How do you find investment properties that are under market value but are also in a good area?
“I would much rather pay full market price, give the vendor what they are asking and so get a foot in the door of a great market rather than get a bargain and then just see that walk out by third of price falls over the next 12 months or whatever.”
A lot of investors are talking about buying property under market value, but how do you buy property under market value that is also in a good area?
Hey! I am Ryan from OnProperty.com.au, helping you find positive cash flow property, and I want to start out this video a little bit different to how I start out every other video which is just an introduction that lead into the answer and to actually help you to question yourself and to say, “Should I actually be looking for properties under market value or should I be taking a different approach to this?” So, I am going to play a short clip for you, of an interview that I did with Jeremy Sheppard from DSRData.com.au.
Now, DSRData is an awesome research tool where you can see the demand for an area, and that can help you assess whether or not an area is a good area to invest in. So I will play this clip where we talk about this under–market-value idea, and whether or not people should be approaching it, and then I will come back after a couple of minutes and I will talk about ‘Okay, if you still want to go ahead and do it, how can you find properties that are under market value in good areas.’
Jeremy: So, I would much rather pay full market price, give the vendor what they are asking; so I have a foot in the door of a great market rather than get a bargain and just see that walk out by third of price falls over the next 12 months or whatever.
Ryan: I think that is good for people to get out of their mind that because a lot of people do teach the best way to invest is to buy below market value so you can get instant equity in an area and look, I am sure there are ways to do that. But it just sounds so much easier to identify good markets, markets that are solid, that are likely to grow, get in there at market value, and see the market rise. And if you really want to create equity then you can do things like renovation or create opportunities within that property yourself.
Jeremy: Yeah. That whole instant equity thing, if your strategy is entirely based on buying below market value, then why would you hang on to a property once you have boarded? Your strategy has now come to its fruition. You have bought below market value, so why is there not a discount flip? You know, there is a renovation flip; you buy, renovate, sell. There is no such thing as a discount flip because as soon as you have settled on that property, it is new value — whatever you paid for it, and that is what other buyers are looking at. This is now the new benchmark. So, if you can and if ever you buy in that area, you can get a bargain, the prices are heading down.
They are not heading up and I remember seeing one property educator complaining about Sydney prices this last year and they are saying that people are paying too much; too much being above valuation. But unless people buy above valuation, capital growth does not take place. It has to be someone forking out a little bit more money and then you have a new benchmark which becomes the standard, and people continue to buy above market value. That is the only way capital growth happens.
So, if you are buying in a location where it runs paying fair market value, you are buying in a stagnant location. You have to pay more to get into these hot markets; that is the unfortunate side effect of getting into the market.
Okay, I thought it was really important to play that video because often when other investors or mentors or coaches talk about buying under market value, you think, “Okay, that is the exact way that I should invest. I need to invest in property that is under market value,” and that becomes the most important thing to you and you start to neglect other areas of research like, actually trying to determine whether or not an area is a good area. And this question came to me – I think it was from David, who asked this question. And it is so hard to determine whether or not an area is a good area.
Just because you think it is a nice, you think it is a good area, does not necessarily mean it is a good area. So, I really like the approach that Jeremy took to where he said, “Yeah, you can try and buy property under market value but what is the point of doing that if you do not actually do your research and invest in an area that is likely to grow?” Because if you buy under market value in area or a discounting properties anyway, where it is a slow market; and that is it, it is going to stay stagnant or decrease, then you are not going to get the return on investment that you would have had if you invested in an area, paid the market price for that property or even over market price if the demand is there, and that is what you have to do.
But you are getting into an area that is going to grow, so I think when you are thinking about purchasing a property under market value, you need to assess what you are actually trying to gain from that. What sort of equity are you trying to gain? What is your long-term plan? Is that actually helping you move towards that?
I think so many people get caught up in the mindset of ‘I want to make money out of thin air’ from absolutely nothing. And I can see why that is a huge draw for people. In a way, capital growth ad market growth are kind of like that: you buy a property, you get into that market, you do nothing to that property, the market goes up and you make money — basically out of thin air.
