The $158,833 discrepancy and why you should never rely on online estimates/valuations when buying property

Buying a property can be the largest financial transaction most people ever make in their lives.  Yet so many times buyers overpay and don’t do the required due diligence on the property in order to help them formulate the real value.

Sometimes this is because of fear of missing out (FOMO) but many times it is because everyday buyers get emotional, don’t know how to value property, and/or don’t have time.

Many online property portals exist and offer free price estimates, and generally these are backed by what is called an Automated Valuation Model (AVM).  These software systems whilst convenient and fast should be used with great caution as they can produce incorrect and inconsistent results.

A better way exists.  This method is one that could save you tens or hundreds of thousands of dollars, and also one that could stop you from making a terrible mistake!

The benefits of AVMs

AVMs have several key benefits for property buyers.

  • Firstly they are convenient – easily accessible online.
  • Secondly they tend to be free, and paid ones are relatively cheap.
  • And thirdly they are based on a lot of technology and in some cases machine learning, and they can therefore process a lot of data very quickly and thus save people a lot of time.

We are not saying they are all bad, but do be very cautious!

The challenges in estimating the value of property accurately

So what is the problem, what is the challenge, you ask?

Well to start with, doing due diligence on an established property in order to work out what your bid should be is critical for any property buyer.

For an investor this is extra crucial as it ensures you don’t overpay.

Doing your homework can also ensure you don’t underbid and waste your time or the time of the Agent or Owner.  In some cases your due diligence may even mean you don’t bid, thus saving a lot of wasted time.

The problem is that doing this and being able to work out fair value, backed by evidence and data, can be time consuming.  This is especially so if you don’t have the appropriate technology, skills and experience.

People therefore get lazy and cut corners.

A worrying trend is that everyday investors (and even some professionals) rely too much on the automated valuation produced by property websites – be they free services or paid ones.

This method can be extremely dangerous as these models do produce unreliable and inconsistent results.

Furthermore, you should never trust the price guide provided by the agent.   Generally these are done to attract buyers and properties mostly sell for over the price guide.  Read this article for some stories on heartaches for buyers.

So you have inaccurate price guides from sales agents, and online portals producing inaccurate estimates.  Sometimes the online portals can’t even generate an estimate.  Do you see the issue?

Let’s look at some real-life case studies below, the average discrepancy of the below case studies is $158,833

 

Case Study 1 – $277,000 discrepancy, Rankin Park, Newcastle

A beautiful 4 bedroom home in the lovely suburb of Rankin Park in Newcastle. Since its last sale and “online profile” the property had undergone significant renovations; new kitchen, new laundry, new room, painting inside and out, landscaping, solar, plumbing etc.

Here’s how the numbers stacked up for this one:

  • Last sold Sep 2021 for $905,000
  • When I inspected and appraised it, the average of the free online estimates from 4 portals at the time was $1,077,500
  • My estimate using detailed comparable sales analysis including physical inspections and using proprietary valuation technology was $1.41M.
  • Several real estate sales agents appraised it between $1.25M-$1.35M.
  • Now this property didn’t end up being purchased nor did it go to market, however, there is a discrepancy here of ~$277,000 from the value estimated by multiple independent property professionals (sales agents and a buyer’s agent who all looked at the property and understood the local market) compared to the online portals.

 

Case study 2 – $157,000 discrepancy, 19 Dangar St, Wallsend, Newcastle

765m2, R3 medium-density residential zoned property with a very well renovated house at front and scope to develop.

Here’s how the numbers broke down at the time:

  1. Purchased in May 2022 for $720,000
  2. House then fully renovated – estimated cost $150,000
  3. Listed for sale in ~ August 2023, asking price $870,000-$930,000
  4. At time of listing, the average estimate of 3 leading portals was $743,000.  One portal priced it at $670,000 which was $50k under what it sold for 15 months prior in a time when the market had gone up; go figure!
  5. After I inspected it, I valued it for my client at just under $900,000.  We chose not to bid on it, mainly due to being so noisy and close to a major busy road.
  6. Property sold in Sep 2023 for $900,000; $157,000 over the average estimate from the main portals.

