Calculate the ‘right price’ to pay for a property

How do you know when the asking price is the right price?

There’s lots of property on the market that is overpriced, and yet others go for above asking, so how can you commit to a purchase without knowing what the ‘right price’ will be?

Overvaluing occurs for several reasons. Estate agents can find themselves in a tricky position, trying to win an instruction when competing in some kind of beauty parade. Overvaluing may be the only way they can take the instruction. Alternatively, they may be pressurised by the vendor to put the property on the market at a higher price than they would otherwise recommend.

Putting a market value on houses is an objective exercise – three agents will rarely come up with the same value on a property, and the more unusual the property, the greater the discrepancy is likely to be.

So how, as a buyer, do you establish the ‘correct’ price for a property?

The asking price is rarely the right buying price. Our advice is to view the asking price as a guide price on which to base your calculations. There are several factors to take into consideration, but if you do your research, and use this equation to make sure you don’t overlook crucial elements, you will come up with a figure that is a sound basis from which to negotiate.

Stacks’ magic formula for the ‘right price’ is this:

B = A – M – V – Bf + CI + R

Where:

B = Buying price

A = Asking price

M = Market discount (Local market conditions and recent comparables)

V = Vendor desperation (How badly the vendor needs to sell)

Bf = Buyer flexibility and attractiveness (How flexible you are in terms of timing, cash buyer, etc.)

CI = Competitive interest (How many other buyers are interested)

R = Rarity (How often a property like this one comes onto the market)

As equations go, it’s not entirely scientific. And it’s not straightforward putting a value on ‘buyer attractiveness’ or ‘vendor desperation’, but you can come up with educated estimates. For instance, if you are a cash buyer who is happy to fit in with the vendor’s desire for, say, a long completion date, then you could look at deducting somewhere between 2% and 3%. And if the vendors are going their separate ways and anxious to move on, then another 5% discount could be on the table.

The ‘right price’ for you may not be someone else’s right price – you need to do some deep thinking as to whether this is the only house for you (probably not, but perhaps) or whether you are the type of person who needs to have ‘done a deal’ in order to be satisfied with your purchase.

Once you know your own position, there are more considerations to add to your rationale :

• Remember, once you’ve made an offer, there’s only one direction the price is going to go, and that’s up. So don’t start too high.
• A useful exercise is to ask the estate agents how they arrived at the price – was it based on some science (if so, what), or just what the vendor thought it should be?
• However punchy your offer, it pays to be a likeable buyer. Nobody likes an aggressive purchaser and some vendors will refuse to deal with you any further if you push too hard – remember this is someone’s home and not just a commodity. And always negotiate through the agent, not directly with the vendor.
• Don’t be pressured by the agent, and don’t always believe that there’s another buyer who has just happened to come out of the woodwork. But be careful, sometimes there really is, so don’t try and be too clever. It’s a calculated risk how far to push negotiations, so don’t back yourself into a corner and allow a third party to nip in whilst you are procrastinating!

In the end, the price agreed has to be one that both buyer and seller can live with, and which will encourage all parties to co-operate towards a successful exchange and completion.

The best guarantee to be sure you are paying the ‘right price’ is to have the ‘right team’ on your side.  Your local Buying Agent knows the local market, competitive interest and can position you as the best purchaser.  Find out more on how Stacks helps people just like you here.