Can the emotional value of property be measured?
What a property is worth on paper and worth in a buyer’s heart can be huge sums apart.
Real estate has an emotional value, as distinct from the logical value, which can provoke a buyer to push the limits of their budget.
A school of thought is that the difference in price can be as much as 5 to 10 per cent. Sydney-based buyers agent Penny Vandenhurk, of Purchase With Penny, says that assessment adds up.
“I think this is an accurate estimate,” she says.
“Sales agents play on the ‘you are going to own this property for a long time’ logic to try and get buyers to think about the money over time, rather than right now.”
,One value is based on the personal desires the home satisfies, such as the address, school zone it’s in, and interior style, which can be achieved through expert staging. The other is arrived at by analysing comparable sales, depreciation, land size, and other hardline calculations.
Lead Melbourne buyers’ agent Tass Pattas, from propertybuyer.com.au, prefers to call the phenomenon “emotional versus logical decision making”. He has seen it play out over his career.
A buyer’s motivations – whether the home is to live in, or an investment – will shape whether they lead with rationality or feelings.
“Owner-occupier buyers are typically more prone to making emotional decisions when determining price, versus investor buyers who are looking for a greater monetary reward around capital growth and yield, and therefore the purchase price is critical,” he says.
“Owner-occupiers can be more focused on personal gratification and status around a postcode, street, style or size of property.
“To get capital growth, investors have to buy well, so they use logical methodology. They compare the sales evidence, they look at the yield, and they work out if the return services the debt. It’s all numbers driven.
“But owner-occupiers? They’re asking, ‘How does this property make me feel? Do I like the kitchen? Do I like the roses in the garden?’ These things have emotional value to them, but they don’t necessarily have a market value.”
Auction buyers, in the cauldron of competition, are notorious for paying a sentimental premium.
“FOMO kicks in,” Pattas says.
“The pressure builds, and suddenly paying another $10,000, $20,000, or $30,000 feels justified because they’re thinking, ‘We may never see this again’.”
Pattas has a property-related YouTube channel that includes a series called Hot Auctions.
“I focus on people’s faces at auctions, and you can literally see the emotional dragon come alive,” he says.
“Couples are looking at each other for justification. Auctions rely on that emotional reaction to drive the price.”
Vandenhurk says it is not always a problem to pay an emotional margin, and buyers often acknowledge it is a conscious choice, rather than error.
Vandenhurk bought a home for a client with a special-needs child, who required a single-level design with a pool and specific access. Fair value of that property was $2.5 million, she says, but the family were willing to pay $2.6 million, or 4 per cent more.
“From my perspective as a buyers’ agent, I actually think it’s OK to pay a bit of emotional money for a property if you’re going to live in it for a long time, and it really is your perfect property, because you’re not going to sell it tomorrow,” she says.
“The key is acknowledging that it’s a bit of emotional cream on top.”
Pattas says the emotional premium is hard to measure as a percentage, but bank staff in lending departments know it when they see it.
If the contract price and the bank valuation do not align, and it pushes up the loan-to-value ratio, the buyer may be subject to lenders’ mortgage insurance, or have to come up with more money.
“When a purchaser pays above the odds because of special interest or emotion, the contract then goes to the bank,” Pattas says.
“The bank values the home based on valuation or contract price, whichever is lower. If the property’s worth $850,000 and they’ve offered $950,000, the valuer might come in at $860,000. Then the purchaser has to come up with the difference.
“That’s where the bank valuation becomes a safety net. It stops buyers from unknowingly borrowing against a figure that isn’t supported by the market.”
Vandenhurk says the role of buyers’ agents is to balance passion and pragmatism for their client.
“It is OK to fall in love with a property, but the key is understanding fair market value,” she says,
“If you bought it and had to sell it again tomorrow, what could you reasonably expect someone else would pay? If you’re willing to pay more than that, are you still financially comfortable with that decision?”
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