually don’t and we suggest you don’t either.

James Value concept: We form a range of value opinion rather than one set value number.

As we know from talk back radio, the dinner table and worksites; people’s opinions on everything, including value, vary greatly.

As buyer advocates we can’t estimate with any high degree of accuracy every individual’s opinion on value.

But it is possible with a high degree of accuracy (circa 90% of the time) to estimate the group’s range of value opinion. That is, a band of values where the majority of buyers may see value on a home.

The most relevant opinions are

  1. The seller’s
  2. The highest other bidder’s (if there is one)
  3. and You.

For a transaction to happen involving you the acutal price paid needs to be

  1. above the seller’s opinion of minimum value
  2. above the highest other bidders maximum opinion of value
  3. below your opinion of maximum value

Repeating what we have previously said. We cannot predict each individuals exact number but we can establish a “range” where the groups (market) opinion of value may lie.

Human beings are different but they are also the same. That is why the majority of us like certain types of homes, songs, people and dislike others.

I couldn’t tell you with a high degree of accuracy if you are prepared to pay exactly $3.20 or $3.80 for a latte but I could tell you that 90 out of 100 coffee buyers in Melbourne would be prepared to pay between $3 and $4 for a latte but not $7 to $8.

This knowledge of the range of values us very important as it allows a skilled negotiator

  • to be freed up to respond to opportunities in an informed manner as they arise.
  • with an accurate “range” valuation to buy a low price rather than focus on a high value if the opportunity arises; while at the same time still buy at a high price if competition is intense; rather than focused on a low value and miss.

James Value Concept:

  • Value is determined by you and your desired outcomes.
  • Price is determined by the circumstances of the negotiation.
  • Rarely are they the exact same number.

Valuing in a range rather than a single figure will also

  • introduce the concept of price v value
  • bring in the concept of risk in relation to targeted price
  • increase the chances of doing what you really want

How do you build or frame or form Your Value Range?

James Value Range is a bit like double-entry accounting.

Firstly, we look at what other buyers have paid for similar homes for sale. Our starting point is looking for similar already bought homes with
a. similar sizes
b. in similar positions
c. with similar buildings
d. in similar markets (recent).

A,b, c and d above are 1. Similars (or comparables) and its like valuing a meal – you compare take away with take away not take away with sit down silver service.

Why? Well that is what most human beings tend to do when buying something.

They think, they consider value, they form opinions by comparing, they form a value for them.

On higher priced and/or more unusual homes it is harder to find similar properties that have recently sold so when trying to establish values we break each home down into 3. Ingredients = Land + building + emotion values of each home that have been bought recently.

Land + Building + Emotion are the three consistent ingredients (components) in a very inconsistent process, that almost all buyers use (consciously or subconsciously) to get a sense of the likely “value” of a home:

The components of Land + Building + Emotion are a bit like Entrée + Main + Dessert. Value each one and then total.

When calculating individual ingredients we want to use a method that the seller or other bidders may use. That’s why we don’t weigh land like apples or use complicated ROI measurements like financial planners do. Most “normal buyers” look at size and then multiply by a sqm rate – this we call this the 2. Calculation.

Land

A sqm metre rate is a calculation done by taking an average of a number of land sales and dividing by the price paid thus giving us an average per sqm rate.

You then multiply the sqm rate by the land size of the home of interest to get your land figure.

Sqm rates differ because, guess what, humans have different opinions, different agendas and select different data through having different criteria. Nonetheless in this surprisingly inexact world ethical and competent experienced professionals can estimate “the group or market range” of land value 9 out of 10 times in a flat market and around 8 out of 10 times in a volatile market. The fact that selling agents don’t seem to be able to do this is more about their agendas than their skill levels. Read our article on Step Quoting http://marketnews.com.au/2014/05/step-quoting-black-or-noble-art/

* Please note this is very simplistic overview and “valuing” land with different views, different sizes, different streets, different zonings and so on is not a matter of reading this article and then stepping into the deal as an expert. That sort of bravado often leads to tears – your tears that is – if not now than 10 years into the future.

Building

It is harder to estimate building ranges, however with skill and experience it is possible with a high degree of accuracy.

Building is generally broken down into

  • size (hard to find from agents isn’t it – try council);
  • condition/quality,
  • age and
  • style.

