Real estate is one of the best ways to build long-term wealth. Undervalued properties are one of the investments that give a high return on investment. These properties are priced below their intrinsic value, so there is a good chance you will make significant profits through appreciation or rental income.
But as sweet as that might sound, you must know you are not the only one looking for these hidden gems. So, how do you spot undervalued properties on the market? Below are all the tricks to find these undervalued properties.
Characteristics of Undervalued Properties
Undervalued properties are ideal for every real estate investor. After all, who doesn’t want to buy a property priced below its market value? For this reason, investors can struggle to find these properties. To help you find undervalued properties easily, we have covered several features that can help you identify them.
Long Time on the Market
When a seller lists a property for sale, they want to close it immediately and move on. But it does not always happen that way. For various reasons, the property may remain unsold. Properties that have been on the market for a long time and with frequent price reductions can indicate a motivated seller willing to negotiate lower prices.
Older Properties or Houses in Poor Condition
Older properties and remote properties are less attractive. Most owners are willing to lower the price to let them go. Properties requiring significant renovations or cosmetic updates are often sold below market value due to their unattractive condition.
Additionally, a property owner facing foreclosure for tax or mortgage debt is willing to sell as quickly as possible. People moving to other countries for work are also willing to sell.
Tax Sales and Auctions
One of the easiest ways to find undervalued properties is to attend tax sales and auctions. Tax sale properties are those whose owners have defaulted on their taxes, and the government sells them to recoup the owed taxes. Bids at a tax sale start at the amount of tax debt plus interest. You could buy tax delinquent properties at a fraction of its market value, depending on how competitive the tax sale is.
Similarly, financial institutions also hold auctions for properties whose owners have defaulted on mortgages. They typically value the property 15-30% lower than the market value.
Use Online Tools
There are so many tools to find undervalued properties. For instance, real estate sale websites and marketplaces have tools to filter the results you want. You can filter results based on properties below the median price, properties selling quickly, properties on the market for too long, or those selling at a lower cost per square foot.
Drive Around
You can also find undervalued properties traditionally by driving or walking around several neighbourhoods where you want to invest. This will help you understand the area.
Look for properties with sell signs or unoccupied properties. There may be a reason why a house is neglected after the owner passes away, and the next of kin may be willing to let it go. You can also ask your neighbours.
Work with a Real Estate Agent
Working with experts has several benefits, especially for novice investors. Real estate agents understand the local housing market and are able to identify undervalued properties. This also gives them access to various properties, some of which are not already on the market. Real estate agents will also help you conduct market analysis and negotiate the final price.
Network With Other Investors
In addition to working with a real estate agent, networking with other real estate professionals, like brokers, lenders, appraisers, and inspectors, can help you land undervalued properties.
If you are new to the business, it may take longer to build relationships, but it’s worth it. Attend networking events, clubs, and online forums to connect with like-minded people. Remember, relationships are two-sided. You must contribute and offer value for them to notice you.
Renovate and Sell
If the property requires repairs or cosmetic updates, consider renovating and selling it at a higher price. This strategy, known as flipping, can yield substantial profits if done correctly. Ensure you understand the renovation costs and the property’s after-repair value (ARV) to avoid overcapitalizing.
Rent for Passive Income
If the property is in a high-demand rental area, consider renting it out to generate a steady stream of passive income. Calculate the rental yield to ensure that the rental income covers your expenses, including mortgage, taxes, and maintenance.
Hold for Long-Term Appreciation
Holding the property for a few years can lead to significant appreciation in markets with high growth potential. This strategy works well in areas with upcoming infrastructure projects or rising property values.
Investing in undervalued properties can yield high returns if done correctly. The strategies above will help you spot such properties. That said, always research thoroughly, as every investment comes with substantial risks.
