Strategies for Finding Undervalued Properties

  • 3 years ago

Strategies for Finding Undervalued Properties

You would not be blamed for thinking that it is impossible to find undervalued properties with current market conditions. When properties are in short supply and high demand, finding an undervalued property is more difficult. However, regardless of market conditions it is always possible to find a property undervalued by the market. 

By definition, an undervalued property is one that is priced below prevailing market values for comparable properties. For example, if a comparable property in the area is selling for 800,000 and you are able to find a property with a seller that is willing to let go of their property at 770,000, then you have identified an undervalued property – we like to think of these as investment opportunities. 

Properties can come to market undervalued for several different reasons; however, it usually boils down to three factors:

  1. The seller is either listing the property directly or is using an inexperienced real estate agent to value the home. The property is then put on the MLS at a value that is below that which the market supports.
  2. The property is in poor condition. As is, the property is in disrepair or has some other deficiency, such as a worn roof that lowers its overall value when compared to similar properties being sold at market values. This means that if the property is brought up to spec, it would demand higher pricing if put back on the market.
  3. The property owner or owners are highly motivated to sell quickly. When a property owner is looking to sell quickly, they are usually more willing to sell the property at a discount if it means closing on the sale faster.

So the question now is, how do you go about finding one of these properties? You could either do your own research to find these properties on your own time, but you run the risk of potentially losing out on deals because there are full-time real estate professionals with more institutional knowledge who are doing the same research more efficiently. We recommend leaning on experienced real estate professionals who are well-researched, able to identify investment opportunities, and able to negotiate a below-market close on your behalf.

Negotiations for undervalued properties – especially in the competitive market conditions we are currently experiencing – really boils down to the following: understanding the property itself and the causes of its value deficiencies, understanding the local market and prevailing values, and identifying areas where improvements are needed to cure the property and increase its value to the same level as comparables. We have honed these skills through over $250 Million in real estate transactions. By properly negotiating and working with the seller on these issues, an opportunity becomes available for you to purchase a property at a discount. As a new owner, you can then invest in fixing these issues and almost instantly have an appreciating asset.

Building relationships with individuals who are looking to sell their property directly, without a real estate agent representing them, can also present an opportunity. Often, a seller representing themselves will price the property for an amount they believe is fair. This can result in both overvalued and undervalued properties being made available off-market. This is where an experienced real estate team can build relationships with property owners, prior to the owners placing their property on the market, to ensure you (the client) are the first in line and able to quickly close on an undervalued off-market property. Identifying and finding properties quickly and discreetly is crucial to securing a purchase of an undervalued property before other potential buyers are able to steal a deal.

Finally, finding a discounted property can simply be a matter of identifying properties with vacant units. If these properties remain unoccupied for long periods of time, it typically means that there is no incoming revenue on the property which will reduce the properties overall ROI. This then presents an opportunity to make an offer that is a bit below market value with the understanding that you will need to make an investment to make the property more enticing to potential renters.

All in all, it just comes down to making sure you have the right team behind you. If you are looking to find and identify undervalued properties to purchase, know that regardless of market conditions it is still possible to find undervalued properties. It just requires the right team. Our experienced team of agents has a roster of on and off-market investment opportunities and is able to source deals for you as you look to create or expand your real estate portfolio.

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Zahn Properties and Lyon Stahl do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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