You may have heard the phrase, “You make money when you buy property, not when you sell”. While the performance of any property after you buy is undoubtedly important, many investors are curious about how to buy property under market value.
In this article, we’ll explore what “buying below market value” actually means, and also look at 10 proven strategies for finding and purchasing quality investment property under the genuine market value.
What Is “Buying Below Market Value” Anyway?
There is common belief that whatever a property sells for is the market value. But this is not always the case…
We define buying below market value as purchasing a given property for less than the property would fetch on the open market, given a reasonable amount of time on the market and a large number of prospective buyers.
There are many situations where a vendor may not have the time, or a property may not have the broad market exposure required to fetch a pure “market price”.
Our definition is distinct from other similar concepts which are often confused with “buying below market”.
Buying Below Market Value vs Buying At A Discount
Buying at a discount simply means purchasing a property at a discount to the asking price.
This happens all the time in property transactions all around the country.
But it doesn’t necessarily mean you’re purchasing under market value. Perhaps the vendor’s asking price was too high, and that the price you’re paying is about what the overall market will bear.
Buying Below Market Value vs Getting A Bargain
It doesn’t make sense to buy a low-quality property with poor future prospects at a price slightly less than what others would pay for it.
By the same token, it may be an extremely astute investment to pay the asking price for a solid property with future potential.
In some cases, property buyers pay more than the price guidance provided by the agent (especially in a hot market).
Again, this may still represent a “bargain” to the buyer, if the property performs brilliantly over the coming years.
Nevertheless, that’s not what we’re talking about here.
Buying Below Market Value From Family: A “Favourable Purchase”
There is a special case of buying below market value called a “favourable purchase”. This is when you buy property, usually from a family member, at a price genuinely lower than the appraised bank/lender valuation. There are special conditions that apply to this type of purchase, and again this is not the main focus of this article.
10 Tips For Buying High-Quality Property Under Market Value
Now that you know what buying under market value is NOT, let’s look at how to buy high-quality property for LESS than that property would reasonably fetch on the open market, given a reasonable amount of time and exposure to enough buyers.
1. Know The Market
It’s difficult to know what represents “value” unless you have a good understanding of comparative sales of the same property type in the same suburb.
One way to know the market is to put boots on the ground and visit open homes and inspections over an extended period of time.
Another way is to analyse the data on a suburb to get a reading on how a certain valuation stacks up against the “norm” in that location.
Once you can analyse a market well, you’re in a position to pounce when value presents itself.
One of our clients was looking to buy an investment property in a particular suburb. He visited dozens of properties and got a sense for what was available for around the $400K mark.
When he was the first to inspect a new property, he enquired what the vendor wanted for it. The asking price, $390,000, was significantly under what he had seen other comparable properties sell for in recent weeks.
“SOLD!” he proclaimed, and inked the contract before other buyers got to inspect the property.
2. Know Your Agent
Similarly, many home buyers and investors experienced good results by getting to know one or more local agents.
If an agent knows exactly what you’re looking for, when they find it, they’ll tend to think of you first.
Some friends of mine spent over a year traipsing from property to property with a local agent. They were looking to buy acreage, but couldn’t find a block that matched their needs.
One day the agent called and said there was a new property on the market – part of a deceased estate that was looking for a quick and hassle-free sale.
They inspected the property and put in an offer the very next week, which turned out to be successful.
3 months later they received a written offer from an interstate buyer to purchase the property for 20% more than they paid for it, indicating they indeed bought well.
3. Obtain A Reliable Valuation
If you want to buy “under market value”, then you need to know what market value actually is. If you know the market well and you back your judgement, then you can estimate for yourself.
Obtaining a valuation can be useful, but it’s important where the valuation comes from. You can be skeptical about any valuation that comes from the vendor.
One form of valuation that tends to be reliable is a sworn bank or lender valuation. Banks have vested interest in protecting their downside.
And they tend to be conservative in their valuations – typically valuing a property at 95% to 100% of a realistic market value price.
