Buying Under Market Value



From: Bruce & Helen Cairns

Hi Again!
Have read a lot about the fact that all the profit is made when you purchase a property and importance of buying property under market value BUT... How do you do this? Does someone out there have the clues on how to do this?
Would appreciate any advice.
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Reply: 1
From: Steve Navra


‘Market Value’ can be a little bit subjective.
Value in the banks eyes??
Or, perhaps, value in the buyers eyes???
So it gets to be a difficult question to answer.

Mostly though the market is set by what the majority are doing. (rightly or wrongly!)

For IP's, the value of a property is best assessed by the rental. In other words, "What will someone pay to rent the property?"

The annual rental divided by the rental yield% in the area is thus the best indicator of real market value. If you then find that the purchase price is below this "Real Value" figure, then you are getting in at the 'right' price.

Hmmmm, also consider looking at the down cycles - when the majority are NOT buying!


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Buying Under Market Value - More Worms

Reply: 2
From: Paul Zagoridis

"Buying Under Market Value" is not really the goal. Especially in a large city with a relatively efficient market. "Buying well" is more like it.

I'd say the only way to buy below market is to stumble across an uninformed vendor and exchange before they realise it. This is VERY rare.

If YOU are the buyer, the vendor hasn't found someone else who would pay more. Or there is some other contributing factor.

I love having a property passed in to me at auction. The agent always says "that's under market", I reply "I'm here, the market has spoken". Sometimes works.

What are contributing factors that improve my annual returns (not capital gain focused)? Apart from the usual suspects of "don't wanters" (Death, Divorce and Destitution) I add:
Quick exchange and fast settlement
Cash settlement or no bank loan/approval
Renovation potential or trashed property

I look for vendors who are motivated to accept a lower price in return for something from me.

I don't negative gear (as a rule) because I've learnt from painful experience what happens when you don't maintain sufficient cashflow.

When would I negative gear? For an instant $50K equity.

However I find too many IP novices sit around waiting for the "perfect" deal.

None of my deals to date have been perfect. But by doing them my deals have gotten better. Thus I can find deals regularly.

The mythical 40% off market value deal does not come along monthly. But they do crop up from time to time. If you are willing to spend every weekend and most nights looking at property, making offers, and attending auctions, you should find at least one a year.

Many people would be better served finding a 10% quick settlement discount after a month of looking. Buy one of those a year and enjoy their weekends (this statement will come back to bite me).

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Buying Under Market Value - More Worms

Reply: 2.1
From: Dave :)


I see your point about the relationship between rental income and property value. However, I must say I disagree with you.

I believe rental returns can give investors false impressions about the true value, or market value, of an investment property.

While a 6% yield is reasonable over a 12 month period, these yields can fluctuate significantly during a normal part of a real estate cycle - and this cycle can range from 2 to 8 years in length. At 6%, this is one seventeenth of gross capital value. Therefore, it would be tempting to think the value of a property is derived by simply multiplying this figure by 17. This could be way off the real value of the asset.

Using annual rental returns soley to calculate the value of a product is innacurate. Rental returns as a proportion of property value can change greatly according to location, land values, seasonal variations, buyer demand, tenant demand, furnished or not, etc etc.

It's just ONE indicator...not to be relied on soley.

Just my opinion...and I stand to be corrected if I'm wrong.


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Buying Under Market Value - More Worms

Reply: 2.1.1
From: Steve Navra

Hi Dave,

YES, of course rental return is just one indicator! (I agree with you)

However, to use this valuation method correctly, only the time of the purchase in the cycle is relevant!

What I mean is that it is the % rental yield in the particular suburb (for that particular class of property) at the TIME of purchase that counts!

So if you were looking to purchase say a 3 bedroom house in suburb X, then you would research what the average rental return, divided by the average sale price is for three bedroom homes in that suburb. (AT THIS PARTICULAR TIME IN THE CYCLE) Let us say that the yield comes out at 6% for example, and that the return on the property you wish to purchase is $280 per week.
Then $280 x 52 / 6% = $242,600

Now your point is valid that market sentiment changes and you will have highs and lows in the cycle:

So, if the not so smart 80% herd have rushed in and bought a particular area (because BIS have said it is good - and by now the herd are too late!) anyway, I digress, and thus the property price has been pushed to an unnatural high, well the rental reality will show this.

