Ignore the price guide: How to work out exactly what a house is worth before auction

Missing out at auction is one of the most heartbreaking aspects of house-hunting almost every buyer faces.

After countless weekends inspecting properties, and hundreds of dollars spent on property reports, there are few things more disappointing than having your dreams dashed on auction day by someone with deeper pockets.

But the hard truth is, if you’re constantly getting beaten at every auction you attend, you were probably never in the running to begin with.

The key mistake most new buyers make is blindly relying on the real estate agent’s price guide, which can mislead them to think the property would sell within their budget.

Instead, buyers should use a method property professionals employ to estimate the value of a home, which helps narrow the search and prevents constant disappointment.

Why the price guide is irrelevant

The price guide provided in advertisements is based on the estimated result the agent has given to the vendor, which is derived from recent comparable sales.

If a house sells for more than the price guide, it’s not necessarily underquoting. An agent is only underquoting if the price guide is lower than the estimate given to the vendor, the reserve, or any offers received during the campaign that the vendor rejects.

All it takes for a property to sell well above the price guide is one emotional buyer, according to Sydney buyers’ agent and associate director of RPM Property, Kyah Johansson. “When it comes to auctions, it’s all about emotional money,” she said.

• Related: Experts reveal the best techniques for bidding at auctionRelated: The big barrier preventing ordinary people from investingRelated: Five hidden costs that sting first-home buyers

How to calculate the true price guide

The underlying value of a property is the land. When looking at houses to buy, land size should be the most important factor buyers consider, and the part of the listing to analyse first.

The size of the block is the key to estimating a property’s value, according to buyer’s agent Lauren Goudy from Rose & Jones.

“If you do some research on 10 comparable sales, and get the average square metre rate, it will be incredible how accurate it ends up being,” she said.

The best way to determine what a property is worth is to ignore the price guide and work out an estimated price per square metre for that property type, based on recently sold properties in the area with comparable block sizes and features, such as the number of bedrooms.

To calculate this number, simply divide the price a property sold for by its size, then do this for surrounding sales over the past six months to calculate an average square metre rate.

Multiply that average rate by the size of the property under consideration, and you’ll have your true price guide.

If every property you’re interested in falls outside your budget, work backwards and determine how many square metres you can afford, then search for properties by land size rather than price.

What else affects a property’s value?

While land size is the main factor, it’s not the only one, and according to Ms Johansson, the type of property will also affect the value.

“A freestanding home is far more valuable than a semi,” she said, adding that new or renovated properties are likely to sell for more than a rundown home. “If you’re trying to get more value, look for something that needs a bit more TLC,” she said.

Sought-after features, like parking in an inner-city area or landscaping, may boost the value. Wide or corner blocks, those with dual frontages and properties zoned for higher-density housing may be worth more, as they often have potential for redevelopment.

Ms Goudy said estimating a property’s value will help buyers decide which properties to pursue and the maximum price they are prepared to pay, which will empower them to bid confidently on auction day.

“The research will give you conviction on what you’re doing,” Ms Goudy said. “When you prepare yourself and you do all the research, you’re going to go into that auction feeling confident.”

How to avoid paying too much

For buyers who want to secure a property before auction, knowing what a property is worth can help determine a price to offer, but according to Ms Johansson, offers need to be strong.

“You obviously want to get the property for the best price you can, but to take it off auction, people need to put themselves in the owner’s shoes,” she said. “On the guide isn’t going to get their attention.”

Ms Goudy said it was easy to make mistakes at auction in the heat of the moment, but researching other suitable properties as a backup plan can avoid emotional decisions based on desperation.

“You don’t want to be standing there thinking ‘Should I throw another $5000 in?’ because you don’t know what else is on the market,” she said.