How to Spot Undervalued Deals in Real Estate

Key Takeaways

• Getting a good deal on a property purchase is the first step to ensuring you make a good profit on it.
• A good deal won’t always jump out at you. It’s important to know where and how to find them.
• Partnering with a property management company can maximize your success as a rental owner.

The golden rule of property investing is that profits are made when you buy a property, not when you sell it. You are more likely to profit from a real estate investment when you buy it at a good price. Usually, the only way to do this is to buy the property below its market value.

Buying a property below market value guarantees instant equity because its value is bound to go up. Also, since you invest less capital to buy the asset, your risk is significantly lower. Finally, from the outset, a high profit margin is baked into the deal when you buy below market value.

But, given that other investors are also looking for the same thing and not all low-priced homes are a good deal, how do you find these properties? Knowing where to look is where the real challenge lies, and you certainly can't rely solely on listing sites. Read this guide by Action Properties Inc. for some ideas you can work with.

Tips For Spotting Undervalued Properties

Here’s how to best spot a good deal in the real estate industry.

Use Pocket Listings

Pocket listings are properties that are sold off-market; they are not listed on the MLS. Sellers who want to keep their sale private for personal or other reasons often resort to this method. Since off-market properties get limited exposure, these sellers receive fewer offers and may be forced to settle at a lower price.

Finding these types of properties requires work. The best way is often to connect with localized networks of buyers and estate agents, since these are the places where off-market sellers sometimes list their properties. Sellers may also opt for direct-to-homeowner marketing, completely bypassing estate agents to sell their home.

Drive For Dollars

This method is exactly what it sounds like. Drive through a neighborhood you are looking to buy a property in. Transitional neighborhoods are areas that are on the verge of growth. Although they are seeing signs of growth, you can still find a few properties that are priced like the old neighborhood.

While driving through these types of neighborhoods, look out for homes that are in a visible state of disrepair. Owners of such properties often struggle to find buyers using the normal means because lenders are reluctant to lend to would-be buyers. If you can facilitate a sale within a short time, these sellers are often more than willing to sell at a discount.

Tax Delinquent Properties

These are properties where the owner has failed to pay local and state property taxes after the statutory deadline. If the delinquent taxes are not paid, local authorities can take action to recover the owed revenue. This usually means taking one of two actions.

The government can place the property under lien, giving the owner a redemption period to reclaim their property. Some owners may opt to sell their home at a discount during the redemption period. The government may also sell the property at a public auction. Investors looking for these properties can find them on the County Tax Offices/Treasurer's Websites.

Use The Mls Strategically

You can find undervalued properties on the MLS if you know what to look for. To find off-market deals there, pay attention to Days on Market (DOM). If a home has spent a significantly longer time on the market than most homes do before finding a buyer, that could be a good sign.

This is often a sign that there is something about the home that is turning buyers away, or maybe the property is wrongly priced. In any case, such owners are usually more willing to accept a lower offer. Another sign to look for on MLS is when the property contains phrases like “priced to sell,” “as-is,” or “seller motivated” in its description. This usually means that there is a deal to be made.

What To Do After Finding An Undervalued Property

Here’s how you should proceed when you stumble across a great deal.

Do Your Due Diligence

No homeowner ever wants to sell their home below its market value. If a home is undervalued, there is a reason why that is, and it is usually not just the surface-level problems that you see. Low-priced homes often conceal major issues like unpaid taxes, structural defects , and legal troubles. Before buying a low-priced home, do your due diligence.

Consider The Market Trends

A low-priced home is only a good deal if there is a possibility for future growth, high resale potential, or sustained rental demand. Evaluate the deal against the background of the local real estate market. It is only after examining the property in this context that you can make an informed decision.

Do Not Ignore The Cost Of Renovation

The home is not undervalued if there is a chance that renovation expenses will wipe out your potential profits. Base your offer on how much it will cost to renovate the home and still turn a profit after you sell it. This should be part of your due diligence.

Do Not Delay Your Decision

Go slow until you have completed your findings, but after that, act decisively. The seller won't wait around for you, especially if there is nothing significantly wrong with their home. You may be sure that other smart property investors are doing the same thing you are doing: looking for undervalued homes in that exact locality.

Bottom Line

Being able to spot a good opportunity in real estate investment can work wonders for your success in the industry. On top of that, one of the most crucial strategies to employ is working with an experienced property management team. Contact Action Properties Inc. today to get started!