UK property agents selling property abroad are infamous for quoting deals that are 'x' percent below market value or have a "genuine" rental guarantee. But how do you know who to believe or whether what they are saying is accurate?

At Property Secrets our deals are always subject to two price tests (1) we commission an independent valuation and (2) we do comparables to see what else is on the market.

What are comparables?

Comparables quite simply compare the price of the property that you are looking to purchase to the prices of other property that is in a similar location and of a similar quality.

Why do comparables?

Looking at what else is selling for (not just what price things are on the market for) is the best way to determine whether a property is priced at, above or below market value. Ultimately you want to know whether the price you're paying is a good one or not.

There is an old property adage that says 'you make your money when you buy not when you sell'.

By buying below market value you lock in equity / profit from day one.

Whereas if you have paid above the market rate you could potentially lose money if you needed to make a quick sale for some unforeseen reason, essentially you have to hold the property longer until the market rises so you can make some money.

This also puts you at a disadvantage against other owners of similar property as they can afford to price their rents slightly lower to get the same yield or afford to sell at a slightly lower price to make the same profit as you.

So it is vitally important that you know you're getting a good deal and not paying over the odds.

How do I find comparable information?

These days there are a host of property portals in most countries that list many thousands of properties so you can do your research in the comfort of your own home.

Furthermore, most developers have websites with their prices lists on there to compare off-plan purchases.

In the UK the land registry release actual sales prices of all properties in the UK that were sold over 3 months ago. Similar government bodies exist in most westernized countries where the same sales price information can be obtained.

Make sure you're comparing apples with apples!

Part of the art of doing comparables is selecting other property that is most similar in terms of both location and quality. There is not point comparing a castle with a cottage.

It is all too easy for property companies to quote developments that have higher specifications and are in better locations (and thus have a higher price) to justify the price of a certain development they are trying to sell.

This is why here at Property Secrets we always back up our comparables with an independent valuation report that has been done by a reputable local valuer using internationally recognized methods.

Comparables vary in different countries

Depending on what country you are buying in the way in which you do your comparables may vary. It is important to know what that country's standard method is before you buy as the price you are quoted may at first appear cheap until you realize that certain things (such as external space, parking, VAT, kitchens etc) have been either added or excluded in the calculation.

In the UK we usually compare the total price of the property with the total prices of other properties that are the same or similar streets, of a similar size and quality.

In many parts of Europe, especially when buying off-plan, prices are often quoted in price per sqm.

In the Czech Republic prices are quoted as the unit price (ie excluding VAT, parking and kitchens) divided by the internal area plus 50% of the external area, such as balconies.

In Poland prices are quoted as the black finish price (ie excluding VAT, parking, final finish and kitchens) divided by internal area only.

In Romania it is even more complicated. Because of the way Romanian accounting practices are it means developers have to sell every square metre of the building to someone, thus prices are usually quoted as the unit price (excluding VAT, parking and kitchens) divided by the total area - the total area is made up of the internal area, the external area, plus the sizes of the walls and a percentage of the common parts of the building.

However, even this standard is starting to change as more international developers enter the Romanian market and bring their own practices with them.

So it is important you check that understand what is being compared with what, as depending on what you include in your calculation can completely distort the result!

Adjusting comparables...

It is practically impossible to find a property that is both the same in terms of quality and location. Often the nearest comparable maybe be very different indeed, thus it becomes necessary to adjust the comparables by a factor to take into account the differences.

For example, if a comparable apartment was 3 floors higher in a building than the property I was looking to buy I would typically adjust the price of my comparable by 2-3% per floor. Unless there was a significant difference in the view or the amount of light the property had.

Similarly I may also adjust the comparable depending on the aspect, whether it is north, south, east or west facing, is the layout of the apartment better or worse etc.

Adjusting for these factors, as well as quality and location, is largely a matter of judgment.

Typically I use different weighting factors depending on whether it is a luxury development or a working class development, or a property that targets young professionals as opposed to families. Certain things, such as a garden size or quality kitchen, are more important as at the top end of the market than the bottom end, and thus they are weighted differently.

Furthermore, if I'm are buying in a city I might typically take 20 percent of the external area in my price / sqm calculations, whereas in a beach resort I would use 50 percent, as the outside space is more desirable, and thus important, on the beach in sunny locations.

Another way of doing comparables

Another way of doing comparables is rather than find as many properties of the same quality / location factors and work out if the price is the best is to find as many properties of the same price and work out whether the property you are thinking of buying is better in terms of quality and/or location.

What to do if there are no comparables!

Sometimes there is simply nothing to compare your property to, so how do you work out if you're paying the right price or not?

This can occur when the property is completely unique and no other such property exists. It can also occur in new markets where the stock of property in the city is very old and a developer comes along and builds the first new development in the city.

There are still a number of things you can do to help you work out if the price is right:

1. speak to local experts, someone who has many years of experience in a market and who has their finger on the pulse of the market should be able to tell you pretty quickly if the property is priced correctly.
2. are locals buying this kind of property, eg if it's a new development and locals are queuing up around the block it's a pretty good sign that there is local demand for this kind of property and that it's not over priced.
3. compare your property to similar properties in other similar cities in the country. Whilst this is not completely accurate it does give you an indication on whether the price is in the right ball park.

Faults of the system

Comparables are the best method to determine whether or not you're paying the right price RELATIVE to similar properties on the market. But what happens if everything else on the market is also overvalued?

Well this is a completely different issue altogether and if this is the case there is likely to be some fundamental problems with the market - and it's in situations like this where, if you are buying, it's important to buy well below market value to protect yourself against any price falls.

The most famous case recently, of over valuations, was with how open-ended Germany property funds valued their holdings. Faced with over valued holdings and declining yields banks tried to maintain liquidity in their funds and not have to devalue them, however, as word got out of their over valuation investors quickly tried to withdraw their money and banks were forced to temporarily close their funds and revalue their assets.

As managers of these funds were paid on the performance of the funds there was a very strong incentive to obtain the highest valuation possible for their holdings. This inevitably led to widespread overvaluation of assets and the subsequent crash followed. Funds lost about a third of their value overnight.

Conclusion

It is vitally important to look at what else is on the market to verify that the price you are paying is a fair one.

Select your comparables carefully so that you don't assume a value higher than it's actually worth. At the end of the day if hoards of locals are buying then it's safe to assume that the prices are fair ones.

Finally, keep the big picture in mind when buying in high growth markets. It's not worth worrying about whether a property is 1 or 2 percent above the market rate if the market is growing at 5 percent per month. It is better to buy today and not wait until tomorrow as the market will have moved on and you'll have lost out on all that growth.