Appraising property attributes

How do we discount or add on a premium when something noteworthy is impacting the property positively or negatively?

Property appraising is a delicate balance of art and science. But how do we apportion a premium or a discount when a feature is a stand out or a significant detractor?

And how do we know how much to apply to the premium or discount?

Today’s Sunday blog is an excerpt from our podcast series, The Property Trio. Dave, Mike and I chatted about this recently in an upcoming podcast and it warranted a blog of it’s own.

The list of positive attributes below are some of the factors that can differentiate a property from a mainstream comparable sale. Some are more rare than others depending on the suburb and style of housing and street layout. They are all value-add features in their own right, and when combined, a property sale can eclipse expectations if these scarce positives aren’t taken into account when appraising.

• Notable designers or architects (example, Eltham’s Alistair Knox)
• New works/extension/renovation
• Quiet court
• Train station within 200-500m
• Attractive zoning (ie. growth zone vs standard, residential zoning)
• North facing rear
• Great views that are at very low risk of being built out/blocked
• Ultra wide block (from a development point of view)
• Ideal floorplan that doesn’t require any building works to renovate
• Heritage signfiicance

Likewise, we need to also take into account the detractors. This will require an appraised estimate to be downgraded, or the buyer may decide to let the property go altogether, pending the magnitude of the issue or number of detractors featured.

• Properties in serious need of repair
• South facing rear
• Challenging zoning
• Heritage overlay when substantial improvements are intended
• Main roads
• High voltage power lines
• Train lines
• Ugly surrounds (ie. industrial buildings)
• Tough overlays (ie flood, bushfire)
• Bank lending policy issues, ie. floor area
• Significant strata fees or high special levies
• Brick cracking
• Obvious problematic neighbours
• Flight paths
• Development sites next door/over the back fence that could threaten privacy and natural light
• Restrictive covenants
• Houses with sordid histories
• Compulsory acquisition possibility
• Easements in awkward spots

Firstly, how do we apply a discount or a premium when a property is impacted by any of these?

Sometimes we can use a rule of thumb percentage value-change for well-known detractors or attributes, such as orientation. A general discrepancy between two similar properties, each with northerly versus southerly orientation is around 10-15%. Over the years we’ve gauged similar properties on well known east/west streets that offer either north facing, or south facing blocks.

While it’s not a perfect science, it’s a well-tested differential.

The challenge is that the the comparison properties do need to be quite similar in terms of land size, dwelling size and style, and date of sale.

This isn’t always easy, and when insufficient sales threaten the analysis, we turn to collating similar properties over a longer time period, and then adjusting figures based on capital growth since the time of sale. Again, this isn’t a perfect science because capital growth figures are median, and not detailed enough for sub-markets.

Over the years, I’ve seen buyers stretch for high quality, multi-positive-attribute properties. Years later when they’ve resold, they’ve replicated the enormous crowd size and the impressive price tag. While nobody likes to overpay, we do need to focus on asset quality and the likely chance that a great property will attract strong buyer interest and strong bidding.

When it comes to negative attributes, however, some of the biggest mistakes buyers can make is to over-inflate the quest for a bargain. While it can feel exciting to buy for a price below an appraised value, a compromised property can punish an owner when it comes time to sell.

Selling in a hot market, a compromised property could be forgiven somewhat, but in a down-market, prospective buyers are reluctant to forgive. Higher buyer-scrutiny and challenging market conditions can give way to strong discounting on compromised properties.

There is a saying “when you buy a bargain, you sell a bargain.”