By William Bronchick
People often speak of buying a property “undervalued”, as if they are discovering something nobody else figured out. Stocks, land, and real estate can all be purchased undervalued, but this is different from buying property UNDER value. There’s a BIG difference, in fact!
Let’s say you think a company is ripe to expand within the next few years. You are speculating that the value of the company’s stock will increase, so you buy AT MARKET PRICE and hope you are right. You can also buy a property at MARKET PRICE and hope demand will increase and thus its value will go up. You can buy gold at today’s price and hope it will go up in price. However, in all cases, you are speculating that the asset will increase in value and that it is CURRENTLY undervalued.
Compare this thinking to buying a property UNDER VALUE, that is below its CURRENT market value. If a house is worth $200,000 based on similar houses that have sold recently, the market value is $200,000. It may be an “up and coming” neighborhood with a good school district that most people have not yet discovered, so you can buy it for $200,000 based on the idea that the future value will be more, so it’s currently “undervalued.”
Or, you can buy a property with a current market value of $200,000 and pay $150,000 because the seller is in a divorce or a foreclosure. In this case, you are buying BELOW value, or with BUILT-IN value. Why is there built-in value? Simple – you can sell it tomorrow for up to $200,000! If you buy real estate undervalued, you have to wait until everyone else realizes what you suspect to be true, that the property SHOULD be worth more.
You won’t likely find these deals on the MLS. You have to go outside the box and market to motivated sellers who are having some problems that you can help them with.