If you have read any guide on property investing or attended seminars or training you will have heard the following:
“Buy below market value”.
But what does this actually mean?
If a property is for sale for £200,000 and you put in an offer for £190,000 and this is accepted does that mean that you bought below market value?
No it doesn’t.
A lot of people think that this is the case and if you are one of them then let me explain why this isn’t (or not likely to be) below market value.
Asking Prices for Properties
The first question to ask is how was the asking price of £200,000 determined?
Did the estate agent recommend this price?
Did the vendor instruct the estate agent to list the property at this price?
These two scenarios are common and happen a lot. Often a realtor will tell a vendor that they can sell their property for a high asking price so that they can secure the exclusive selling rights to it.
When the property doesn’t sell at this price they will ask the vendor to consider reducing the price. Yes these are sneaky tactics but this does happen often.
The other side of this coin is that the estate agent recommends that the vendor list the property at a price that is close to the true market value, but the vendor insists that they want it listed at a higher price.
So the bottom line here is that you should never accept the asking price of a property to be the true market value.
Real Estate Investors Obsessed with Buying Below Market Value
A lot of new real estate investors and some experienced ones are totally obsessed with the concept of buying below market value. They spend a great deal of time calculating bids they should make for specific properties while paying little attention to finding out the real market value of a property.
So what they can end up doing is buying a property below the asking price rather than below market value. As asking prices tend to be inflated then they might have actually purchased the property at its true market value or even above.
Here is another problem. If you believe that the true market value of a property is £180,000 for example and you are looking to buy at a minimum of 20% below market value then you would need to submit a bid of £144,000. If the asking price of the property is £200,000 your bid will be almost 30% below the asking price which the vendor is unlikely to accept.
Do you have the confidence to make a bid of around 30% lower than the asking price? Some people will and some won’t. The thing is that the vendor will probably see this as a dramatically low bid and reject it out of site.
So what do you do?
Well you need to know the approximate market value of the property so that you can base your decisions on this.
How do the Professionals Assess the Market Value of a Property?
Please bear in mind that coming up with the true market value of a property is almost impossible to do. Even if two properties look identical it is very likely that they will be different in a number of ways. So it is rarely just a question of comparing “like with like”.
Did you know that there are two different types of valuers in the UK? Well there are those valuers that work for financial institutions and perform valuations to support a mortgage application. Then there are different valuers that work with estate agents and recommend asking prices for properties.
It is actually very likely that both of these valuers are qualified surveyors but the methods used to come up with the final price are different. A valuer that works with an estate agent is going to take recent house sale transactions into account. The prices these properties sold for will have an impact. A mortgage valuer will not do this.
What happens when the market is slow and there hasn’t been a lot of house sale transactions to compare with? Well then the valuer will need to rely on their own experience and judgement to suggest an asking price.
Hardly an exact science is it? It is easy to define how professionals should calculate the market value of a property but it is a lot tougher in practice. Mortgage valuers are usually more conservative in their valuations than estate agent valuers. At the end of the day if a valuer gets the market value right to within 10% then they have done pretty well.
The problem with this is that 10% is a lot of money when purchasing a property. If the true value of a property is £200,000 then an estate agent may list it anywhere between £180,000 and £220,000. That’s a £40,000 spread. And a lot of valuations have a wider margin of error such as 15% – 20%.
So how can you Assess the Approximate Market Value?
The first thing to say here is that you need to do this. Never just accept an evaluation. Do your homework and your due diligence. Find out what similar properties are selling for now and what they sold for in the recent past. If the market is fairly slow then you may need to go back a bit with your research.
If you see that some properties sold for less than they should have done there may be a number of reasons for this. Some people are under pressure to sell their properties fast because they need to relocate or they may be going through a divorce for example. If a house has been repossessed it may have sold at auction way below its true value.
You need to take these possibilities into account. Valuers do not normally have this additional information to hand but it is in your interest to have it.
Where do you find this house price transaction information? Well if you know local estate agents well then they may be willing to help. You can also use websites such as:
Take a look at as much recent data as you can for similar house prices in your area. You can then calculate an approximate price by taking the highest prices and taking an average. Don’t include low selling prices in your calculations as this is going to skew the results.
Does this mean that you will be able to purchase properties below market value? Not all the time no. But at least you will know approximately what the real value of a property should be and not have to rely on inaccurate asking prices.