How much is that house really worth?

House-hunting can be a highly frustrating process. Perhaps the most infuriating situation is when you set your heart on a house, then miss out – over and over again. You are caught in a tug of war between wanting to secure a suitable home and not wanting to overpay.

You may also find there’s a disconnect between what you think is a reasonable amount to pay for a certain house and what it actually sells for. Your parents might be saying, ‘That’s a ridiculous price, we’d never pay that’; or the house sold only two years earlier for half that amount; or the price is $250,000 above CV.

It can also be expensive to keep missing out. It often costs several thousand dollars to do your due diligence on a property, plus a significant amount of time. After all that preparation, when the auction bidding starts at $20,000 above your limit, it can be heart-breaking.

Instead of just tearing your hair out, how can you get an accurate idea of what a house is worth so you don’t waste your time and money on places you can’t afford? The only way is to follow your local market closely and understand what all the various valuations mean.

How helpful is the council’s rating valuation?

The first valuation attached to a house will be the council’s rating valuation, known as a CV, RV or GV. Real estate agents often mention it in the advertising, but it is not necessarily an indication of what the house will sell for right now.

The CV is a rigorous analysis of local sales and aims to be very accurate for a specific date, but it’s only as good as the information the council has available for that property. Work that doesn’t require a consent won’t be included. That work could add a lot of value – like a new deck or a kitchen or bathroom makeover.

“Our valuations are a snapshot at the revaluation date,” explains Peter McKay, principal valuer at Auckland Council. “It is a statistical process and we value 575,000 properties – we can’t inspect them all, so we recommend that people get private registered valuation reports for buying, selling and getting mortgage funds.”

Councils only issue a full rating revaluation every few years. Auckland Council, for instance, released CVs for mid-2017 and new ratings have been pushed back a year due to the pandemic. Headlines like ‘Sold for $1 million above CV’ will become increasingly common the further your region gets from its last ratings valuation date.

What about online valuations?

Online valuations are described as “an up-to-date CV” by Nick Goodall, head of research at CoreLogic, which collates data from a number of sources to supply online values at Property Value as well as direct to businesses. Lenders use these as guide when they consider a home’s value, explains Goodall:

“Online valuations are used by the banks themselves, so we do due diligence on their behalf. These valuations are considered accurate enough for banks to use for over 90% of their lending. But they are only as accurate as the data you’re feeding into them.”

A full market valuation: as close as you’ll get but not perfect

A visit from a valuer takes into account that new deck or refreshed kitchen, plus all the chattels, and looks at recent comparable market sales.

“A valuation covers all aspects of the property, internal and external. If the valuer’s done the job properly, the valuation should be pretty close to what the average person is prepared to pay,” says Geoff Green, director at Greenland Valuers. “But the purchase price is always assessed by the buyer.”

That’s why, although a full valuation is the closest you’re likely to get to the sale price, a house can still sell for more. Ultimately, a house will sell for what someone is willing to pay for it, which could be driven by more than just careful analysis. Buyers are also swayed by a huge range of emotions – including love, fear, greed, nostalgia and competitiveness. When strong feelings are involved, no valuer can predict exactly how buyers will behave.

Watch the market closely

Sometimes homes sell for more than the valuer expects. The main factors that push prices beyond expectations are:

•   A rapidly rising market.
  
•   Two or more buyers who are determined to buy that particular house.
  
•   A desperate pool of buyers in general.
  
•   A shortage of listings, so more people are competing for a small number of homes.
  
•   Falling interest rates.
  

Some of those factors you’ll already be able to assess, while others require you to start physically house-hunting. To get a sense of what other buyers are willing to pay, you need to attend open homes and watch prices closely.

“You can’t assess the value without being in the market,” says Goodall. “You need to spend time in the market looking at houses and watching sale prices. Talk to your bank or a broker, get a feel for what your limits are and how much you can borrow.”

After visiting enough properties, you’ll become a micro-market expert. You can step into an open home and almost immediately have a sense of how much it will sell for. At that point, if it’s what you’re after, you can quickly make a competitive offer. You may also be able to spot the occasional property that’s been undervalued by the general market but works for you, adds Goodall.

What if you keep missing out?

If you feel burnt out on house-hunting, you have several options, including:

•   Adjust your expectations and buy a property that’s realistically in your price range.
  
•   Pay more, if you can reasonably afford it.
  
•   Rent, and invest your money in something else.
  
•   Wait for a market downturn.
  

There is no right option here. Each one comes with risks, opportunity costs and compromises – which are inherent in any big financial decisions. Weigh up your options, consider your priorities, and think about speaking to a financial adviser to understand the pros and cons for your situation.