Real estate investing is one of the best ways to build long-term wealth. Not only do house prices consistently trend up over time, but as a real estate investor, you get to take advantage of leverage and compound your wealth.
However, experienced real estate investors will tell you it’s essential to pick an intelligent entry point. When searching for your next investment property, it’s critical to find something priced low compared to the market value. One of the worst things that can happen is you buy many real estate properties, then realize you can’t afford them and have to sell them before you can earn any money.
To avoid this, you need to buy real estate at a lower median price than the rest of the market. However, how to find undervalued real estate is a question that many professionals in the industry even struggle to answer. So how can you best position yourself to find undervalued real estate to buy? This post will show you how with three simple tips. First, let’s take a look at why finding undervalued real estate is so important.
Jump ahead to
The Importance of Finding Undervalued Real Estate
An undervalued property is a piece of real estate owners selling for less than it is worth. There are several reasons why a property might be a bargain. Still, before attempting to find undervalued real estate, it’s essential first to understand why buying undervalued real estate is vital in the first place.
To become a profitable real estate investor, you will need to stick it out for a while. According to some sources, it could take as long as ten to twenty years before you see any massive returns. During that time, you’ll need to figure out how to stay afloat. Staying afloat is where finding good real estate deals come in.
Let’s say you want to become a passive real estate investor. If you can buy a rental property for less than its market value, you’ll be much more likely to rent it out at a reasonable price (that tenants can afford) that will allow you to cover all your expenses.
Your rental income will go farther, you can put less on the down payment, you’ll be able to afford property management, and you might be able to buy even more investment properties. So the last thing you want is to be stuck with a second mortgage and house expenses you can’t afford.
Buying undervalued real estate is even more critical if you want to be a fix-and-flip investor. If you spend too much money on the purchase, you won’t have enough to renovate the place, leaving you with a vast liability instead of an asset. But, of course, flipping the house becomes much more complicated when you’re tight on money.
Buying a piece of undervalued real estate will give you more options and help protect your downside. But how do you know if an investment property is cheap in the first place?
How to Determine if a Property is Undervalued
To determine whether a piece of real estate is a bargain, you’ll need to know the market you’re looking in well. Keep in mind that over the years, more and more people have become interested in real estate investing, so there’s more competition than ever today. So if you’re too slow, even if an undervalued property appears on the market, it will get snatched up, leaving you with nothing.
One of the best ways to determine if you have an undervalued property on your hands is to monitor a specific area consistently. This area could be your whole state or even just your city. You’ll want to keep track of what houses in your area have historically been selling for over the last three years. Try to get as much information about these houses as possible:
- Was this a condo or a detached home?
- Is it a single-detached home or a duplex/triplex if it was detached?
- What part of your area is this piece of real estate? Is it in the higher-end part or the lower-end part?
- How many days on average do new pieces of real estate stay on the market?
- Are there any new growth opportunities in the area that could spur demand for housing and significantly boost the price of accommodation soon?
Once you look at enough real estate, you’ll understand what property goes for in the area. Then, when a new piece of property gets listed, you can almost immediately tell whether or not the property is undervalued.
Generally, a piece of real estate is cheap if it has the same characteristics as property in the area but costs less. For example, if you determine that the average price for a two-bedroom single-detached home in Seattle, Washington is $1,000,000, but you suddenly see one for $500,000, that could be a good indicator that it’s undervalued.
Reasons Why a Piece of Property Might be Undervalued
These are six main reasons why owners can sell good properties below market value. Here they are:
- Downsizing – One common reason for selling property below market value is downsizing, which can occur when the owners no longer need the space and want to simplify their lives by moving to a smaller home.
- Presentation – Another reason an owner might sell a property below market value is its presentation, including factors such as an outdated kitchen or bathroom or general wear and tear.
- Divorce – In some cases, couples going through a divorce may opt to sell their property below market value to split the proceeds evenly.
- Uninformed selling agents – If an inexperienced or uninformed agent is selling a property, they may list it below market value.
- Financial distress – Due to financial distress, owners may have to sell their property below market value. For example, this can occur if the owner faces foreclosure or has significant debt.
- Difficult tenants – If tenants are renting a property and are challenging to deal with, the owner may opt to sell the property below market value to get rid of it quickly.
Things to Consider When Buying Undervalued Real Estate
Like any real estate investment, there are a few things that are highly important and that you should keep in mind before diving headfirst into investing.