 

Case study 3 – $42,500 discrepancy, 3 year old house in Geelong

The above two case studies are both different but are both for older properties.  This next case study is a newer property in a newer subdivision where many of the properties are similar age, construction method and style.  Having similar houses leads to more consistent data I find and more sensible valuations do appear in this case.

Nevertheless it is still important to add that human factor when assessing and appraising properties, and working out what to bid.

Here is how the numbers stacked up for this one, and whilst the discrepancy is not as large as the above 2 examples, it still shows how proper due diligence can and does help you achieve better results.

  1. The average of the free online estimates from 3 popular websites was $752,500.
  2. The average of the 3 comparable sales provided by the Sales Agent was $723,000 (Under Victorian law they must provide this).
  3. My estimate using detailed comparable sales analysis and proprietary valuation technology was $716,000.  Basically what I told my client in this case was that if you pay over $716,000 you would overpay!
  4. My recommended bid price was $710,000 which took into account various factors including the market, competition, client’s desire to win the property (which was very high) and the client’s budget.
  5. We secured the property at this price of $710,000:
    1. $42,500 less than the average of the main online portals
    2. $13,000 less than the agent’s comparable sales
    3. And the agent said we won the bid by $2,000!

 

A solution – a unique combination of technology, data and human expertise

The solution involves a combination of technology, data and detailed due diligence from an experienced property professional.  The image below shows some of the inputs or factors that should be considered when working out your price.

The technological aspect to this process involves:

  • Having access to high quality data – property data, suburb data, physical inspection data
  • Being able to utilise this data quickly and efficiently using technology.

The human element includes many elements such as:

  • Physical inspection(s) of the property
  • Physical inspection(s) of comparable properties and noting what the pros and cons of each are
  • The street appeal and quality of any renovations
  • Does it look like there could be unapproved works on site and if so what is the risk of these?
  • The local market at the time – is it a buyer’s or seller’s market
  • The natural light within the property, the noise and neighbourhood
  • Understanding the value of different land titles and zoning, and any development potential of the property
  • Understanding the local suburb and what gentrification has or is being undertaken
  • And much more.

These are just some of the factors used in working out whether you should bid on a property to start with and what your bid price should be.

 

It’s about more than the price

Price is very important of course but it is important to recognise that the conditions of your offer are also very relevant.  hings like settlement timeframe, cooling off periods etc, contract changes.  Anything can be negotiated.

If you understand the vendor’s needs and  you can tailor your conditions to suit, then your offer can be more favourable.

Additionally, the relationship you build with the sales agent or owner is also very important.  Treat people like you would want to be treated yourself, with respect and professionalism, and this can help your cause.

 

Conclusion

Online tools to provide quick estimates or valuations of residential property are fast, convenient and powerful.  From my experience though they do produce some very inaccurate and inconsistent results, ad sometimes they can’t produce a result due to a lack of data.  The above case studies demonstrated an average discrepancy of $158,833.

Automated online valuations also lack a human element i.e. physically inspecting a property and understanding the street, neighbourhoud and local market etc.  For these reasons we recommend buyers and especially investors do not rely on online property estimates/valuations.

If you want to work out what the fair price to pay for a property is, work with a professional.  Buyer’s agents are good people to help you here as they are continually looking at properties and can provide an independent appraisal of what to pay with all emotion removed from the process.

 


ABOUT THE AUTHOR

Nigel Watts, co-founder of Niva Property, is a licensed buyer’s agent, Qualified Property Investment Adviser (QPIA®), qualified Engineer and has over 15 years’ experience helping contractors value and estimate construction assets.  Nigel has a multi-million-dollar property portfolio in various states and has built up his portfolio to provide him financial freedom to do what he loves – being a buyer’s agent and helping people attain financial freedom using property as a vehicle.  Contact the Niva team for a no-obligation discussion about your life and retirement goals and how property can help you achieve these.

DISCLAIMER

We acknowledge that some property portals have paid versions of property estimates/valuations and that these paid products may produce a more accurate estimate than the ones used in some of these case studies.  Niva Property acknowledges that online valuation systems/portals are powerful but, based on real life examples above and other research every day, we believe they should be used with caution and that buyer’s should undergo maximum due diligence in order to work out the price they are prepared to offer.

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