Values versus Pricing at the Highest End

Value Price

Week One:

is not a number, it is a feeling.

Price has no emotion, no conjecture, it’s factual.

Price is not value and value is not price.

I buy a number of family homes for people –  perhaps more than anybody else in Melbourne, perhaps not – and at some point in the client and buyer advocate discussion we will get to money, to worth, to how much?

So when asked the question, how much should I pay Mal?

My response is often seen as flippant or evasive – as it’s never a question I answer directly.

In my opinion, your dream home has a value to you – as much as you think it is, at any point in time – not a dollar more and not a dollar less.

That is often very different from the price, I think a buyer may buy at or the seller may sell at.

This is value vs price.

Value is a feeling, an emotion and price is a number, a fact.

Good negotiators separate the two key concepts of price and value and they do so whether buying or selling.

Value is what an individual feels and price is what an individual does.

As you go up the food chain, establishing clear distinctions will enhance your ability to negotiate effectively, especially when much of your will be in isolation – with only advisory opinion fed to you (second hand) with little or no factual vindication.

So we help buyers and sellers with value, we give them pricing – but we don’t determine their value.

A working start point.

If you don’t have a clear starting point, then your negotiation position(s) are merely reflections of others (usually your opponents opinions). History shows this is not always a sound basis for effective negotiations, if your main aim is to achieve a result, in your best interests.

Over the years, I have found that a price range is superior to a single price because it allows better decision making.

If I give you a single number and it’s high, we pay high and we didn’t need to. If I give you a single number and it’s low, we miss out and you didn’t want to.

I accept that a single imposed “value” price is necessary in such matters as business accounts and divorce. However, in the matter of family home negotiation, it is an outdated concept; one that relates back to early last century law, when the notion of a “price at which one willing buyer and one willing seller, both with full knowledge and neither under pressure would pay” was the manner in which value was assessed for exchanges to take place.

In Melbourne in 2018, and in fact in many parts of the world, with massive population increases and the prevalence of moral and immoral, highly sophisticated selling techniques, the paradigm has changed. There can now be three willing buyers for the same one willing seller, the participants can be under “agent” pressure and more often than not, one or both or all of the participants, lack full knowledge.

A professional’s price range should contain the likely three key opinions on value (buyer, seller, highest other bidder).

Out and about today with Duane Woloweic at 15 Laxdale Road Camberwell

Out and about today with Duane Woloweic at 15 Laxdale Road,

I’m a total believer in a simple algorithm to assist in giving initial guidelines of a possible pricing range and below are my current workings on three suburbs, expressed in $ per sqm. I keep lots of little notebooks – I think the internet and algorithms and software are all great sources of information, but to rely on them exclusively, is in the end to think………….. well to think, what everybody else thinks.

And this is where I part company with so many today. I feel that many completely abandon any satisfactory form of post-algorithm negotiation process, to test the validity of their initial pricing theory.

So this may seem a paradox, a catch-22 statement and possibly hard to pack away mentally, if you are new to pricing;

BUT

Once you have calculated price range AND if you are really, really good at your job, you will then assume you may be wrong AND as a true expert negotiator you will remain of that opinion, until the deal has been consummated between two parties, in writing.

More on that another time…..let’s not get too bogged down on theory.

So how do we at James Buyer Advocates establish initial pricing parameters on a targeted home? We use a process which we call our James Control Price Range?

Like any good accounting system we have checks and balances – it’s a triple entry system.

  • plus Building plus Emotion
  • Comparable to other similar homes
  • Totem Pole

Below we have started showing initial land values as we see them, in three key precincts, within key suburbs – , Hawthorn and Brighton – three of Melbourne’s four jewels.

The algorithm for land is often a simple multiplication – size by $ per sqm.

Why?

Well why do you buy potatoes by the kilo, material by the metre and hamburgers by the number? Practicality, convenience and history are a large part of that – the trick to good price negotiation, is to know more than just what you are initially told, by any party to the transaction – eg the fact is the land size and the $ per sqm the opinion.

Over the next few weeks/months, we will cover all major suburbs in Inner Melbourne for land pricings.

We will also examine pricing on all major building types.

And finally the Emotion factor – the number that improves negotiations to such a degree, that it gives your figures a rigor, that they simply would not have without the emotion component.

