In property investing circles it’s often said that you make the money on the deal when you buy.
Most people think this means that if you buy a property “under market value”, then it's considered that you made a profit on to the way into the deal, keeping you one step ahead of the game.
Now I don't fully agree with this idea.
I believe you make your money when you buy your property because you've purchased the right property - an "investment grade" property in the right location, not because you buy it cheaply.
That's because a cheap secondary property will always be a cheap secondary property.
But on the other hand if you can snare the right property below its "market value", that sounds like a great idea doesn't it
But how, as a property investor, do you genuinely buy a property for less than it's true market value?
What is buying property under market value?
The most important thing to note initially is that there is a vast difference between buying under market value and receiving a discount on a property.
Both are welcome of course.Buying at a discount means that the property was bought for less than the asking price.
Of course that doesn't necessarily make it a good buy.
Usually the vendor has added a premium to their asking price to make you feel good when you receive your discount.
Then there are those developers who have a loaded the "sticker price" on their new projects and offer you a discount as an incentive to buy what are usually secondary properties.
Again for a short time you may feel good, until you realise you have still overpaid and the developer just has taken the first couple of years of your capital growth – and it was not theirs to have.
What I'm trying to explain is that it is possible to buy a property at a heavy discount and still pay too much for it.
On the other hand buying a property under market value means buying a property for less than what it would receive if it were sold on the open market in a transaction between a willing purchaser and a willing seller.
This is sometimes called buying under its "intrinsic value."
Buying under market value is a strategy that has been made famous by billionaire investor Warren Buffet who made his wealth by valuing companies and comparing those valuations to share prices.
He then buys if the share price is significantly cheaper than his calculated valuation.
Simple, yet effective – and highly profitable.
So how does this work in property circles?
Before I explain, I should point out the buying a property below its intrinsic or market value is only one of the six strands we use as part of Metropole's 6 Stranded Strategic Approach to buying investment great property.
You need the other strands as well to ensure you buy the right property.
Just buying a property at a great price is not enough.
So we also look for properties that have:
- Owner occupier appeal
- A high land asset ratio
- A "twist" -something unique or special or different about it
- Value add potential and...
- Are located in an area with a long history of strong capital growth
But, back to the question...
How is the market value of a property determined?
Many would say that you can't really determine market value until a particular property has been sold in the open market.
And following on from this, "technically" you can't really buy under market value.
In order for buyers to purchase a property for under its market value, you need to ascertain its market value in the first place, and as I said that's the price it would fetch on the open market, in an ‘at arm’s length’ transaction, taking place between unknown parties.
Just to make things clear...despite what you might think, a formal valuation is not a good indication of a property’s true market value.
A valuation is likely to be pretty accurate, but valuers tend to be very conservative, especially in the current market.
I have often seen them suggest a property is worth considering more than I would be prepared to pay for it and it other times I've seen them value properties for less than a number of interested parties have been prepared to pay for it.
Note: The best way to estimate market value is by analysing the prices of comparable properties that are being sold in comparable locations.
«Under market value» property considerations
If you want to buy a property using an "under market value" strategy, here are a few things you need to know:
1. It requires patience
Suitable properties for buying under market value don’t come along every day.
When someone is willing to sell their property under market value price, they usually have a pressing reason to do so.
They might be forced to sell faster due to moving house, debt, divorce or a deceased estate.
This means they are motivated sellers and likely to be more inclined to sell for under market value, if you are able to make them an offer that suits their needs – such as a quick sale, or a specific timeframe for settlement.
To make this strategy work, you need to remain patient until you find the right property, and you need to build relationships with a number of real estate agents, so they contact you before the property hits the open market.
That's where using a buyers agent like the team at Metropole comes in so handy.
We are in the marketplace all day every day and on the speed dial of active local estate agents and have access to off market and premarket properties and deals from motivated vendors.
2. You need strong negotiation skills
Property negotiation takes a certain amount of finesse – especially if you’re aiming to haggle your way to an under market value deal.
So make sure you brush up on your negotiating skills and go in armed with knowledge, by researching the property market beforehand, and being as up to date as possible about the prices in the area of similar properties.
3. Utilise the professionals
Of course if you're not an experienced negotiator or have access to detailed market and research data, that's again when our team at Metropole who are professional negotiators can I help you level the playing field.
Our property strategists can formulate a plan for you and then our experienced buyer’s agent may be able to negotiate on your behalf and secure a deal under market value – they can be especially successful when negotiating with a real estate agent who doesn’t know the area very well.
The downsides… are there any?
As I've already explained, just because a property is able to be purchased for below market value, that doesn’t automatically mean it’s a great buy.
There could be a number of property flaws that would mean a lower-than-market-value asking price.
For instance, I know one investor who enquired about a property in a block of units.
With very little negotiating, the owner was willing to accept a 20% reduction in price.
When the potential buyer did more digging, they discovered this particular unit block was renowned for crime, disputes and tenants who don’t pay the rent. No wonder the existing owner was in a hurry to offload it!
In circumstances like this, getting “a great deal” can turn out to be a false economy, as it could mean a huge investment in repairs, maintenance and renovations – not to mention loss/lack of rent.
When it comes to deciding on your strategy for purchasing property, it can be overwhelming.
Buying under market value can be a brilliant strategy to get ahead financially, but just be sure you are genuinely buying under market value, as opposed to securing a discount.
The former can be a fast track to property wealth – and the latter, a headache that just won’t go away.
