home-valueIt’s a strange occurrence. Although your home might be valued by a bank at one price, it can be listed at another and often end up selling at a completely different number. Why does this happen?

We’re going to take you through a fictional home sale process in a bid to shed some light on the situation.

The price is right – but which one?

Enter Smith family. They have a house in the city, but are looking for a change of scenery, so decide to buy a property on the coast.

They get in touch with their bank to discuss refinancing their home, in order to release funds for their new property deposit.

They also get in touch with their local real estate agent and request a property valuation, prior to putting their home on the market. The appraisal is provided, the house goes to auction and is sold. In the meantime, the Smiths receive their council rates notice by post, which they’re required to pay prior to leaving.

Whilst packing boxes later that day, it hits her – Mrs Smith realises that there are 5 different prices attributed to her property, not including her own perceived value of the property. She begins to wonder: “Did our property go for the wrong price?”

So, why exactly do these variations exist? It largely depends on each individual’s motivating factors.

Your bank’s price

If your home is mortgaged, it’s almost certain that your lender will need to conduct a valuation. This is so they can feel confident that your home still reflects the valued amount, so they have some security against the amount you borrowed. This way, if you – for whatever reason – can’t pay your mortgage, the lender will be able to retrieve the debt.

For this reason, it makes sense that a bank would want to undervalue a property prior to mortgaging it, as it helps them to plan more realistically. Common undervaluing amounts range from 10-20%. The Smiths were none the wiser that the bank’s price didn’t actually reflect their property’s true market value.

Your real estate agent’s price

So they know what sort of audience to approach when selling your home, it’s common for real estate agents to provide a private property valuation.

Prior to giving a number, agents will typically research similar properties in the local area. They’ll then provide you with a number range which your property should sell within. This is a useful asset for vendors, as they’ll have a better idea of what price to advertise.

The Smiths’ agent concludes his inspection and, based on a strong market requirement for 3-bedroom homes in close proximity to schools, he quotes them $550,000 to $600,000.

The sale price

Regardless of whether the property is sold at auction or via a private sale, the final price that the successful buyer bids is the property’s legally-binding sale price.

Especially-popular markets, high demand for certain locations and strong turnout can all affect the final price a property brings in.

In this scenario, the Smiths’ auction has a large turnout and 8 of the audience become active bidders. The hammer closes the auction at an impressive $630,000.

The council valuation

Each year, when homeowners receive their local councils rates bill, they’ll see the following on it:

  • Capital improved Value (CIV)
  • Site value
  • Net Annual Value (NAV), or Gross Rental Value (GRV)

By utilising comparable sales data and State Valuer-General office stats, these figures will be calculated and sent out. Councils, as well as water/fire authorities, rely on these to work out how much homeowners owe them for services rendered.

According to their municipal rates bill, the Smiths’ property had a CIV of $480,000, which was the total value of land including property. Their site value was $280,000, which was the land value excluding any property situated on it.

The homeowner’s price

When the time comes to sell, every homeowner tends to be optimistic, holding that ‘dream price’ at the back of their minds.

Most sellers also have an idea of the lowest price they’ll be comfortable selling a property at. Both of these price points are usually based on location, size and features, but occasionally, seller price expectations are governed more by emotion than facts.

In this situation, the Smiths didn’t really understand how they should price their family home, when the time came to sell.

Although their research had shown that similar 3-bed properties were selling for an average of $510,000, Mr Smith had other ideas.

The previous summer, he’d just had a new pool installed, which he believed should add at least $50,000 to the sale price.

In the end, regardless of property features and location, the price will usually be defined by what the market is willing to pay for it, be it through auction or private sale.

If you have questions about buying or selling real estate or would like to speak to a real estate agent, contact us today. We’d be happy to offer advice.

The information and links provided on this website are for general information only and should not be taken as constituting professional advice. This information does not take into account the financial situation or particular needs of individual readers. Before making any decisions about matters discussed on this website, you should consider whether it is suitable for you in light of your own circumstances, and seek appropriate advice.