Land + Building + Emotion = Price Range.

But that’s for next week’s article.

I leave you this paradox

The pricing system we use is the one we use, because we have found it is the one that works best for our clients – simple as that.

It is one of checks and balances.

It is a combination of algorithm and mind craft (science and art) and when we arrive at the final “expert” price range – one of the key and immediate next steps we have found in effective negotiations, is to potentially distrust our own assumptions and begin the game with an open mind.

If you’re still with me, until next week then, when we examine specifically and simply;

Land + Building + Emotion = Price Range.

James dollar per square metre prices we are using for Brighton land Dec 2017 to Feb 2018.

James $ per square metre pricing we are using for Brighton land Dec 2017 to Feb 2018.

James $ per square metre prices we are using for Hawthorn land Dec 2017 to Feb 2018.

James $ per square metre prices we are using for Hawthorn land Dec 2017 to Feb 2018.

James $ per square metre prices we are using for Toorak land Dec 2017 to Feb 2018. Full tables available for James Buy/Sell clients.

James $ per square metre prices we are using for Toorak land Dec 2017 to Feb 2018. Full tables available for James Buy/Sell clients.

Value Price

Week Two:

Last week we looked at why value is a feeling and price is a fact – we also looked at why utilise a price range and not a single price (click here).

Last week’s Land Pricing Recap

Below are photographs out of our notebooks on current land values as we see them, in three key precincts, within suburbs Albert Park, and . Last week we outlined the same in Toorak, Hawthorn and Brighton.

The algorithm we use for land is a simple multiplication – size by $ per sqm.

This week Building Pricing

Working through building values on is very different from family homes and is a lot like land: there is a size and a per square metre rate ie, an example for high-end is 200 sqm in size x $16,000 per sqm = $3,200,000 plus or minus the emotion factor.

However, pricing family home buildings is a lot less algorithmic, like land and apartments and a lot more like an individual craft.

For example: In recent times, local Melburnians have placed less value on buildings than some other cultures – that was particularly evident with the rise of the overseas Chinese buyer after the FIRB changes in 2008. I remember for a few months watching auctions run well past my calculations, on blocks with fairly average houses. The large majority of these were bought by overseas Chinese buyers. It wasn’t until I had a number of Chinese clients that I learnt they, at the time, were  “valuing” homes more so on size, on number of bedrooms; than on style and condition.

This was another new valuing paradigm, from another culture – neither right or wrong – just different. As the Chinese community were/are significant buyers, we had to factor it into our current pricing workings.

In 2018, those valuation differences in buildings have largely evaporated as the market has morphed from overseas buyers v local buyers, to a more consistent market of just “top buyers”, be they local or not – all having roughly the same increased view on land values and therefore, by default, a reduced value on buildings.

The latest building valuation or pricing paradigm is:

Overlays: Heritage v non Heritage

At the of town in Toorak if you can bulldoze it – then even if the home seems a grander one with merit and valued at say $2 million –some buyers place little value on the home and we need to factor that into our range. In Hawthorn, we price homes differently, simply because our experiences are different.

Where there are Heritage controls, the pricing of the building gets a different treatment to no Heritage controls and the way we deal with this is in the Land and Emotion figures.

Practical Pricing of a Building (family home)

There are many different family home building types – however, we price all under three main categories.

  1. Single Fronteds
  2. Double Fronteds
  3. Big Homes

While it’s tempting to add another category for unusual homes, we maintain a discipline that they must fit into one of these.

Let’s choose one; single fronted homes. Pricing single fronted homes is one of the easier pricing jobs to get an approximate range right. There are usually a number of similar size, condition and quality homes in the area and turnover is common.

Our definition of a single fronted building is:

One corridor – rooms to side on that one corridor. Single or double storey. Width generally 5-6 metres – but can be as wide at 10 metres. Includes timber or brick (we price the same in single fronted homes) – older period or modern townhouse.

Illustration One: Condition

Illustration One: Condition

When looking over a single-fronted home we want to price, we have three categories and three sub categories within each category.

Condition

Shell: Exactly that – front facade and not much else – no modern flow – wet areas in wrong places.

Reno: Floor plan roughly modern, but needs a reno.

