Housing: Market Value vs. Personal Value - May 2024

By Rich Harvey, CEO & Founder, propertybuyer.com.au

You’ll have heard me discuss the importance of understanding value when it comes to property acquisition. It’s a fundamental metric when making smart decisions about whether to proceed with a potential purchase.
Value is a measure that allows you to compare the worth of one property to another. It’s also the figure that enables professionals such as buyers’ agents, financial advisors, accountants and mortgage brokers to calculate what you can comfortably borrow, spend or invest.
In reality, there are several different types of property value, like insurance value or mortgage value for instance.
However, when it comes to actually deciding what figure to put forward on a contract, there are two key measures of value which are crucial… and grasping the distinction between each can be the difference between securing your dream home or being left waiting in the wings.
To that end, let’s look Market Value compared to Personal Value.

What are Market Value and Personal Value?

Market value is a widely adopted and well-defined measure that’s utilised by professionals throughout the property industry.
Market value is formally defined as the estimated amount for which an asset should exchange on a given date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion.
Put another way, it’s what it should the property should sell for on the open market between a reasonable buyer and a reasonable seller.
Market value is important, because it tells you as a purchaser how high to pitch your offer if you want to be competitive.
The second concept I’d like to discuss is Personal Value.
Personal value reflects the figure you, in particular, would be willing to pay to acquire a specific property. It is the individual drivers that compel you to offer a certain figure for a home, and that amount might be above or below its market value.
Essentially, market value is what the market will pay, while personal value is what you would pay.

Why do they differ

From the outside, market value would seem like the right price for any property, wouldn’t it? Why would anyone choose to pay below, or, worse still, above market value for a home?
In reality, there are plenty of scenarios where this is the case.
The most common is in a rising market where price growth is rapid and doesn’t look like slowing down anytime soon.
In this instance, a few elements come into play.
Firstly, the comparable sales you’re using to assess a property’s market value become dated only weeks after they’re contracted. For example, all that “recent” evidence may suggest a property’s market value is $700,000, but if your comparables are three months old then the current value might already be closer to $730,000.
Secondly, you need to factor in near-future price movements. If you have a handle on the sustainability of price growth in these markets, then paying above the odds to secure a home now might be a good idea. It could seem expensive today, but just a couple of months down the track during a hot market and that price will look cheap.
But there are even situations in more stable markets where a buyers might be willing pay a bit extra.
Let’s say you’ve found the perfect property for your needs, and homes like this rarely come along. It could be worthwhile for you to stretch your budget – especially if it’s going to be your family home for the next 20 years or so. A property cycle or two down the track and that buy-in figure will feel incredibly conservative.
I’ve helped many clients and friends in this exact scenario. I had found a property in one of the most unique cul-de-sac streets on the Northern beaches for a fully renovated 5 five-bedroom house with a pool. My friend was debating whether to increase his offer from $1.4 million to $1.425 million – this situation was 15 years ago. Now a $25,000 increase seemed a lot at the time- but it was a competitive buying situation and other buyers were in the mix. This property is now worth $4 million. In retrospect, it was a minimal amount to pay to secure a dream home to raise a family. 

Other situations where a high personal value is justified might be where the buyer is a neighbour and can amalgamate the property with their own to create an attractive redevelopment proposition.
Essentially, various scenarios can result in a situation where your personal value varies from the property’s market value, and you can justifiably pay that special price.

The key to value

Determining your personal value is essential when looking to buy a property.
It’s a matter of weighing up all the pros and cons, understanding what the market is willing to pay and then assessing where you fall in the price scale based on your own circumstances.
Paying your personal value can make sense, but you must be careful to avoid some major risks in this situation. We can all justify paying more because of our “personal value” bias but need to manage our emotions in the buying process. The best option is to utilise the skills of a trusted, independent advisor like a buyers’ agent. We can run the numbers and dissect your needs to explore how important it is that you secure that particular home. A buyer’s agent will also ensure you don’t pay too far above the odds, by negotiating on your behalf.
Without a buyers’ agent on your side, you could be left wondering, “What if?” instead of saying, “Thank goodness I acted.”

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