You have not created any value for the world; you just kind of held onto a property that is going up in value. And I feel like it is the same sort of approach buying under market value; you do not want to do anything to the property. You do not want to be an active investor; you just want to click your fingers and make $20,000 in instant equity. Look, I think if you can get it, if you know how to get it, great.
But I think going after this golden goose of free money from doing nothing is probably not the best approach if you can take a more strategic approach to your investment. Say, “Okay, what is the goal? What am I trying to achieve? What is my strategy for getting there? And what can I actively do to improve the property that I purchased or what can I do to buy in a good area so I can get the growth that I want or create the growth that I want by doing improvements to the property? Or see if … cause them, finding solutions to people’s problems.
So, I just want to – I guess, set the tone for this episode and just question whether or not this is the golden goose that you think it is, or if you should actually be spending more time doing more research or having a strategy where you can achieve your goals without buying property under market value. And if you happen to find one under market value that also ticks all the other boxes that goes with your strategy, then great! It is going to help you move towards your goal faster. But if you cannot buy under market value, you can still achieve your goal anyway.
I do not know. I just feel hesitant in recommending things to do because I feel like people will just go out and this is a one strategy to achieve financial freedom, to achieve success when really, it should just be a small portion of your overall strategy. So in saying that, how can you purchase properties under market value in good areas?
If you believe that you have done the research, you have looked at DSRData.com.au, you have gone through the 18-point checklist that I recommend or you have your own research that you do into an area; if you have done that and you are thinking, “Okay, yeah. I am happy with this area. I think it is a great area to invest in. How do I find the property that is under market value?”
The first thing to look for is to find problems that you can fix. So looking for a property on the market that has some sort of problem with it that you can fix to improve its value; obviously, you want to fix this problem for less than the value that it creates. But often, people will steer away from properties that have problems with them.
One example is, I remember walking past this one house every single day, that has been on the market in the area for like 6 to 12 months or something like that in an area where property is selling 30 to 60 days. I did some research into it and thought maybe this has a problem that I could solve; it turned out that this property had concrete [[counter]] and it would be a difficult problem to solve. But let us say you did have a solution to concrete cancer. You knew how to fix that. Whereas everyone else, investors will get scared.
No one wants to buy a house with concrete cancer, but if you knew how to fix that how to fix that on a budget, then you could get that property severely under value because no one else wants to touch it. So it is that sort of approach. Obviously, I am not saying go out and buy a property with concrete cancer, but find properties that have issues and then find ways that you can fix those issues.
I think it was Robert Kiyosaki who talked about him and his wife. They went on a trip to the countryside and they decided to look at property because that is what they do. And they found this property that had been on the market forever and no one wanted to buy it. And when they – I am going to paraphrase and I may get some things wrong, but when they inquired about why no one was interested in this property, they discovered that no one was interested in this property because it did not have access to water.
There is no river that they could draw water from for the house, or local dam nearby and the property would not run out of water. And so they did some research and found out that they can actually extend the wells that they have or put in some water tanks or something for that property so in the wetter months they would fill up and the house would have water all year round.
I think they then subdivided that house, sold off the house for more than what they paid for it and they got a parcel of land for themselves. And so they did very well with that because they found a problem that no one could be bothered to fix and no one wanted to buy this property with the problem. But they worked out how to fix it and ended up making a nice profit from it.
So if you are looking at purchasing a property under market value, first place to look is to find the properties that have been on the market for quite some time and that have problems. Now, to find these properties, obviously, staying on the pulse of the market by looking online and seeing the properties that are still on the market or properties that have dropped in value, is a very useful tool.
But also talking to real estate agents and asking them what they have on their books that has not sold in quite a period of time because there may be people that have listed their property, it has not sold, so they have kind of taken it off the market but the real estate agent knows that they really do want to sell; and so you could approach that sort of property.
