Buying Under Market Value

As the economic ambiguity, economic pressure and doom and gloom outlook brings an increased number of sellers into the property market, we have started to see more and more of “below market value” property listings. When you manage to find a seller who is looking for a quick sale on his/ her properties, there is a an opportunity to negotiate for a good price from the seller.

But first, you have to understand, why do people sell property below market value?

Nobody would ever want to sell something for less than what it is worth unless they are in a distressed situation or they are under pressured such as they might be facing some of the following situations:

• Facing financial difficulties

• Need extra funds for business purposes

• Facing repossession: One point to note is that if a property ends up in an auction it still doesn’t mean that it’s a cheap bargain, it might just means that it has not been sold by an estate agent within the prescribed time scale and there may be a very good reason for that.

• Facing divorce issue and want to get rid of the property soon

• Relocation for work purposes

• Need funds to invest in other properties

Under these circumstances, decisions made can often be irrational and emotional. When negotiating with seller, never be afraid to ask questions like:

“Why are you selling?”

“How long has the property been on the market?”

“What other offers have they received?”

Knowing this information will give you a clear idea of how much room there is for negotiation. You can further negotiate with the seller to accept lower offers than they originally expected especially if the property has been on the market for an long period of time.

However, it is very important to do some research before you purchase those “under market value properties to make sure that the sellers need a quick sale for a genuine reason and to ensure that it is nothing to do with any problems with the house. One of my advice is to always lookout for any flaws or faults which can help you to bring down the overall cost of the property. If you can get to the negotiation phase of a sale armed with a builder inspection that shows the property is less than ideal, you could use those flaws to your advantage to negotiate a better price.

But on the other hand, for example, if you think you can use the leaky roof to negotiate down the sales price of your purchase, think first: do you really want a house with a leaky roof? Fixing problems down the line can often be more expensive than you expected at first, so only purchase if youre sure you can handle making improvements within your budget.

Some takeaway tips on purchasing below market value properties:

Always analyse and do extensive survey on the quality of the property. Properties in established areas with adequate infrastructure like public transport, shopping malls and leisure facilities tend to have strong demand from investors which will improves capital growth potential.

Good investment value means researching the local market to find out the recent sub-sale prices for properties of comparable land size, type, number of bedrooms and degree of renovation. Once you have determined what you believe is the property’s fair value, always stick to that limit and walk away if the bidding or negotiation goes beyond it. You have to understand that no matter how high is the asset’s quality, overpaying will never brings you good investment returns.

A question you should ask yourself is that if there is a great deal proposed to you at some time, will you be able to grab this deal fast? You might be questioning that is anybody looking at the deal at the same time, how soon do I need to make the decision etc. Inexperienced investors will find recognising a genuine opportunity difficult and the timing challenging. If an excellent deal does come on the market, you’ll need to identify it straight away and move fast with confidence. But rushing into a deal worth hundreds of thousands of dollars is not something you should do when you’re new to the game. So make sure that if there is any deal proposed to you, only make decision if you know the market of that area well, understand it’s demand and the current market value and only you can make sure that you made the right purchase decision.

You have to understand the current market situation as well. If the market is strong, the chances of you finding a distressed seller will be less. However, when the market is weak, demand is weak with respect to supply, hence sellers will find it difficult to sell their properties as there is too much competition in the market. This is the time where you will be able to negotiate some great terms with the sellers as they would like to get rid of their properties fast for whatever reason in the shortest period of time which give you more room for negotiation. In certain cases, seller will be willing to offer 30% below market value for cash buyers as they need the money urgently. During downturn of the economy, those who holds cash is the “King” as they definitely have more bargaining power.

Always take into account entry and exit costs such as stamp duty, loan and legal fees, real capital gain tax, sales agent commission and more. Unless you’re buying for around 15% or more below market value, you’ll find it hard to buy and sell and make a worthwhile profit after tax. Remember that if you sell within short period of time, you will need to take into account the RPGT (Real Property Gains Tax). So, you much always know your purpose of purchase be it for rental or to flip. Take into account the necessary cost involved when making your investing decision whether your strategy is to buy and hold rather than sell, then you’ll need to ensure there is adequate upward pressure on prices forecast for the future to make the holding costs worth it. If you get that right, the upside on profit is much more rewarding.

During the market downturn, there will be lots of opportunities to invest in below market value deals which will brings you great returns over the long run if you invest in the right properties, which suits your investment goals. Be sure to lookout for it and if any deals come by, make sure that it is properly analysed and structured.