So if you are able to buy at a significant discount to bank valuation, providing the other details of the property check out, you may indeed be buying very well.
4. Pre-Settlement Opportunities
Sometimes, a property buyer will sign a contract on a property purchase, but for whatever reason, are unable to settle.
This usually means that the property vendor (often a builder or developer), has a property they were expecting to sell that needs a new buyer.
In cases like this, it’s not unusual for the original purchaser to forfeit their deposit.
This may creates a “price buffer” that the developer can be persuaded to pass on to a new buyer in the form of a discount off the bank valuation.
5. Distressed or “Highly Motivated” Developers or Builders
When a vendor needs to sell quickly, the buyer naturally has more leverage on price.
Property that doesn’t sell as planned tends to start burning a hole in the developer’s pocket. Sometimes there are opportunities to pick up a relative bargain.
This helps to get the developer out of a tight space, and also provides some instant equity to the purchaser.
6. Mortgagee Sales or Deceased Estates
A vendor with plenty of time on their hands, and a direct stake in the outcome of the sale, will usually hold out for the best price they are able to obtain within a reasonable time frame.
There are some cases, such as mortgagee sales or deceased estates, where the aim of the vendor is simply to dispose of the asset for an OK price.
In these situations, the seller does have a legal obligation to achieve “market value” for the property. However, in practice, there is often less time, effort and due diligence put into making sure this occurs.
Resources such as the National Mortgagee and Deceased Estate Database may assist in shortlisting potential properties that fit these categories.
7. Divorced Estates
Similarly, with divorcing couples, there may be a variety of emotional and practical reasons why the vendor is unwilling or unable to maximise the sale price.
- They may need the proceeds of the sale quickly
- They may have bad memories of the marital home, and just want to “get rid of it”
- They may feel bitter that the other party will get most of the proceeds
If you understand the motivations behind the sale, that will often give you the upper hand in negotiations.
8. Negotiate Effectively
There’s nothing like good old fashioned negotiation for getting a deal done.
Often this starts with understanding exactly why the vendor wishes to sell. There may be variables other than contract price that they are interested in maximising.
They may want a quick sale. Or perhaps they are looking for a long settlement to enable a relocation somewhere else. There may be broken fixings or appliances, for example, they might need a dryer repair or dishwasher fixed.
Strong negotiation skills, plus the ability to walk away with a straight face, can often tip the balance in favour of a sale at a very attractive price.
9. Consider Engaging A Property Advisor or Buyer’s Agent
There are several reasons why engaging an advisor or buyer’s agent to act as your intermediary can help obtain a better price. For example:
- An intermediary typically knows the market very well. They can use their market knowledge to understand genuine value when they see it.
- An intermediary will cut emotion out of the equation. A cold, hard, logical approach is usually how you negotiate the best buying opportunities.
- Intermediaries can be effective negotiators because they can say to the vendor, “I have a buyer here with money to spend. They’re serious, but they need a very good deal.”
10. Be Ready To Transact
There’s a common thread here: if all vendors were in no hurry to sell, and were able to speak with a large number of potential buyers, then all properties would sell at “market price”.
However, that’s not the case. Sometimes vendors need or want to sell quickly.
And when they do, they’re willing to drop their expectations around price. That’s where you can swoop in, providing you’re in a position to move quickly. That means:
- having the deposit funds available (typically 20% of the purchase price, plus costs = 25% of the purchase price).
- being in a position to service any lending against the property. In addition to having a steady income, it also helps to have all your tax returns and financial records in order so you can obtain the loans you need to purchase quickly.
- ensuring the right investment structures are set up and ready to go.
While it’s a good thing to purchase property at the best possible price, remember that it only counts if you’re purchasing high-quality property with strong cash flow and growth potential.
And the valuations need to stack up. Conservative bank valuations are a solid guide.
Finally, saving $15,000 off the price of the wrong property won’t do you any good.
The most important thing is to purchase the right property for your situation and goals. If you’re like our help in determining the right type of property for you, please get in touch to book an Investment Property Strategy Session.