Under Market Value – You Make You’re Money Going In

Whether you’re purchasing a home to live in or buying a rental , owning property can be a great investment. Owning property can generate wealth in many different ways, but perhaps the best way to build wealth through investing in property is to buy under market value.

One of the most popular phrases in the real estate investing world is ‘you make your money going in.’ What this means is you buy a property for less than what it’s worth. If you accomplish this task, you’ve made money the second you acquire the property.

In the stock market world, this is called value investing. In value investing the idea is to figure out what a stock is worth and then buy for less. After acquiring the stock you’ve essentially earned a return. You simply have to wait for the stock to realize market value to earn a return. Joel Greenblat describes it like this, “the secret to investing is to figure out the value of something – and then pay a lot less.”

This principle can be directly applied to purchasing a property and in a lot of ways can be done more effectively and consistently than with stocks. Below I’ll explain why you should buy under market value and how to do it.

Why buy under market value?

Well if you’ve haven’t already figured it out by now the number one reason you buy under market value is that you make money on day one. If you were to buy a house worth $100,000 for $90,000 you earn $10,000 going into the deal. It’s no wonder so many real estate investors live by the saying ‘you make your money going in.’

The second reason you buy under market value, which is often overlooked, is that you hedge risk. Whether you invest in a stock, business, or real estate, all investments routinely go up and down in value. So if you were to buy a house at market value for $100,000 and the value dropped by 10%, then you would lose $10,000. Therefore, it’s important to buy under market value in case the housing market takes a dip. It hedges risk!

How to buy under market value

There are hundreds of ways to buy under market value, but below I’ll lay out just a couple ways and tips to buying under market value.

#1 – Learn what houses are worth.

If you want to buy under market value you need to be able to know what market value is. There are several ways to do this.

First I recommend looking at a lot of houses. Simple I know, but if you look at a lot of houses you’ll begin to identify what constitutes a good deal. You’ll begin to get a mental picture of what certain houses are worth. The more you look at houses the better and quicker you’ll get at finding good deals. You don’t necessarily even have to do this in person, but just get on Zillow or a similar site and start looking through the recently sold selection.

Second, work with a realtor who can give you CMAs (Comparative Market Analyses).

Realtors have access to a powerful tool called the MLS (Multiple Listing Service). The MLS has a ton of information on the housing market, including house characteristics, how long they were on the market, and the selling price. Using this tool realtors are able to give you a pretty good idea of what a house is worth with just a few clicks of the mouse.

#2 – Look for the motivated seller.

A motivated seller is someone who really wants to sell their home. Motivated sellers will sometimes sell for under market value in exchange for getting the property off of their hands quickly.

You can probably imagine the reasons someone would be motivated to sell quickly. They may need to move for a job or they got into financial trouble and need to get out from under the house. Regardless of why they’re motivated, the important thing is how to find motivated sellers.

Here are two simple ways to find motivated sellers. First, some listings openly state “motivated seller” in the description. When a listing states “motivated seller” it’s letting all buyers know that they want to sell quickly. This is a great place to start and these sellers are super simple to find.

The second is to look for homes that are vacant and have been on the market for a really long time (6 months or longer). A seller of a vacant home still has to pay holding cost (interest payments, property tax, utilities, and insurance). That means everyday the house is on the market they lose money. If it’s been on the market for 6 months, the holding cost can add up to thousands of dollars. Not only has this type of seller lost a lot of money in holding cost, but it’s possible they haven’t gotten an offer in months. It’s likely these sellers are more motivated than others.

#3 – Look for the fixer upper

One reason people are willing to sell under market value is they don’t want to deal with the necessary repairs to demand a fair asking price. When looking for houses, look for the one that needs minor repairs and sprucing up. Look for out dated fixtures or ugly wall paper. Perhaps a few hundred dollars and a couple days of landscaping is the only thing keeping people from buying the home.

Always make sure the bones of the house are in good shape, but putting a little sweat equity into a property, might just be the thing you need to land a home for under market value.