NOTE: The banks base their valuations on recent sales in an area – so they recognize what the herd are overpaying as a form of market value. (Which can be used to advantage by the way!)

Conversely, if market sentiment is low and prices are below what the rental reality (AT THAT TIME) indicates, THEN might be a good time to be buying!

Sorry so loooong, but I figured you had earned the full response.
Ahem, other methods of valuation should NOT be ignored. (Take 10/10 for that)


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Reply: 3
From: Michael G

Bruce, this might help you.

Market value is what the market is willing to pay. When you buy a property that IS the market value of the property at the time.

Though this can be below the "average" market value or "fair market value" of the property FOR THAT AREA.

You don't actually buy below market value, but you can buy below the average.

Some examples...

1) Buy property in Winter. Why? because people don't really like moving in the cold or wet seasons, and normally Spring is the most popular time to sell. So buying in the Winter is the time of less demand so buyers would have a better edge to negotiate as there are less of them.

2) The "motivated vendor" this is the holy grail for investors. This is a seller (vendor) who wants their place sold NOW. If they are pressured by time, then they are going to take a price which meets there needs and not bother with asking for more, as long as you can settle quickly, what's a motivated buyer? here are some examples...

- the divorced couple (usually sells to settle cash payouts, you could be lucky and find a vindictive couple who sells to you cheaply).

- seller moving overseas, this person has a set date when their moving, and have had trouble selling, and now just needs to the place sold before they leave.

- deceased estate. Greedy heirs want a property sold they inherited to cash up so they can go on a spending spree, none of them can settle on a price and each have their own needs and wants and just want the money now.

What ever price you buy such properties at are going to be "market value" for you and the buyer. As an investor what you would do then do is have the place "valued" for refinance and equity. A valuer will compare your properties with others in the area (ie sales) and judge yours on them, since other sales were not so motivated then your value will go up to theirs relatively, thus you bought under the AVERAGE market value.

How else could you negotiate below average market value?

Cash is just one commidity that can be exchange in a deal. Something else is TIME.

What if the seller didnt need to sell in a hurry?, but wanted a little cash now?, then you could do all sorts of weird stuff with extended settlements.

How about transfer a deposit to the seller now (10-20%) in exchange for a 6-12mth settlement?. Ensure you have legal claim to the title, find a good solicitor.

How can that get you below market value, well lets assume the market rises 10% in the next 12mths and the agreed purchase price was $100,000, and the deposit was 15%

You spend $15,000 and the property goes from $100,000 to $110,000. And you actually settle in 12mths time. Didnt you just buy a $110,000 place for $100,000?, ie 10% below average market value?

What if, the seller didn't need cash?, but wanted from trade work done on their new property and you're a trades person.

Lets say the commercial going rate for the work is $15,000, and you do it for $10,000, but it costs you out of pocket $5,000. And again you negotiate the 12mth settlement.

Then you not only save 10% but a further 10% through labour. Giving you a 20% discount.

What if you negotiate 2 of these deals, and offer one to your trade mate, in exchange for doing a little labour (ie so you dont have to do the work yourself).

They get 1 property, you get another, and your discount is even more!

Ask yourself this, what is something worth?

The answer, what ever someone is willing to pay for it.

How much is a book, seminar, property, car, t-shirt, milk, bread, anything?

It all comes down to time or money. A price (or value) is a ratio of just these two things.

Just think of the price of milk in a supermarket as compared with a convenience store (ie 24hr petrol station). Exactly the same product, the difference?, a factor of time. If you forget the milk it saves you time, by being able to buy it there NOW, not later or the next day at the supermarket.

So when you look at property, find out how much time the Vendor has (is there any time limits affecting them).

This is not to teach you how to do it, but more to make you understand the IDEA behind the action of buying below AVERAGE market value.

Michael Gruber
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