Finished: Recently completely renovated, to what most would think is an acceptable standard.

Illustration 2: Size

Illustration Two: Size

Size

Shell: As above.

Double Storey: Could be terrace, could be double storey, single fronted and this is a price number that we find, has a far degree of mental elasticity. Plenty of times we still use $400,000 for a double shell (especially if narrow). Speaking of width, an extra metre on a traditional 5 metre single fronted pushes value up – yet a single metre between 10 metre and 11 metre often goes unnoticed.

Modern Finished: Again mental elasticity, even if it’s finished – a tight three bedroom single fronted, over two storeys can still be below $1,000,000 on our price books and yet we have priced at $1,500,000 (very occasionally) on absolute double-storey gems.

Illustration Three: Quality

Illustration Three: Quality

Quality

After condition and size – we are looking at the WOW factor.

Un-reno: Shell as above – can still have wow – good bones as they say and we have priced a few at $400,000.

Older Reno: Usually most things are in the right place, but dated.

Modern Reno: Depending on quality it could be $800,000 for single level, through to double that for two storey and brilliant.

Interaction

Using the above guidelines, we price with a combination of facts, algorithmic rules AND intuition/experience – for family home pricing the interaction is mostly joining the paths of condition, size and quality.

Pricing

Some unkind people, may call some of what we do with building pricings, “pin the tail on the donkey”.

Occasionally we agree with them, when it comes to the weird and wonderful – however we have a fall back that picks up our pricing “errors” – its called Emotion.

We will cover that next week.

Examples of pricing for single fronted homes:

Let’s say we are pricing an Albert Park Single Fronter (Danks St) versus a Canterbury Single Fronter (Maling Road).

Albert Park was more than a shell, but still needed a reno.

Canterbury was slightly bigger and had been renoed.

Albert Park was on 200 sqm and Maling Road was on double the land size 400 sqm

Albert Park: Land (200 sqm x $10,000 per sqm) + Building ($400,000) + Emotion = $2,400,000 +- Emotion

Canterbury: Land (400 sqm x $3,500 per sqm) + Building (between $600,000 and $800,000 – say $700,000) + Emotion = $2,100,000 +- Emotion

Last week’s pricing paradox

Our pricing system is a combination of algorithm and mind craft (science and art) and when we arrive at the final “expert” price range – one of the key and immediate next steps we have found in effective negotiations, is to potentially distrust our own assumptions and begin the game with an open mind.

This week’s pricing paradox

Look at all the “FREE” pricing advice you receive from the banks, from internet sites, from certain agents quotes – most follow certain algorithms or scientific processes – but if they are wrong more often than not, then irrespective of the market logic behind them, the numbers they provide are useless as negotiation foundations, as there is no trust.

Pricing is a numbers game and numbers are scientific.

However often the best “pricers” follow, in part at least, a seemingly ever-paradigm-changing non scientific way to come to a “building number”.

Good pricing is always about the result, more so than just blindly following some secret algorithmic process - which follows on that good pricing includes algorithms AND experience, not just algorithms, which follows on that who is pricing and their proven accuracy, is more important than how the pricing is done and their unproven marketing.

Still with me/us? Well done.

Next week Emotion Pricing – which allows a range instead of a single price.

Value Price

Week Three:

This week is the third in our four part series on values and pricing – last week was building pricing (click here) and the previous week was land pricing (click here)

Today we look at Emotion – the figure that allows the price range instead of a single price.

Land + Building + Emotion = Price (range)

A quick recap;

  • Value is not price and price is not value.
  • Value is what you feel and price is what you pay.
  • You determine what you feel, where you see value and it’s different for everybody.
  • The final expression of these feelings of value between buyer and seller is the price paid.
  • So only you, can truly determine your value and there is no right wrong or wrong – there is just different for all of us.

In negotiations we have found over the years, over the thousands of negotiations, that being able to assess where the three combatants, opponents, participants (call them what you like) may be on value/price is a foundation for better negotiating – in terms of price, in terms of risk and in terms of current and longer term success.

Our definition of successful negotiations is getting what you really, really want.

So how do you achieve that?

How do you know how others may value?

Lets do a practical example of a price range which now includes emotion.

Here is a we bid on yesterday –  we were not successful.

The property is at 22 McGregor Street, Middle Park.