These are the big 4.

Here are 3 of 10 key building value guidelines that we follow at James

  • we calculate at replacement value
  • 1940s to 1970s homes without architectural merit – zero. With merit – difficult!
  • that need to be completely gutted – a token amount depending on size

And some more concepts for you.

  • Buildings are very much like clothes: they are fashion statements and, as such, various styles go in and out of fashion.
  • The value of a building can depreciate just as a new car does the moment it is driven from the showroom.  If half your money is spent on the home (the other half on the land) and that home goes out of favour as many do (such as the recent fad to Georgian reproduction homes), then while the land component may be growing in value, the other half of your money is working in a negative direction growth-wise.
  • With (which are almost all building) it can be devilishly difficult for the inexperienced to estimate PPP and FFF values on some when you don’t have size or that size “is a rough guess or even false” and rates vary from $5,000 to $18,000 per sqm. And all this while you are looking at just a piece of paper with a drawing on it, a contract with some dubious promises and an excel spreadsheet with numbers on it selected and controlled by the salesman.

Emotion

Just like land and building you can never place an exact number on emotion and know for sure that it is right.

Our emotion number is also our catch-all to allow for variances in land and building opinion.

What you learn to do from experience is understand the psyche of others and reflect emotion accordingly based on what we call price stations. But that is for another time, another article.

We have always been interested in the notion that businessmen when selecting a figure for a transaction say to us: “Now Mal I’m being completely unemotional about this, this is a business decision. I’m looking at the facts, I’m examining the data and I’m weighing up the evidence.”

The facts are: they are looking at other people’s emotional decisions.

If Judy and John paid $1,500 per sq metre for their land, but would have paid $2,000 psqm except nobody pushed them (the agent was asleep at the wheel); if Peter and Suzie were new to Melbourne but needed a place quick and paid $1,100,000 for a home that nobody else was interested in at $900,000 simply because it was available; or Han the Investor didn’t compete for a Hawthorn single -Edwardian one week because he listened to Kochie on Sunrise but then next week went hard because he read Glenn Steven’s opinion on the market in the Fin Review.

If all three of these homes were the “similars or the ingredients” the businessman used to determine his or her value, is there not an element of emotion in the businessman’s decision?

What about the newspaper headlines which one month shout out record prices paid, the market has gone ballistic, buyers are full of emotion; yet next month those same record prices are regarded as normal and used as similars to determine future price estimates?

We are a funny lot us humans when it comes to value – aren’t we?

Being able to estimate emotion comes from experience in being able to estimate the groups “psyche range” on a home at the time of sale.

And so we now have the ingredients Land + Building + Emotion from which we can 4. Build our Range of Values

Why a James Value Range again?

Repeating ourselves: While we can’t estimate with any high degree of accuracy each individual’s opinion on value, it is possible with a high degree of accuracy (circa 90% of the time) to estimate the group’s “market” range of value opinion. In other words where the majority of the group may see value.

A skilled negotiator can with an accurate “range” valuation buy a low price rather than focus on a high value if the opportunity arises; while at the same time still buy at a high price if the bidding is intense rather than focus on a low value and miss.

Overall we have found a “value range” allows better decisions by a buyer than a single figure focus.

Our James Value Range has a bottom, a middle and a top.

  • BASE: Willing buyer and willing seller, one figure valuation (International Valuation Standards Council) is still an important and legitimate concept, but in many ways an inferior one for Inner Suburban Melbourne home buying. The concept has its origins last century when was plentiful and not as concentrated. This more traditional concept is still the basis for almost all legal, tax and divorce valuations. We think it is relevant, but only if there is one willing seller and one willing buyer and we reflect that in what we call our Base Price Value. However good homes in competitive auction and competitive private sale situations in good markets are rarely bought at this value estimate.
  • MIDDLE: Two willing buyers and a willing seller is part of our more modern valuation concept for Inner Suburban Australian home buying – which forms part of a range rather than one individual price.
    Our statistics (bidders per auction) prove that many good Inner Suburban homes have more than one bidder, creating pressures and upping the price buyers are willing to pay.
    This middle price of our range assumes informed and transparent competition and we use a formula (we call it our stations formula) based on thousands of auction and competitive private sales that we have been involved in. The concept of two reasonably pressured buyers is reflected in what we call the “in the mix”. At this price, in a competitive situation our stats show you have approximately a 50% chance of buying and a 50% of missing out.
  • TOP: Two, three or more heavily pressured buyers and/or an unwilling seller is the third part of our more modern valuation concept and this is reflected in our Buy price. This is where we feel a buyer may need to see value if they want to be the purchaser in an extremely competitive situation or a difficult seller situation. 90% of the actual results on homes we place values on fall below our 90% buy figure.