So that is one step to do. Obviously, another thing you want to be looking for is people who want to sell because they are in distress for one reason or another. It might be they have had a divorce. It might be that someone has passed away. It might be that they need to sell their house to move on and to purchase another house. This information can be difficult to find, so the real estate agent – if they are good, is not going to say, “Well, this person really needs to sell this property in the next 30 days because they are buying another house.”
They are not going to give away that information but what you can try and find out is, what does the buyer really want? And often you will hear that the buyer wants a quick settlement or something like that. That generally means that the buyer is under some sort of pressure, and what you need to be doing is be willing to negotiate. That might mean in terms of price, yes; but you can also negotiate in terms of terms.
Often, that multiple people making offers on a property but if you have a deposit or you can give a bigger deposit, if you have finance approved already, if you can do a shorter settlement; having all these ducks in a row so that you are looking like a more guaranteed buyer is definitely going to make someone more likely to accept a lower offer than whether you are just some random person, you do not want to put down a deposit, you do not have finance organized, all of these sort of stuff.
So, if you are willing to commit, if you have everything in order, if you look like a serious buyer that this is going to go through; find out what they want, negotiate on those terms and say, “Hey look, I am willing to give you a shorter settlement – really short, but I would need like a price discount, like I would need this figure for my finances to work.” And so that is one way to go ahead and approach it. So find out exactly what the seller wants and so you can pay a lower price but you can give them exactly what they want in terms of the terms that they want for the property.
There are kind of 2 ways to do it. There are ways that you can find properties that have gone back to the bank and things like that. I do not actually know how to do that so you would need to seek out that information. That is something I probably need to get someone on to interview about is how do you find the mortgages that have lapsed and the bank has retaken over the property because someone could not afford to pay their mortgage and things like that. I do not know how you find those things; I do not know anyone who does know those things but yeah.
Firstly, finding property that no one wants because it has a problem and finding the solution to that; and also, just finding out what the seller wants in terms of the terms and even just going in and talking to real estate agents, be willing to make offers that are below their asking price. But maybe do not do extreme low-balling so they just reject you, but willing to go out there. Act as a serious buyer and say, “Look, I am willing to purchase this but I can only do it at this price.” And if you do that on enough times, on enough properties, as long as you are not low-balling so much that you are pissing the real estate agents off and they are not taking you seriously.
As long as you have serious offers but they are a bit low and you can just give an explanation like ‘my finances really need to work out, I really need to do this,’ eventually they are going to get to the point, “Okay, we know this person is serious but they are going to offer less than the asking price.” If they have someone who is in a desperate situation, they might say, “Hey, come and have a look at this property.”
They might not say to you, “You can offer less than the asking price,” and they will probably accept it; but if you generate a relationship with them, they will understand you do not want to pay market value for a property, they can point you in the direction of the right properties to look at. Becoming good friends with real estate agents, finding out about them is definitely a good idea as well because they could potentially help you because they want to get a sale through and they might know that this property is not going to sell but this person needs a serious buyer who is willing to do it, so it might end up being a perfect match.
So, in saying all that, again, I do want to just remind you that buying property under market value, as Jeremy said, does not tend to be a strategy in and of itself because if buying under market value is such a great strategy, there would be so many people out there buying under market value and then flipping that property for a profit. But people do not really seem to do that and so, it seems to me that it could be a good aspect of your strategy and your property investment portfolio.
But you probably would not want to bank your entire future on finding properties under market value. I like it as an extra step: if I can get it, that is great; but I would personally like to have an overarching strategy that I could achieve without buying property under market value and I would achieve my financial freedom anyway. And then if I get it, it kind of speeds up the process and makes things easier.
So, I hope that this has helped explain to you how to find properties under market value in good areas. If you need help actually finding those good areas, which both Jeremy and I agree is the most important part; I do have a course on suburb research that you can go ahead and check out.
I am going to go through 18 things that you can look at online to assess whether or not an area is likely to grow, stagnate or if it is a poor area to invest in. Head over to OnProperty.com.au/research if you are interested in that. And until next time, stay positive!