How to Assess a Property's Value
Searching for a new property is a famously stressful experience. So when you eventually reach the point of negotiation you’re in a high-stakes game, one where you’re likely to feel as if the vendor’s agent holds all the cards. Fear of losing out naturally makes you vulnerable. Once you’ve set our heart on somewhere, all those media reports of slow markets and falling prices offer little comfort or assistance. In reality every house price will be negotiable to a greater or lesser extent.
N is for Negotiability
After months of fruitless searching you see somewhere you like. It’s got everything you want in a home. Unfortunately it’s at the upper edge of what you can afford.
So how can you tell whether your dream home is really worth the asking price?
And if the price is too full, how much lower might you sensibly offer instead?
You want to know the property’s Negotiability – or N-Factor for short.
Establishing the N-Factor is not an exact science. There’s no magic formula. But negotiability is generally determined by the inter-relationship of 4 variables: Desirability, Comparability, Supply, and Proceed-ability.
D is for Desirability
If you didn’t like the property you probably wouldn’t be reading this in the first place – but how many others are really interested? It’s harder to tell with fresh instructions. The longer a place has been on the market, the lower its D-Factor will be. Changes of estate agent or multiple agencies are both tell tale signs of a lower D-Factor.
C is for Comparability
How many comparable properties exist in your favoured area? In a typical suburban street the answer is very clear. Consequently, variations in asking price between similar homes in the same street are not too hard to understand. Character or period detached properties in the country are naturally more difficult to compare in this way.
I always employ a few simple principles when assessing value for clients, whether in town or country.
Firstly I adjust recent historic selling prices for property inflation by postcode.
Secondly I assess fair value from top down or ground up, i.e. the cheapest/ most expensive property in the street, neighbourhood, or village. I’m always wary of “herd pricing” by estate agents, an inevitable consequence of the way competition between agents to secure instructions can push up asking prices.
Thirdly I benchmark both these measures against total internal floor space. Outbuildings such as garages, stables or garden rooms should be treated as distinct from living and working space in the main dwelling.
A good comparability analysis is invaluable. It enables you to make a reasoned assessment of what intangibles (such as a quiet site, large plot, Grade 2 listing, or thatched roof charm) are really worth to you as premium over fair value based on the C-Factor.
S is for Supply
How many similar properties are there on the market currently? In other words how much choice do you the buyer have in practice?
The lower the S-Factor, the more important it is that you are decisive in choosing what to offer and how best to frame your offer. Because the longer you wait, the more likely you are to face competition.
P is for Proceed-ability
Have you the finance ready? Are you a cash buyer, chain free, or under offer?
Proceed-ability has a clear hierarchy. Cash buyers top the hierarchy, followed by sale agreed chain free buyers, then sale agreed buyers with a chain – and so on. The importance of the P-Factor is easily under-rated. It is increasingly screened by the vendors’ agents at all price levels. They will always favour the more proceed-able buyer.
A Working Formula for Negotiability
Property valuation is not an exact science. But we can illustrate the relationship between the 4 Factors with a simple formula:
D/ (C+S) – P = N
It doesn’t matter whether this is strictly robust, mathematically speaking. What counts is the relative (high/ medium/ low) levels of the component Factors, and how they modify each other to drive that critical Negotiability.
The higher the right hand figure (N) is, the smaller you may expect the gap between the asking price and the selling price to be. To secure a place with a high N-Factor you may have to pay close to the full price. But as that right hand figure gets smaller, you may reasonably expect a higher gap between asking and selling price.
Using this approach has three big advantages.
Firstly, it lets you put a sensible figure on Desirability in the context of a given location and property type. It’s nice, sure – but is it really worth £XXX,000?
Secondly it helps you turn Comparability into an effective and meaningful benchmark to furnish a reasoned argument to the vendor’s agent in support of an offer below the asking/ guide price
Thirdly, it reminds you to emphasise your Proceed-ability in your first offer and any subsequent improved bid. Sell your property first before you start making serious offers, and you’ll be treated much more seriously by vendor’s agents. They may well even favour such buyers over higher bidders who are less able to proceed.
Applying these principles should make your negotiation less daunting and more straightforward, and deliver the home you deserve at a fair price.