Buying Under Market Value. The How And The Why
Buying Under Market Value. The How And The Why
“You make your money when you buy.”
Many people have heard that saying before… but what does it actually mean? Why is it so important? And… most importantly, how do you do it?
Like most people, I love finding a good deal.
Whether it be on a new pair of shoes, a local steak night, or cheap flights, everyone loves to feel like they are “winning” in some way when they purchase something.
Real estate is no exception, and I’m sure most people would agree that it is the most important purchase in which to ensure you’re getting good value.
There is a fine balance though, between really good value, and just plain cheap.
Right now, today, I could find you a habitable, high yielding, 3 bedroom house for less than $50,000... Pretty cheap, right? But does it represent good VALUE?
Value, I like to say, is in the eye of the beholder, because there are so many different metrics on which people judge “value”.
In real estate, value is what you get when you pitch a suite of variables - such as location, size, land content, dwelling type, aspect, features, value add potential, neighbourhood demographics, macro and micro economics, and lifestyle drivers - against cold, hard cash.
If you’re looking for your new family home, in a particular area, the value equation will be very different from someone looking purely at an investment asset.
Regardless, we always want to ensure we’re getting a good deal and not paying more than a property is “worth”. People have different reasons for this, but for us it is not just about trying to get something “cheap”, it is about risk mitigation, and forward planning towards the next purchase.
Think about it this way
There is a house in the area on the market. You’ve had a look, and it seems really great, and you get pretty excited thinking that it seems like a good deal… but how do you know?
In short, unless you’re sitting on the valuation panel of the institution you’re borrowing from, it’s a moot point, as they will decide the “value” of the asset to which they will secure the finance against.
You can, though, take some pretty strong steps to make sure you’re on the money.
Step 1 - auto valuations
There are a lot of different websites, free and paid, that will give you automated valuations.
These can be pretty good to give you an idea whether something is grossly over or under priced, but each website will vary greatly, so don’t rely on finding the golden answer here. List all the different auto valuations in a spreadsheet, and write down the average.
Step 2 - sales comparables
Here’s where you need to do a little bit of work. Jump on the different real estate sales websites, search for recently sold houses that are (honestly) very similar in features, size, and quality, have sold in the past few months, and within say, a 2km radius of the property you are looking at.
Put all your findings in a spreadsheet. Find the average.
Step 3 - independent valuation
This step isn’t for everyone, but you can pay for an independent valuation from a licenced valuer. This is a great way to get a professional opinion, but it will often still be very different from what the lender will value the property at.
Ok, so you now have a load of raw data.
Look at the averages you have, and find the middle point. This will likely be the best estimate to the true Market Value value that you have.
Let’s just say that, miraculously, your data shows that this house is listed at precisely the estimate you have come to. Go and buy it?
Not so fast
Sellers are always motivated in different ways, and if you should always negotiate on either price or terms. Start by finding out which is more important to the vendor. Just ask. They might be looking for a quick sale because they have to move for work, in which case they are less fixed on the price and just want it gone. In other cases, they might have other reasons to sell, but really need a longer settlement, in which case you can negotiate the price down to accommodate their needs.
Put the vendors needs first, but leverage it to maximise the value proposition. It’s like jiu-jitsu. If you can negotiate well, by listening to the vendor's needs, and reacting to those needs in a way that you get the most leverage, then you can often secure a much lower purchase price.
Remember though, this isn't about ripping people off, it’s about maximising the value in the deal for both sides of the transaction.
If you can negotiate a price that is 10% or more below the Market Value estimate, it will not only give you some added security if there is a turn in the market but also potentially provide you with the equity you need to fund your next real estate investment purchase. You can essentially “purchase” equity, by paying less than the total valuation.
You can make money when you buy
By taking the time to do your research on the market, understanding the value of the asset, and listening to the needs of the vendor, you could very well find yourself saving, or making, tens of thousands of dollars - without ripping anyone off.
Sounds like a good deal to me.