If the words of Warren Buffet, investing is all about buying dollar bills that are selling for 10 cents in the market. In essence, he talks about understanding the difference between the quoted valuation (asking price) of an investment and its actual intrinsic value.
Now, in the case of stocks, temporary greed and fear in the market may make it possible for the prices to go high and low. However, when it comes to real estate, it seems highly unlikely that someone will sell their million-dollar home for less than what it is worth only because of temporary ups and downs in the market. But given the right perfect storm they will!
The high-ticket price of real estate investments usually makes investors more patient. Hence, the question arises, “When and how can someone come across an undervalued real estate investment?”. This article will list down some of the common scenarios under which properties sell for less than their worth….in other words “Under Market Value’.
Seller Duress
The prime reason that any property will sell for less than what it is worth is seller duress. When we assume free market prices for properties, we make an underlying assumption that neither the buyer nor the seller is in any rush to close the deal. They are aware of what the property is worth and are willing to put in the time required to find a buyer that agrees to the asking price.
However, in reality, a lot of sellers face financial duress. Sometimes they are laid off from their jobs. At other times, they are filing for divorce. Still others have racked up credit card debt or have suffered losses in the stock markets. The answer to most of their predicaments is fast cash. It is important to pay attention to the word “fast”. These sellers value time a lot and are willing to offer a bargain if the buyer can provide immediate cash and alleviate their financial duress.
Seller Ignorance
Also, we have assumed that the seller is fully informed about the worth of their property. This is a farfetched assumption. The reason being that real estate prices are not listed like stock market prices. Rather they are approximate prices and can differ from property to property. Therefore, it is very likely that the sellers of some properties are not aware of the particular advantages that are provided by their property and do not charge a premium for the same. As such, it is highly likely and probable that an investor may come across an ignorant seller who accepts an offer for less than what the property is worth.
Loss Mitigation
Many times, buyers default on their loan obligations. This could be due to a personal financial emergency like a job loss. Alternatively, it could be because the interest rates on their mortgage went up significantly. As a result, they can no longer afford to make the payments. In either case, the property is foreclosed on by the banks.
Once the banks have control of the property, the scenario completely changes. Banks have no interest in making profitable investments with repossessed properties. Their motive is simple and clear. They want to minimize their losses and sell the property to the first buyer that offers a decent price. As such, banks may not wait a whole lot of time, to realize the true worth of the property that they have acquired. Many real estate investors have made their fortunes by consistently hunting for foreclosed homes.
Creative Improvements
Another strategy in the real estate game is to create positive cash flow from a property when certain creative improvements are made to that property. An example – you buy, let’s say a big family house with 4 bedrooms. Now, there are very few families who may want to rent out a large 4-bedroom house. Therefore, you retrofit the house to create 4 self-sufficient studio apartments. These apartments can be leased out to students or working professionals. The combination of 4 studio apartments which are fully furnished for the target audience may provide at least 50% more rent than if the same property were leased out to a family.
The real estate investing world is flush with stories of investors who made millions making creative improvements to their property. However, you must understand your demographic and rental market before embarking on this retrofit scenario.
Information Imbalance
Lastly, some real estate investors are more well connected than the others. As a result, they have a better idea of the development plans that the government has created for a particular neighbourhood before such information is made available to the general public. As a result, they have an edge over other investors because they know there will be an adjustment in the value of the property in the future. Therefore, they are poised to buy the properties at undervalued prices and make a gain as the prices rise.
Now I am not talking about insider trading. (It is illegal and can lead a person to prison). What I am suggesting is ‘market research’ and ‘due diligence’. Most future plans are available to the public if you know where to look. Always start with the local councils and planning offices. Ask questions – show interest.
In conclusion, there are multiple scenarios under which a person can buy a property at a price which is less than its market value. One just needs to be more diligent and watchful for such opportunities and utilise them when they arise.
