What it is, and what it isn't
It's a limit for one house, set from evidence. It is not:
- The price guide. That's the selling agent's number. See how to read a price guide.
- A valuation. A bank valuation or a sworn valuation is a different thing, done by a valuer for a different purpose.
- Your borrowing capacity. What a lender will lend sets a ceiling on what you can pay. It says nothing about what this house is worth paying.
- A target. The aim is to buy well below it. It's the line, not the plan.
Where the number comes from
We build it in three layers, the same three we use for every purchase.
- Comparable sales. Recent sales of similar houses in the same pocket: land size, bedrooms, condition, street. These set the range.
- The pocket's typical price. How this patch of a few hundred homes sits against the wider suburb, and whether it's moving faster or slower. A great house in a soft pocket doesn't get the top of the suburb's range.
- Adjustments for this house. What makes it better or worse than the comparables.
Here is an illustrative example. The numbers are made up to show the method, not drawn from a real sale.
| Step | Example |
|---|---|
| Adjusted comparables range | $800,000 to $830,000 |
| Larger, flatter block than most comparables | +$10,000 |
| Faces a busier road | minus $15,000 |
| Roof needs work within five years (from the building report) | minus $10,000 |
| Indicative range for this house | $785,000 to $815,000 |
| Walk-away price | $815,000 |
The walk-away price usually sits at the top of the evidence, not above it. Paying the top of a well-supported range for the right house can be fine. Paying past it is where the trouble starts.
Write it down and sign it
In The Home Path, the third client decision is approving the property and signing a written limit. That happens before any offer goes in or any bid is placed. We don't go past it without a new written instruction from the client.
Writing it down matters for two reasons. It forces the number to be decided while everyone is calm and the evidence is on the table. And it gives the bidder (whether that's us or the client) something firm to hold when the room gets loud.
Emotion at auction
Auctions are designed to move people. A few things happen to almost every buyer:
- Small steps feel small. A $5,000 bid feels like nothing against an $800,000 price. Ten of them is $50,000.
- Sunk cost. After weeks of inspections, reports and planning, losing feels like wasting all that effort. It isn't. The effort bought information.
- Competition becomes the point. Somewhere in the bidding, the goal quietly shifts from buying a good house to beating the other person.
- The "one more bid" story. It's always just one more. Then one more again.
A signed limit is the cure for all four. It turns a decision made under pressure into one made a week earlier.
Missing a house hurts for a week. Overpaying hurts for years.
Why overpaying lasts
An investment property earns its return from growth on the whole price. Money paid above what the market supports has to be made up by growth before you're even level.
As an illustrative example: paying $20,000 more than you needed to, borrowed in full at 6.2% interest only, costs about $1,240 a year in extra interest, every year, on top of the $20,000 the next buyer may not pay back. Our Escape Plan shows how much a higher purchase price can push out the year you could buy your own home.
When to change it
A walk-away price can move, but only for a reason:
- New evidence. A close comparable sells, higher or lower.
- New information about the house. A building report finds something, or clears something we were worried about.
- A change in the client's position. Finance, plans or priorities change. Your mortgage broker can confirm what finance allows.
It doesn't move because the auction is going well, the agent says there's another buyer, or it's a lovely sunny day on the footpath. If it changes, it changes in writing.
The pocket does the heavy lifting
Most of the evidence for a good walk-away price comes from understanding the pocket properly. Our guide to choosing a suburb and pocket explains how we read that layer.
General information only. Nothing on this site takes into account your objectives, financial situation or needs, and it is not financial, credit, tax or legal advice. Past performance is not a reliable guide to future performance.