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.
Regards
Michael Gruber