Above is the basis of the James Value range.

As you can see from the diagram – the range is formed by adjusting the emotion content.

Of course valuing is not a perfect science, as we are dealing with humans; but neither is medicine. Before you go into surgery do you want a qualified and experienced woman who knows what she is doing, with a plan and some guidelines, who has given your individual case some thought or do you want Uncle Bob leaning over and saying “I think pull his gall bladder out, yeah that’ll do the job”.

Valuing land and building and emotion is the pursuit of perfection of the imperfect by the imperfect – but the closer you get, the better your buying decisions and negotiation strategies can be.

May I digress for one important moment please?

We are not dismissing the work of professional valuers or the importance of the market value concept. Far from it. We are just saying the concepts and systems used in traditional valuation methods do not transfer exactly when buying in . It’s a bit like AFL and Rugby – both football but ….different.

Market value is an important concept in meeting Criteria 1 and 2 of your plan (Article 3) when considering for instance and other alternative homes you may buy which are now on the market.

Example: If there were five bidders on a home at $1,000,000, but only two of you at $1,300,000, is the market value of this home $1,000,000 or $1,300,000? What happens if that lone bidder who pushed you to $1,300,000 had bought the week before and didn’t compete. You  would have then bought the home at $1,030,000 as the other three bidders duly stopped.

In the future is the market going to see capital growth off the $1,300,000 that was paid in exceptional circumstances or $1,030,000 which many others paid for similar properties but not this one.

It is important to know when to stop or to know clearly why you are doing what you are doing. Eg Its not wrong to pay $1,300,000 if the home and value met your Criteria.

And so we at James have our Value Range.

The final two procedures are checking procedures.

5. Totem Pole or Self Perspective review. This is where you line up 20 or so recent sales (similar and others) in order of dollars and see how your value range sits on the totem pole. Eg At the range of values you suggest would you prefer homes above, at, or below your value range. It really gives you some perspective on your “values”.

6. Peer Review Its healthy to think you are not right on every value. I know I’m not and I have valued thousands of homes. In our office before every rating, every value, every negotiation strategy goes out the door it is peer reviewed. I suggest you do the same, as it either forces a change or makes you stronger on your thoughts – either way is helpful.

Your peer is not the agent- they have different agendas. Your peer is not Uncle Bob in another state as he has no local knowledge. Your peer review should be a professional but if you don’t want to use a professional then husband and wife should each do it individually, but again I would suggest you get a valuation check from a professional unattached to you, such as a buyer advocate.

What you are trying to establish in going through the valuation process is

1)   What the seller and the Highest Other Bidder may think is value so you can think about the price you are willing to pay to buy the home under a variety of circumstances bearing in mind what risks you are prepared to take.

2)   What is the value to you of this home compared to others – eg it needs a reno; how does it compare to renovated ones (less costs to reno).

3)   What is a reasonable price to expect to pay on this home so as to get normal or good growth for this area type of home going forward.

4)   What value range you are prepared to operate within that will achieve the emotional and financial outcomes you want on this home.

Thank  you for your time –  Next week Negotiation.


More in The Age, Weekly Review, James Buyer Advocates Young Homebuyer series

Article One: Good Home and Bad Homes – Simply your decision. Glen Iris gain a $million – Southbank lose a $million CLICK HERE

Article Two: Clarity Plan – PPP’s – get the best out of now  CLICK HERE

Article Three: Futureproof your plan FFF’s and put a $million into your pocket – CLICK HERE

Article Four: Due Diligence. Boring but very profitable. Great hourly rate work – CLICK HERE

Article Five: Value Concepts that can work for you – CLICK HERE

Article Six: Practical Valuing – CLICK HERE

Article Seven: Negotiation at the Pointy End – CLICK HERE

Article Eight: Walking the Walk – CLICK HERE


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