Ep 9. How Property Price Estimation Tools Work
In this episode, Michelle explains the correlation between pre-approvals, bank valuations, and property price estimation tools. She also goes into depth about why you need to be cautious when making decisions before confirming the value of a property with your mortgage lender.
Here’s what you’ll learn from today’s episode:
Pre-approval vs bank valuation
Should you use a price estimation tool?
How to interpret a price estimation tool
How to deal with valuations during market fluctuations
Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
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Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.
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VIEW TRANSCRIPT
Hi and welcome to another episode of Buy Your Side, the Property Podcast to help you make better property buying decisions. My name is Michelle, the Principal of Buyers Agency, Michelle May Buyers Agents in Sydney. Now this is going to be my fifth effort to try and start this podcast about valuations because I don't know about you, but I'm still working from home and I've had kids making milkshakes in the kitchens, trucks pulling up outside, and I'm trying to do this in a quiet space so you can actually hear what I've got to say. So today I am wanting to talk to you about the correlation between pre-approvals, bank valuations, and those big bank price estimator tools. You know, the ones that you get on your app, and how helpful they really are. So let's get started.
So I know that the hot property market at the moment is very, very tricky. And I talk to buyers on a daily basis, and one of the biggest reasons why buyers reach out for help is because they're really scared of overpaying, and they're not sure about values and where the market is going. So, of course, overpaying, or the feeling that you've splashed out too much cash and then the situation where the bank won't give you the mortgage you need because they don't think the property's worth it is the worst case scenario. So today I wanted to talk to you about understanding the risk involved and how you can navigate this much better.
There is a general lack of understanding about the process of bank valuations. Now, there's a difference between the bank valuation and, of course, the pre-approval that you get from the bank. The pre-approval indicates your value as a borrower to the bank and has nothing to do with the potential property value that you're buying. So many people forget that the pre-approval for home doesn't secure you that full amount of money. It just means that your desirability as a borrower is based on your income, your debts, your assets, your financial history, and, of course, your ability to make mortgage repayments, and how keen the bank is willing to have you as a client. It's all about risk assessment for them. They don't really care about you, let's face it. The bank still needs to see the property that you choose to buy in and say, "Yes, James and Patricia, this is a great buy. We will lend you that million dollar as per your pre-approval on this property." They could turn around to you and say, "Look, it's great that you've decided to buy this place for $1,000,000, but we only think it's worth $800,000." So you then have to find the extra $200,000 elsewhere, or go to another lender and hope that they will give you the valuation you need.
So it's important to understand that the pre-approval is a way to narrow down your search to understand what kind of properties you can be looking for, what the repayments will be, what your costs will be on a monthly basis. But it doesn't give you the freedom to then go out and spend that kind of money just on any kind of property. The trick here is, of course, that the bank won't value your property until you've signed on the dotted line. So you don't actually know until they've done the valuation, whether you're in the clear or not. So too many buyers don't factor this in, and they base their offers on their loan pre-approval. And of course, it's also become increasingly common for people to jump on those free property price estimators, whether it's from the bank or whether a helpful broker has printed off a report from one of the portals and no doubt trying to be helpful. But there's more on that a bit later, because those are not entirely reliable and can be misleading to your purchasing decisions. So the problem here is obvious you behind a hot market because the bank has told you they're willing to lend you the money, you sign the contract, they do the valuation, decide the property isn't worth it and won't let you do the money you need and you can't find your finances elsewhere, then your deposit is gone.
The other thing is also that the real estate market fluctuates really quickly, so if you purchase when the market's really hot based on what your bank is willing to lend you, you may well find yourself in hot water when interest rates rise and the market changes. And if you've bought a dud, you know your property can instantly lose a significant amount of value, and so you run the risk of having negative equity and face significant challenges if you need to make a move before the market recovers. So this situation is a perfect example of why you really need to do your independent research to understand what a property is worth before you make an offer, before you go to auction.
Which brings me back to the price estimator tools. I know that one of the big banks has recently been spending a lot of money on TV, advertising their new and improved price estimator tool. And let me tell you that as a Buyer's Agent who is in the market every day, nothing irks me more than these auto estimators because I've tried many of them out over the years and they come back as completely useless and inaccurate 99% of the time. So I wanted to talk you through what the problem with these tools are so that you can make better decisions. I mean, by all means use them, but then add your own research and really look at the information critically, because I think that a little bit of knowledge can be a very dangerous thing.
The first red flag with these reports is that the price range that they usually put on a property is huge. It's not uncommon to see an estimate that gives a low and a high end of the price range, which varies by hundreds of thousands of dollars. Which is funny because in the real estate industry, the Office of Fair Trading actually regulates the price range estimates that real estate agents can give. It's a maximum of a 10% variance, which is in place for a number of reasons. I mean, the most significant one is to prevent under-quoting and misinforming buyers on the hunt for their property. So why these price estimator tools can get away with quoting ranges anywhere from four one million to three million is quite beyond me. But, you know, a 10% limit ensures that any price estimate remains as reasonable and accurate as possible. There's really no point in looking at one of these reports that have such a major range because, you know, you could just pick a number and it'll be right at some point.
The other thing that you need to realise is that these free reports, their computer generated so they're put together by algorithms, no human hand touches these things. And so they leave out many important factors that are, really, very important in the real estate market because I don't know if I've ever said this before, but a lot of what we do as buyers agents has nothing to do with property. It has to do with people and how they react to properties. So in these algorithm computer generated reports, they only look at facts and figures. They only look at, for example, the property's previous sale price. Recent sales in the area of comparable properties and things like land value.
But many of these comparable sales are quite old, leaving out many recent sales, particularly the ones that are non-disclosed off market ones, for example. And they also only look at comparable properties in the same suburb, has the same number of bedrooms and bathrooms, and has sold in a reasonable amount of time. But it doesn't look at the quality of the comparable properties. One can have an IKEA kitchen and one can have a Poggenpohl kitchen quite different. They don't look at the functionality of floor plans, they don't look at aspects, internal light. Not even mentioning, for example, the desirability of certain school catchment areas and services, other cafes in the area, is there a really cool, vibrant vibe to a particular pocket of that suburb? And also, they don't look at any medium price changes since those comparable sales occurred or current market supply.
Now, I don't need to tell you that at the moment, the market is going up by enormous amounts of money on a weekly basis. So a sale that they put in those reports that happened three months ago or even six months ago, I've seen sales in those comparable price tools that were nearly a year old. Again, that is not what the Office of Fair Trading recommends, it should be within a three month period. But even three months ago, the median price has gone up by so much that you need to calculate and figure that in. So think about this very carefully. By all means use them, but it's like comparing apples to oranges. Is it ever worth getting a price estimating report from a lender? My answer would be not really. If you're looking to estimate how much you should expect to pay for property, these bank estimates really don't give you very accurate information. So I think by all means use them as a baseline, but really, also add your own research and look at Domain, Real Estate, look at the recent sales, look at land sizes, look at all those things that I've just mentioned. But also ask the agents for comparable sales and then collect all that data and then work out the best way forward. I know that sounds like a lot of hard work, but trust me, it's worth it. And this is what my team and I do on a daily basis. So we get really into the finer detail of these things. And I think that if you want to make a smart decision and not overpay, this is really what is needed.
So good luck. I hope this episode has helped you put things into perspective. If you want some help, reach out. If you've got a question, drop me an email at hello@buyyourside.com.au. Thank you for listening.