What you need to know:
Understanding factors that lead to real estate properties fetching less than their worth is crucial for buyers and sellers alike, enabling them to navigate the intricacies of the real estate market more effectively.
In the realm of real estate, it is not uncommon to witness properties being sold for less than their perceived market worth. This perplexing phenomenon has sparked the curiosity of buyers, sellers and industry experts alike. There are multifaceted factors that contribute to real estate properties being undervalued.
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 who agrees to the valuation.
However, in certain situations, sellers may find themselves under duress due to personal or financial circumstances. These factors can create a sense of urgency and lead them to accept lower offers to expedite the sale process. Sellers facing divorce, job loss, or imminent relocation may prioritise a quick transaction over maximising the sale price. Seller duress can often result in real estate properties being sold below their true worth.
Real estate prices are not listed as stock market prices. Rather they are approximate prices and can differ from property to property. Sellers who are unaware of the true market value of their property may set an asking price that is lower than what it could potentially fetch.
Inadequate research, failure to seek professional advice or reliance on outdated information can lead to sellers undervaluing their properties, resulting in below-market sale prices. 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 far less than what the property is worth.
Many times, buyers default on their loan obligations. This could be due to a personal financial emergency such as 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 minimise 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.
Lastly, some real estate investors are better connected than others and this can significantly impact property valuations. Such buyers who possess insider knowledge about market trends, upcoming developments, or potential risks may use this information advantageously by negotiating lower prices.
As a result, they have an edge over other investors and know about the adjustment in the value of the property whereas the rest of the market does not. Therefore, they are poised to buy the properties at undervalued prices and make a gain as the prices rise.
Understanding the aforementioned factors that lead to real estate properties fetching less than their worth is crucial for buyers and sellers alike, enabling them to navigate the intricacies of the real estate market more effectively. By being aware of these dynamics, stakeholders can make informed decisions that align with their goals and objectives.
Most properties are at least 25 percent below market value but in some cases can be as much as 40 percent below market value. In order to verify the market value of a property, carry out extensive due diligence including sales comparables. Investing in below market value properties is an excellent way to maximise return on their investment as they are purchasing a property with instant equity.