Most of the real estate buyers I know told me that they have bought their last deal for less than its market price. However, many real estate sellers told me that they have sold their property for market value or even more. So, who is right? It can’t really be that most of the buyers are buying for less than the market value, and most of the sellers are selling for more than the market value… Actually, there is a process for buying properties below market value, and we are about to unveil it. My experience has taught me that good investors usually follow these steps: they look for a property that is 20%-30% below its market value and sell (whenever they decide it is right) for its market value or for a little bit less, in order to proceed to the next deal.
- It gives you a certain margin upfront
- It can save you money that you need for construction and redecorating
- It will improve your Cash on Cash return, and NOI.
- It raises your net worth, which can be useful for future bank loans.
- It lets you sell your property easily if needed, including all the transaction costs.
What are the ways for buying under market value? Know yourself – decide what will be your red lines for getting into a deal. Some investors take 20% below market deals, while others will buy a property only if it is sold for 40% below market value. The decision depends on your risk aversion level and the amount of transactions you want to be involved in. If you will buy properties for at least 40% below market, you are probably going to make a deal once in a few years. Know the region – the only way to know if the property that you are considering of buying is being sold below its market value is to know its market value! It may sound trivial, but many investors, and especially beginners, make the mistake of not knowing the region enough, and appreciate a property for the wrong value. The right way to do it is to know the neighborhood very well. That means to have the data of all the last deals that were closed in the last years, and get an estimate for sqft sold around the neighborhood. The properties that were sold during the last year and located about a half a mile from your area should be taken as more important. If you are considering buying a property it is always preferred to speak with agents that work in the area, and figure out what are the prices that they recommend to sell a property. This way you can be sure that they don’t bullshit you as a buyer. It is possible to use tools like Zestimate, but be careful since they work differently in different places. If you are still not sure about the right prices it is possible to use an appraisal. Even if you will not buy the property, a good and unbiased appraiser will help you understand the prices of the properties in this neighborhood much better. Search hard – obviously it is great to buy under market price property, but it does take some effort and patience to get these undervalue transactions. It involves watching every property coming to the market for a few months, keeping in touch with several agents or lawyers, for getting many suggestions. It involves due diligence for several properties, in order to be sure you are buying the right one. Use the web – a good deal can come from the street, but it can also come from the web. You can start by searching pre-foreclosures in records in the county clerk or recorder’s office. There are websites which informs you about real estate auctions, and many offers foreclosures and short sales. In the current market most of those deals won’t be attractive, but there are still good offers among them. In conclusion, finding the undervalued properties is not an easy mission. However, it will allow you to be more confident with your deal, and it gets easier once you acquire your experience. Good luck!