- Location – Consider the location of the property. Is it in a good neighborhood? Is it close to public transportation? These are all factors that can affect the value of a property.
- Age and condition of the property – An older property is likely to be undervalued but may need more repairs. When considering an undervalued property, make sure to factor in the cost of any necessary repairs.
- The Market – It’s essential to research the current market conditions before investing in any property, especially undervalued properties. Also, ensure you know what similar properties are selling for so you don’t overpay.
- Financing – Make sure you can get funding for an undervalued property before making an offer. Be prepared to put down a larger down payment and have a higher interest rate.
- Rental potential – If you’re considering an undervalued property as an investment, make sure it has good rental potential, which will help you offset any costs associated with the property and make a profit in the long run.
- Personal preference – Of course, you should ultimately buy a property you like. But be sure to consider the other factors on this list before making your final decision.
How to Find Undervalued Real Estate
Just because you know when a piece of real estate is a bargain doesn’t mean you’ll be able to find them. You could understand the local market perfectly, but if you sit around and play the waiting game, it could take a long time before investing.
So, here’s how to find undervalued real estate with three tried and tested methods.
Find Motivated Sellers
One of the best ways to locate undervalued real estate is to find motivated sellers. A motivated seller wants to get rid of their real estate and get rid of it as fast as possible. Negotiations with these sellers often go much smoother, and you’ll be able to bring the price down much more because you have the “upper hand,” and many motivated sellers want to get rid of the piece of property they own.
You can do this in a few different ways. Firstly, you can try to find off-market properties. These real estate properties are perfect for real estate investment as you can typically negotiate a lower price without a middle party. Secondly, you can find online real estate and try to scour for the best real estate deals. Of course, you’ll probably need to engage with a broker, but that doesn’t mean you can’t find motivated sellers.
Regardless of how you go about it, you’ll want to determine why the owners are selling the property. Ask whether the homeowners have recently bought property elsewhere, whether they’re in financial trouble, whether they’ve recently gotten a divorce, or whether the house is close to foreclosing.
Some real estate investors even look for recent death announcements to get an early tip on what properties might be easier to buy.
Another way to find motivated sellers is to network within the real estate investing community. Building solid relationships with other real estate investors will help you as you can share opportunities and build from each others’ success. Deals that are right for you may not be suitable for everyone, and vice versa.
Finally, remember that once you find a motivated seller, you’ll often need to move fast to win the deal. Many motivated sellers will take a lower price immediately instead of waiting for a higher offer. This fact means that if you’re not one of the first to put in a request, the property won’t be available for long.
Look for Unappealing Houses
If you can find a house that objectively “does not look good” but is in a good area, you may be able to snatch it up for an undervalued price.
Many people will look for real estate properties that are in peak condition and are “turnkey.” Houses that are in perfect shape and easy to manage justify a higher price. Those houses will tend to have more competition, and thus you won’t be able to get as good of a deal on them.
“Ugly” houses, on the other hand, don’t get the spotlight as much. Most people in the real estate industry aren’t looking for a project to take on when they buy a property, so if you can find real estate that needs some work, you could have a good deal on your hands.
Also, consider light industrial areas as this real estate market segment is often overlooked, and you can find some “rundown” houses there.
- Properties that have ancient style
- Old-fashioned kitchens with built-in appliances
- Other signs that the property could be renovated and made better
The one caveat to buying ugly houses is that you need to ensure not to overestimate how much a place will be worth post-renovation. Many people spend way too much money renovating real estate and don’t add value.
One way to buy undervalued real estate is by looking for “the worst house on the best street.” You can use the prices of the other houses as a benchmark for what your property might go for once renovations finish. This way, you can fix up the house, and it will be worth the same as the other houses on the street.
Attend Events Like Auctions
One final method of finding undervalued real estate is attending events like auctions. Usually, governments, banks, real estate agents, or even specialized companies hold these auctions. These auctions are where houses that can’t be sold off are auctioned off as a last resort for whoever owns them to get rid of them.
Speed is one of the most significant advantages of auctions over other buying processes. If you have the highest bid, the property is all yours. You don’t need to go through a lengthy negotiation process that’s common with going through a real estate agent. However, if you win the property, you may need to pay a large percentage of the cost of the property upfront.
Another benefit of these auctions is that you can sometimes lock in lower interest rates with these purchases. That means fewer lifetime payments for you and more money in your pocket.
