The only valuation that matters is yours

Recently we gave a talk to more than a hundred high-net-worth individuals at the Sandringham Yacht Club for Peter Wilson of Godfrey Pembroke, where we involved the participants in a hands-on exercise that introduced them to “valuing” high-end homes.

There were three steps to the process. First we asked them to give their valuation of three 250-square-metre beachfront blocks in Sandringham that were up for sale. Then we informed them there was a conservative valuation of $5.4 million from a reputable valuer, and asked them to revalue the blocks in the light of this information. Then, after telling them the asking price was $8 million and there was possibly a winning consortium’s bid, we asked them to give a third and final valuation. Their final valuation had to be above the possible winning consortium’s bid – after all, there is no point coming second if you want to buy something.

Three clear things came out of this exercise:

1.            At the top end people have a very wide opinion of values: In this exercise the estimates varied from $3 million to $12 million on the same offering. People were genuinely trying to estimate correctly – there was self-interest involved.

2.            The power of suggestion: While the value range remained wide for the second lot of “valuations” after the $5.4 million value was tabled, not one participant’s valuation was now below $5.4 million. Once a credible suggestion had been given, it seems everyone put a floor under the price. Very interesting if you are the only taker on a home.

3.            The power of step quoting:  Scenario three produced a wide range of valuations but not one was below the valuation the respective participant had put in scenario two. In other words, for every one of the participants the price had gone up. This is again about the power of suggestion and the power of step quoting.

For buyers who believe that an asking price is an asking price and a valuation is a valuation – like rocks set in stone on which to build a platform of action – this scenario may seem a bit perplexing.

But the fact is that when you’re buying a property – especially at the top end – opinions, suggestions and questioning are how a final sell price is established.

When agents are dealing with buyers – including us as buyers’ agents – they use suggestion firstly to frame an area of thought e.g. a price range and then to move you the buyer up the price ladder. Depending on the agent’s credibility you will either go with that suggestion or you won’t.

Agents also use questioning to work out if you are actually on the price ladder – and if so at what position. They do this to ascertain broad interest which they report back to the vendor, and to ascertain your interest so as they can decide on a plan to take you up to the next rung.

As buyer’s agents our role is to do the reverse.  Our job is not to establish a credible floor, but to establish a credible ceiling. We use the power of suggestion to indicate to the selling agent where a client may be on the price ladder. We use questioning to gain information and to see if those suggestions have been effective.

Remember that in home buying there are three opinions that really count when it comes to forming or framing your price thoughts. Firstly: the vendor’s sell price (not asking price); secondly: the highest other bidder’s buy price (That is the only other buyer competition we are concerned about); and thirdly: your own thoughts on price. Which is actually the most important opinion on price.  Not the valuer, not the buying agent and not the selling agent, not Uncle Jim’s – but yours. If it is informed and considered then it is correct and more important than all others.

Some of you may view this all as a game and some may not want to be involved. But here in Melbourne, it’s the way homes are bought and sold (yes, even auctions). It’s called haggling or bargaining, and what that involves is a contest between seller and buyer. In many cases it’s unavoidable – and when it is, you might as well play the game as best you can.