Click on here for our James Home Rating and also then click thru to James Auction Report

Click on here for our James Home Rating and also then click thru to James Auction Report

As we stated last week the Base Figure of our price range, comprises the land price + the building price.

So on Land = 286 sqm x $10,000 per sqm = $2,860,000 and the building is a bigger double-fronted shell in need of renovation, which we have assessed at $600,000 so;

Our Base Figure is Land + Building = $3,460,000.

It’s a pretty important figure to get right.

As many times in a rising market, we say the chances of us buying below this number are such, that on the balance of probabilities, they are not worthy of serious consideration.

So in our price range figure we feel that the sellers, the highest other bidder and your opinion of value will 8, maybe 9 times out of 10 be above this figure if a deal is to take place.

You need to get your base figure as right as often as you can, please – you need to really understand the land and the building components, so your starting point is as accurate as it can be.

The Top Figure of our range is where Emotion joins in.

Emotion is not always a positive number.

A range does not always go up from the Base Figure – many times it does, as we at James focus on buying good homes and we have been in a strongly rising market. However, to help you understand more about about emotion and ranges we have included 22 McGregor Street, Middle Park, which we assessed as having negative emotion (due to its renovation) and so;

22 McGregor Street, Middle Park we have (Land + Building) - Emotion = $3,460,000 minus $200,000 = $3,260,000.

Our Pricing for 22 McGregor St Middle Park yesterday Our Pricing for 22 McGregor St Middle Park yesterday

Our Pricing for 22 McGregor St Middle Park yesterday

Our Price as a range is $3,460,000 to $3,260,000.

OMG you’ve lost me, Mal –  where did that -$200,000 figure come from?

What we are saying is without the renovation we feel the home was worth $3,460,000 (Land + Building).

With the renovation we felt most buyers would see the home as worth less ($3,260,000).

That is what we call the Emotion figure(s) and that is what gives your pricing rigour and that is what we are here to discuss.

Emotion is a figure that comes from our experience of buying in the PPP’s – that is, buying in that price range, in that property type, in that position – in this macro market, in that micro market.

By adding (or subtracting) the emotion figure, we feel that the sellers, the highest other bidder and your opinion of value will 8-9 times out of 10 be below this figure (TOP FIGURE) if a deal is to take place.

Getting "beaten" at 22 McGregor St Middle Park when stopping at our limit. As it turns out we believe the neighbour was the successful bidder. James Auction Report below

Getting “beaten” at 22 McGregor St, Middle Park when stopping at our limit.  James Auction Report below.

McG2

Emotion, don’t like that word – then use Error.

Huh?

Stand at an auction next Saturday and point out IN ADVANCE who is going to bid and how much they will pay and do it to the dollar. Can you do it? I can’t – I can’t get anywhere near it for each individual bidder and I do this for a living and have bought over 1000 homes.

But what I can do with a high degree of probability (8-9 out of 10, most seasons) is before an auction; state that IF a deal is to happen, that it will take place with a buyer and the seller between this figure (BASE) and this figure (TOP).

And by “knowing” this (price range), through experience (emotion) and algorithms (land+building), we have been able to plan how best to advance our sides’ interests.

Price ranges are not just for auctions, they are also for private sales, expressions of interests, tenders and off markets.

Please remember 84% of all interactions DO NOT take place on the street, in a public auction. You cannot see the whites of your competitor’s eyes, so you have to make your decisions on far more esoteric observations, than others’ hands in the air.

Here is pricing for an older off market - the asking price was $16,000,000 adn we bought it between the base and the in the mix number after many months of haggling.

Here is pricing for an off market – the asking price was $16,000,000 and we bought it between the base and the in the mix number after many months of negotiating.

For us, we feel negotiations are fraught with danger without solid guidelines in the background;  Land + Building + Emotion = Price Range.

Knowing what the price will be, increases your chances dramatically of success and along the way not paying too much and/or not missing out, by poor assessment of risk.

If our clients know the price range then good things can happen, such as;

  • In a low risk manner they can reject false and/or unrealistic buyer/seller bids via the selling agent, well above the likely price range and;
  • In return offer sensibly and respectfully, a number within a range that will put them well and truly into the game, at a point that the future will not show was a ridiculous number.

