How to Find Undervalued Homes
Today, you'll learn how to find undervalued homes and several strategies to turn them around for a great profit.
If you are wanting to make it big in the real estate investment world, there are various strategies that you can employ. One of the most common strategies is to purchase homes on the cheap and make money from them by either fixing them up to raise the value or waiting for them to naturally appreciate in value. If you are wanting to purchase a property on the cheap, you will be wanting to keep an eye out for what is called undervalued properties. But what does this mean, and how exactly can you find them?
Table of Contents
- What is an undervalued home?
- Why are some homes being sold undervalued?
- What are the main benefits of undervalued homes?
- What are the best methods for finding an undervalued home?
What is an undervalued home?
While it is true that when homes are on the market, the seller is trying to get as much money for the property as is possible After all, this is the whole point of real estate investing. But sometimes you can luck out and find a property that is undervalued. Millionacres explains that an undervalued home is simply one that is being sold for less than it is worth in the respective market.
Each property on the market will have an appraised or market value. The value of the home will be determined by the location or the size and the condition of the home. There can be many reasons why a home will be undervalued, and these will be discussed next.
Why are some homes being sold undervalued?
You may be wondering why a home or any property for that matter would be sold for less than it is worth. And there are many potential reasons for this. Some of them are good reasons and are a sign that you are making a good purchase. Others will be red flags, and a sign that it is one to avoid. In fact, The Balance claims that banks will sometimes underprice in order to sell an undesirable property. The main reasons why homes may be offered at lower than their asking price include the following.
These are homes where the owners have gone bankrupt or are unable to pay their mortgage, so the bank takes possession of the home and wants to sell it quickly to recuperate losses. These can be a particularly good deal as they are often good homes in desirable areas, it was just the previous owner who has fallen onto hard times. When many people talk about undervalued homes, they are actually talking about foreclosures.
Homes that require a lot of work or are unlivable will be sold at an exceptionally good price. They will require money to bring them back to code however, so you need to consider this expenditure when considering purchasing one of these properties. Make sure you get a fixer-upper inspected so there are no nasty surprises (such as the house needing to be completely required or replumbed).
If the current owner is not receiving the rental income they are expecting, they might be willing to sell under market value to guarantee a quick sale.
What are the main benefits of undervalued homes?
The main benefit of an undervalued home is that you can save a lot off the purchase price. This means that you may be able to purchase more house than you thought you were able to, and you will not need to borrow as much from a mortgage lender. Of course, you need to make sure you understand the reason for the house being undervalued, or you can ruin any savings by needing to end up spending more to fix it or lose out in the long run from underperforming rental income.
The best benefits of undervalued homes are felt by home flippers. They can recognize the potential value of the house and will have an idea of how much they need to spend to bring it back up to its true value. So you can end up making a lot of money on a good, undervalued home when it comes to reselling (often at above market price).
What are the best methods for finding an undervalued home?
If you are looking to add to your portfolio and find an undervalued home, the first and most important step according to New Silver is to know your local market. You can be falsely led to believe that a property is being sold under market and tricked into paying full price. So, if you know the value of the houses in the area you are looking at, you will know what a good deal looks like. There are other tips to find and purchase an undervalued house for investment purposes, and these include:
Look for motivated sellers
Why are they selling the property? The more motivated the seller, the more likely they are going to accept an offer under market price. Divorce, death, and new jobs are three reasons why a good property could be undervalued.
Buy the worst house on the best street
An ugly house that needs a lot of work will be undervalued by default. No one is going to pay the same for the worst house when they can get something seemingly better for the same price. So, if you can see the potential and afford some cosmetic changes, you can snag a deal.
Go to auctions
Often foreclosure homes will be auctioned off, so they may not be instantly recognizable as an undervalued home. You can never predict exactly how much an auctioned home will sell for, so there can be some disappointments, but you can be lucky to snag some real deals.
If you are looking to find an undervalued home to add to your portfolio, then there are certain methods to ensure that you get yourself a bargain, rather than inadvertently purchase an undervalued home that will never gain its value back. If you are savvy and put in some work and research, you can certainly find yourself an incredibly good deal by purchasing a home under market value, and then profiting in the long run.
Charles is the founder of infoSpike.com. His real estate investing experience started in 2004 and he is currently focused on rental property projects. He enjoys learning about real estate investing, personal finance, and marketing. Read more about Charles here.