The only risks associated with auctions are how intense some can get. It would help if you set a number (that stems from the prior market research you’ve conducted) and stick to that number no matter what. Also, make sure to factor in a relatively large discount from the market rate, as many auctions don’t let you inspect the property beforehand, so you’ll need to take their word as is.
Finally, don’t feel discouraged if you don’t win the property at these auctions. Many people tend to bid, which can be very competitive. Start attending property auctions frequently, and you’ll get used to them. Eventually, you will land your property.
Tips to Help You Find Buy Undervalued Real Estate
Regardless of which method you choose to find undervalued properties, there are certain things you can do to help tip the odds in your favor no matter what. Here are some things to look for:
- Work the numbers – One of the most important things you can do when looking for an undervalued property is crunching the numbers, which means looking at the potential rental income, capital growth prospects, and any costs associated with renovating or repairing the property. If the numbers stack up in your favor, then there’s a good chance you’ve found an undervalued property.
- New Infrastructure – Another sign of an undervalued property is if there is new infrastructure the city is building nearby, which could be things like a new train line, highway, or even just a new shopping Centre or school. Properties close to new infrastructure tend to see an increase in demand (and, therefore, prices), so if you can find one that hasn’t been fully valued yet, you could be a winner.
- Buy in A New Development After Completion – The best way to find an undervalued property is to buy in a new development after it has been completed, anything from a new housing estate to a large apartment complex. Developers will usually have already made their profit by this stage, so you may be able to negotiate a lower price. Plus, you’ll also get the bonus of a brand-new property.
- Work With a Real Estate Agent – If you want to up your chances of finding an undervalued property, work with a qualified real estate agent. A good agent will have their finger on the market’s pulse and often be aware of properties for sale below market value. They can also help you navigate the negotiation process to get the best possible price on the home.
Things to Be Cautious of When Investing in Undervalued Real Estate
Though buying undervalued real estate can help you create lots of long-term wealth, there can also be many risks.
If you’re looking to buy an undervalued property, there are a few things you need to keep in mind.
- First, you need to ensure that you’re getting a good deal. There are a lot of scams out there, and you don’t want to end up paying more than the property is worth.
- Second, you need to be prepared to put in some work. Undervalued properties often need a bit of TLC to reach their full potential.
- Finally, you need to be aware of the risks involved. An undervalued property can sometimes be a good deal, but it can also be a money pit. If you’re not careful, you could lose a lot of money.
Pros and Cons of Investing in Undervalued Real Estate
There are both pros and cons to investing in undervalued property. On the one hand, you may find a property whose owner prices it below market value, which can provide a good investment opportunity.
On the other hand, hidden risks may be associated with the undervalued property, such as structural problems or problem mortgages. Therefore, it is essential to do your research and due diligence before investing in any property, regardless of its value.
Pros of Buying Undervalued Real Estate
- You may be able to find a bargain: If you can find a property seller with prices below market value, this can provide a great investment opportunity. By buying at a discount, you may be able to sell the property for a profit in the future.
- It can be an excellent way to get started in the property market: If you are new to property investing, the undervalued property can be an ideal place to start. By taking on a property below market value, you may be able to reduce your overall risk.
Cons of Buying Undervalued Real Estate
- There may be hidden risks: One of the main risks associated with the undervalued property is that there may be hidden problems that you are not aware of. For example, the property may have structural issues or problem mortgages. These hidden risks can cost you a lot of money if you are not careful.
- It can be risky: In general, investing in undervalued property is a riskier investment than buying property at market value because you may be taking on a property with hidden problems or a difficult financial situation. Therefore, it is essential to research carefully and consider all risks before investing in any property.
Recap: How to Find Undervalued Real Estate
Investing in real estate is one of the most lucrative ways to expand your wealth over time. Not only can real estate provide cash flow and passive income in a poor housing market, but real estate investments also appreciate over time and can make you very rich with capital gains. That being said, it’s essential to find undervalued real estate to buy, lest you lose money immediately (or aren’t able to hold on for as long as it is profitable).
Whether you’re looking at residential or commercial real estate, thoroughly researching real estate ensures the property you’re buying is undervalued. To find undervalued properties for real estate investment, you’ll want to be on top of your multiple listing service (MLS) and grasp the local real estate values for the area.
Before buying a property, try to find one that is undervalued first. To find undervalued properties is an art more than a science, but with enough practice, you could be doing it even better than the real estate professionals. So what are you waiting for? Don’t just settle for standard real estate prices; get out there and try to find yourself some good deals!