By “knowing” what price a home will likely go for, allows one to provide some leadership in the deal, lest a buyer accepts that life is best served by ignoring the law of the jungle and blindly following what the selling agents tell you to do.

By “knowing” a price we have time to consider our allocation options away from the maddening sense deprivations of a screaming auction – we can make better decisions in the cool light of day – we have more rational thoughts and our clients have a quieter time to consider their position.

Having “unlimited” money can make it harder to assess value as it becomes harder to read your true feelings so in these cases what provides the feeling of value can often be time.

At this point I want to also remind you of the first value paradox we stated two weeks ago – the other side of “knowing”.

Our pricing system is a combination of algorithm and mind craft (science and art) and when we arrive at the final “expert” price range – one of the key and immediate next steps we have found in effective negotiations, is to potentially distrust our own assumptions and begin the game with an open mind.

Example: Yesterday we bid on 29 Grove Road, Hawthorn, sold at $4,630,000 – we bid, but were out of it at our Top Range (Land + Building + Emotion) figure of $4,130,000 – a full $500,000 below the final volcanic result.

Our pricing range was submitted earlier this year, we potentially distrusted our figures and we kept sniffing and digging during the campaign, as we are in a new market. We did revise with our clients (at our pre-auction meeting), that there was a possibility this campaign was on fire, we were initially low on the emotion and possibly $4,500,000 should be our new Top Figure. Our clients didn’t go there and as it turned out, even that would not have been enough. That’s why we remind of the pricing paradox, as there’s our 1 out of 10.

Emotion, price ranges and values are only part of, not all of, high quality negotiations.

Let’s get back to emotion and ranges.

The above case studies strongly support a range, rather than a single price.

Why?

Focus on a single price – if it’s too high, then you risk overpaying.

Focus on a single price – it’s its too low, then you risk missing out.

Neither of these would be a buyer’s desired outcome and therefore, it is the knowing that you are probably wrong on any one number, that strengthens the value of your price range in getting the best deal – the one that you really, really want.

Emotion is for us a better concept than error or deviation; it’s a more relateable and positive concept that allows a practical range and gives estimates far greater rigour, far greater accuracy, far greater trust – which over time lead to far better results for …….. YOU.

So in advance, how can we “know” a price (range)?

How can we believe in a price that will encompass others’ unknown opinions – the highest other bidder, the seller and your (possibly unknown) value opinions?

So how do you get that Emotion number, Mal?

Good price ranges begin with the BASE figure (Land + Building).

The Emotion component of the price range gives you the TOP figure and comes in many ways, from a knowing experience.

Here are 5 Top Emotion components on a home – that make a difference to price outside the characteristics of Land + Building:

1.     Macro market Bidderman

2.     Micro market Bidderman

3.     Agent

4.     Wow Component / presentation

5.     Asking Price

Emotion pg 1Emotion pg 2

Some other Serious Emotion Components:

6.     Heritage Overlay

7.     Light

8.     Ceiling Heights

9.     Bedroom Size

10. Panoramic Views

Emotion pg 4Emotion pg 3

Still not sure why you would put a seemingly arbitrary number into a scientific calculation?

Ok, why do some of the best chefs do what they do, add a bit more or a bit less seasoning?

The answer is: Better Results.

So good pricing is about the “better results” and with our next article hopefully it will come together for you; as over the years we have bought a lot of homes because our clients “knew” the “correct pricing” for them, in advance.

Land + Building + Emotion = Price Range, is a results based pricing method that we use, because it works.

And despite our admission that it is not perfect; Land + Building + Emotion does achieve good results – more so than any algorithmic one number solution.

Good negotiations and pricing are about parameters, not single points.

Phew, we have gone around the “how much” game to come back to this – You, the Highest Other Bidder and the Seller.

What will the price be?

What is my value?

What do you really, really want?

So are you feeling lucky …….. buyer? Well are you?  Oliver Brice staring down those before him at 33 Canterbury Road, Middle Park. Bought After $5,575,000. 2 Bidders

So are you feeling lucky …….. buyer? Well are you? Oliver Bruce staring down those before him at 33 Canterbury Road, Middle Park for a successful result. Bought After $5,575,000. 2 Bidders. Photo: Rhianna Hoyle

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