Most investors would want to score an undervalued property in a highly challenging market. This task requires loads of research and time, but finding a bargain property could be worth your while.
There are many reasons why a property could be selling below its market value. It could be because the seller is under financial pressure, going through a divorce, or needs a swift sale. Whatever the reason may be, snagging a total bargain in a “severely unaffordable” market could be quite a win.
Here are some steps you could take when searching for an undervalued property:
- Number crunch. Knowing the market is important in finding an undervalued property, according to Cameron Kusher, executive manager for economic research at REA.
“Data is your best source of knowledge when looking to purchase a property. When considering a purchase ensure that you look at what other properties have sold for in the local area and what price other properties are listed for,” Kusher explains.
You could know what to expect when buying in a suburb by assessing the local median sale price over time. Some questions you should ask are:
- What have the levels of capital growth been over time?
- What is the average vendor discount?
- How long does it take to sell a property in this area?
- What is the gross rental yield and median weekly rents?
All these questions could be answered with data, which could help you become better informed and more capable of targeting suitable suburbs and properties.
However, you might still need to dig deeper.
“The tip is to look for suburbs that have a good level of amenity but in comparison to the nearby suburbs, or suburbs with similar characteristics, have either a lower level of growth or a lower median price,” adds Kusher.
Also read: Does a market’s median value trump median price?
- Find a motivated seller. Looking for a motived seller could help you secure an undervalued property. Pay extra attention to the circumstances of the sale—why the property is being sold, what are the sellers’ circumstances? Then, try to get an understanding of how motivated the seller is to work out what extent you may be able to negotiate.
Asking pointed questions about the sale may provide you with valuable information: for instance, has the property bought somewhere else? Are they in financial trouble? Have they recently filed for divorce or lost their job?
- Seek the ugly duckling. Remember that age-old real estate saying about buying “the worst house on the best street?” That saying generally holds true for investors looking to maximise their capital gain over the medium to long term.
Kusher agrees that finding an undervalued property that looks a bit run down could yield good results.
“The best advice is to look for properties that need a little bit of TLC. If the property doesn’t present well, the selling point will be hampered. It is amazing the difference some paint, some work in the garden or some new cabinetry can make on a property which previously did not present well,” he says.
However, investors should make an educated decision when buying a property that needs TLC, warns Jason Pitkeathly, property investment and mortgage finance specialist at Menzies Financial Group.
“There are dangers as these properties tend to be tired, run down and sometimes damaged. We find purchasers often pay too much for the property and then don’t fully factor in the costs of repairs, renovation and holding costs through the duration of the remedial work,” Pitkeathly says.
Also read: A guide to house flipping for profit
- New infrastructure. Infrastructure development and amenities could help an undervalued suburb to boom. New train lines, shopping centre, and access to other amenities may increase rental yields and capital growth.
Pre-approval for large developments is often dependent on the inclusion of large areas of parkland, so buying an undervalued property in a closely built-up area that is scheduled for development may increase both rental yields and capital growth through the extra level of amenity that the new development will provide.
Pitkeathly, who is also an experienced property valuer, echoes this sentiment.
“Often newly gentrified areas can be difficult to value. If a property has architectural significance, is unique in flavour, of the first of its kind in an area a valuer will find it difficult to find comparable sales evidence and the fair market value can be somewhat subjective. If you are confident in your research and purchase decision and can cover any shortfalls because of a low valuation, it should not take long before you can realise some of the equity in that property,” he explains.
- Unsuccessful auctions. Properties that are passed in at auction may provide investors with a great opportunity to negotiate a bargain, according to buyer’s agent Chris Gray from Your Empire.
“An agent might over-quote a property. If it’s worth $900,000 and the agent says $950,000, if no-one turns up to the auction the property gets a label that the owner or agent wants too much for it and it stays on the market for months,” he explains.
- Purchase in a new development after completion. Buying off the plan and selling upon completion could earn you some good profit while attracting no holding costs, but you can also pick up an undervalued property after construction is complete. Developers do a pre-sale during the construction phase, and a lot of investors may think they will make a good profit when they sell post-construction. However, if the market doesn’t go their way, they may want to exit the building—and this is where you could swoop right in.
Also read: Five things to look for before investing in regional areas
While it may feel like you hit the jackpot finding a property below market value, you still have to think whether it’s the right fit for your portfolio.
You also need to consider if the effort and the costs you may have to incur are worth the investment. Consulting an expert who could guide you in your decision when purchasing an undervalued property (or any property, for that matter) may be helpful. Remember: just because it’s cheap, doesn’t mean it’s a good deal!
This article originally appeared on yourinvestmentpropertymag.com.au in October 2011, and was updated for style and content in January 2020