If you’ve spent any time researching properties, you will have come across a ‘price guide’ on more than one occasion. On other occasions, you may have bemoaned the fact a listing didn’t have a price guide, because it made it harder to figure out if you could afford the property, or if you were simply wasting your time conducting diligence.

The first thing to understand is that a price guide will often bear little resemblance to what a property sells for. Largely, it is a figure used by real estate agents to entice more people to view the property and hence get emotions involved, which will help fuel competition between buyers.

How do price guides work?

Price guides are a ballpark figure that a real estate agent estimates a property might sell for, based on recent sales of comparable local properties, plus the vibe of the buyer market at the time. Most Australian states and territories have legislation in place to make sure agents are being held accountable and to stop them from underquoting- an illegal practice in which an agent purposefully sets a guide well lower than the vendors will accept, in order to maximize the number of buyers vying for the property.

The rules do differ from state to state. In Queensland, price guides aren’t allowed at all for homes going to auction.

But in NSW, agents are encouraged to put a price guide on a property. The law stipulates that an agent must give a vendor an estimated selling price, based on 5 recent comparable sales in the area. The price guide then must be within 10% of that estimated selling price. So, if an agent tells a vendor they can get $1 million for their home, the price guide they give buyers will usually be $950,000 – $1,050,000, or $1 million – $1.1 million.

The problem is

While the above sounds fair enough, problems can arise in markets where there have been few recent transactions. And with most of Australia suffering from a severe undersupply of property, there are many areas where sales have been scarce.

So, you might be looking at a property that you think is affordable based on the price guide, only to find out that the ‘recent sales’ used to set that guide were from more than a year ago…sometimes even 2 or 3 years ago. In property, that time gap can be the difference between boom and bust.

Some of those sales may have happened during the aftermath of the steepest interest rate hikes in history, meaning the market was correcting and properties were losing value. Now, the market has recovered and is growing again, so the conditions are completely different, and the comparable sales might as well be apples and oranges.

No 2 properties are the same

Whatever the market, there will always be reasons why 2 similar properties can command completely different prices. Location, property condition, flood zoning, pest damage, insurability, even Feng shui… the list is endless. That’s why a price guide is not a price, but a guide.

The truth is that an agent will never know for sure what a home will sell for, so if you have been given a price guide that aligns with comparable sales, you should know the agent has satisfied his or her legal requirements. Even if you are then blown out of the water by other bidders at an auction.

Other ways to get an idea of a property’s value include doing your own comparative market analysis, or engaging a professional valuation company to assess a property’s value based on its fundamentals, rather than the mood of the market. This can also help you understand how much a bank is likely to lend you if you do want to buy in that area.

The importance of due diligence

Price guides are a distant second in importance when it comes to property investing. The main game is your own due diligence. This involves comprehensive research on properties and the local market, looking at historical sales data and taking note of amenities, with a focus on zoning regulations, upcoming developments in the area, economic diversity, transport and access to education and health facilities.

Due diligence should also extend to engaging professional advice where suitable from accountants, solicitors, buyers’ agents, mortgage brokers and financial advisors. If you need help figuring out what your strategy looks like or you need more information, reach out to the Investor Relations team at B.Invested.