Putting your property on the market
To get a realistic idea of how much you can afford to spend on your next home, there’s a fundamental question that first needs to be answered – how much is your present home actually worth?
Nail this down early in the process and it will help you stay on course later when buyers start haggling for price reductions.
What’s it worth?
This is a subject with serious potential to ruffle feathers. Chartered Surveyors know from bitter experience that informing proud home owners that their property is worth less than they’d fondly imagined is tantamount to hurling a personal insult. The same holds true at a national level. Voters will tolerate all manner of dishonesty and ineptitude from politicians, but if house prices start to slide, governments generally do too.
Into this maelstrom of sensitive egos and personal finances steps the estate agent. To muddy these waters even further, estate agents have their own agenda – to win business, which is rarely achieved by proffering cautious estimates of value.
It’s probably a bit of an urban myth that if you ask three different agents you’ll get three wildly different valuations. To be fair, even highly qualified Valuation Officers assessing properties for tax purposes accept that there is a permissible leeway of up to 10 per cent accuracy. But there’s no good reason why local estate agents should be too far apart when valuing conventional properties such as 3 bed semis where there are plenty of similar houses in the locality. So unless an agent is incompetent or desperate for business, significant differences of opinion are only likely to occur with odd, one-off properties, such as converted chapels or sprawling manor houses.
How to value
When it comes to valuing our own homes, there’s a tendency with most of us to view them through rose-tinted specs. It’s obvious that our personal good taste in flowery wallpaper and coloured bidets must make our house worth considerably more than that ghastly place down the road that was on the market last year at an outrageous price.
So how do the professionals do it? Residential property is normally valued by making comparisons with recent completed sales of similar types of houses in the local neighbourhood. These can be accessed at the Land Registry (HMLR) or on Rightmove.
Accurate valuation requires an ability to stand well back and take a long, hard, objective look. But as noted earlier, this puts estate agents at an immediate disadvantage, because there’s an obvious conflict with the need to win business. Disappointing potential clients with honest, but lower than anticipated valuations is not necessarily the best way to do this.
Agents rarely have formal qualifications in valuation, but those with experience and good local knowledge usually have a pretty shrewd idea as to what price a property will actually sell at – which is why surveyors frequently seek their (genuine) opinion of value.
But comparing one property with another isn’t the only trick in town when it comes to valuation. For example, you could instead base the property’s value on its investment potential, a method widely employed with commercial and retail property. This involves assessing the amount of rent the property is likely to generate in the space of a year. This rental income is looked at as equivalent to the interest you could earn from a sum of money sitting safely in a building society account.
The question is, what capital lump sum (or value of property) would you need in order to generate this annual income? Because of the relatively high risk involved in collecting rent (your tenant could disappear without paying), you would expect to earn a higher interest rate or yield than you’d get from a ‘safe’ High Street savings account. So if banks are paying 1 per cent interest, you might expect to earn a rental yield of 3 to 5 per cent.
By working backwards you can calculate a property’s approximate ‘capital value’. Suppose the annual rent is £10,000, and you need a yield of 8 per cent, then the property would be valued at £125,000.
Needless to say, calculations aren’t always this simple. To judge what sort of return you need to earn it’s necessary to weigh up the benefits of any additional future growth in the building’s value against drawbacks, such as property being a notoriously ‘illiquid’ investment – ie you can’t get your money out in a hurry by suddenly ‘liquidating’ your house or flat. You also need to take into account the projected returns from alternative investments such as stocks and bonds, the term and quality of the lease and how yields and inflation are expected to perform over the years ahead.
Nonetheless, this can still be a useful rule of thumb in helping buy-to-let investors judge whether a property is overvalued.
To get an idea of the true value of your house, a good place to start is by checking actual Land Registry sale prices of other properties in your street. This information is widely available online so you can see the actual selling prices your neighbours accepted for homes – a tempting proposition even if you’re not selling!
Another useful guide to the true value of your property is to take the price you paid when you bought it, and then ‘index it up’ using one of the leading online house-price calculators such as Nationwide or Halifax. Obviously you also need to add something for any improvements you’ve made to your home. But this doesn’t mean just adding the price you paid for your conservatory or loft conversion.
As what you spend on a home improvement and the amount it adds to the value can be two very different things. The amount of value added will very much depend on the extent to which it overcomes a major drawback, such as a lack of parking or a tiny kitchen. Some ‘improvements’ can actually reduce the value, such as fitting artificial stone cladding or installing cheap plastic windows in charming old period properties.
If, when you bought your property, you managed to negotiate a substantial discount to the original asking price, it can be tempting to believe that the property is worth considerably more. But this is not always the case. It sold for the best price the seller could get at the time, and may not have been such an amazing bargain if, for example, the original asking price was set miles too high.
Our next blog – coming soon …….
Setting your asking price …
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