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What is a Below Market Value Property?
Simply speaking a below market value property is one that is being sold for less than it is worth. This might sound like a ludicrous concept. After all, who would agree to sell a property for less money than it is worth? This kind of thinking might tempt people to believe that this principle is a real estate myth, because the price of real estate is set by the market, making it is almost impossible to find something that is undervalued. In other words, a piece of property should not be priced at less than what it is worth, because information is available on what other similar homes can fetch on the market.
Although the concept of below market value property might be hard to grasp at first, a closer look can provide a better understanding.
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Is Below Market Value Property a Myth?
The first important distinction is to clearly define the difference between a discounted asking price and a below market value property. A real estate investment is not considered to be below market value if the seller agrees to go down a bit on his asking price because the original asking price may have been above what the market would reasonably allow. A real estate investment is also not considered to be below market value if the lower price is reflective of the condition of the property, because again, a property that needs work is naturally worth less than one that is in mint condition.
These two conditions are often mistakenly considered to indicate a great deal. Although getting something off the asking price on a terrific property might sweeten the deal, it does not necessarily mean the property was below market value. Similarly, the propety should not be considered below market value just because you can negotiate a low purchase price on something that needs a lot of work and you are able to do the job yourself or you can find cheaper ways to make the improvements.
So what can indicate a below market value property? Well, a property is only considered to be below market value if its price after all things considered, including the location, condition and size of the real estate in question, is comparatively less than the other similar properties available for sale.
Why would a seller do this? Well, a seller might be persuaded to let go of a property for slightly less than its market value because other things are more important. For instance, if a seller is motivated to sell because they need to take up a job offer or they have already closed on another property and they cannot carry both mortgages at once, they may agree to sell for less than the market value for a short closing date. Also if the seller wants to attract only those who are serious about the property and are ready to make a cash purchase they might place a higher value on this than on squeezing as much as possible out of the sale.
Therefore real estate investors can essentially find a below market value property by identifying a motivated seller.
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