Searching for undervalued real estate in what’s been a “hotter than habanero” real estate market can appear futile, almost a fool’s errand. However, actually finding an undervalued property, one that is available for sale for less than its actual market value, is possible, if you apply a strategy that differs from that of your competitors also in the hunt.
Knowing what to look for and how to interpret readily available data can put you ahead in the race, if you are willing to invest the time and effort.
Table of Contents
- What is Undervalued Real Estate?
- Common Traits of Undervalued Real Estate
- How to Find Undervalued Real Estate
- Common Traits of Overvalued Real Estate
- Home Buying Resources
- A Great Deal on a Home Does Not Require Major Renovations
- Proptech That Enables Homebuyers to Make All Cash Offers
- Researching a Neighborhood Before Buying a Home
- Home Inspection Technologies to Alleviate Your Purchase Anxiety
- More Recommended Home Buying Articles
- Related Topics: Home Buying | Home Selling | Home Inspections | Legal Matters | Financing
What is Undervalued Real Estate?
Undervalued real estate is defined as property that is available for sale for less than its actual market value. In other words, the real estate is being offered for a price that is lower than what it would normally command on the open market. How is this possible? There are many reasons why properties may be undervalued.
Common Traits of Undervalued Real Estate
- Property Needs Improvements
- Death of the Owner
- Short Sale or Pre-Foreclosure
- Bank-Owned or Post-Foreclosure
Property Needs Improvements
A recent property on the market in Los Angeles was severely undervalued by the real estate agent, mainly to attract the interest of prospective buyers, as it was in a highly desirable neighborhood. The old real estate adage of “location, location, location” still applies, even to the most dilapidated “fixer upper”. Remember, once you improve the structure, the surrounding properties will help increase its market valuation, immediately, and over the ensuing years.
Death of the Owner
Elderly or infirmed homeowners, who are living out their remaining days “aging in place“, may sometimes have relatives who live a far distance away from the property. When the time comes to settle probate, adult children or relatives may not be willing or able to spend sufficient time cleaning out the home or dealing with a drawn out real estate transaction.
For most, an inheritance is “found money”, especially if the home is free and clear of any type of mortgage or other financial obligation. A desire to “just get the deal done” is common, so that everyone can get back to their lives. Situations like these are a boon for “all cash buyers” as these types of transactions require no waiting time for mortgage bankers to render a loan decision, and there are usually no contingencies that need to be fulfilled before the deal closes.
Whether acrimonious or amicable, divorce is never pleasant, especially if there is a mortgage involved. Once again, this is a situation where both parties are looking to go their separate ways and get past the nastiness, so dragging out a sale for the highest price is usually not the primary aim in this circumstance.
Keep in mind that there can be situations of divorce that involve neighboring properties, as well.
Short Sale or Pre-Foreclosure
When a homeowner fails to make mortgage payments, he is considered in default to the mortgage lender. If attempts to rectify the missed payments are still met with non-payment, the lender will issue a Notice of Default, followed by a grace period in hopes of getting the account current.
Since the foreclosure process is very costly for banks and other financial lenders, their best options are to modify the current loan or force a short sale. In this situation, the owner still has rights to the property, but the bank has an interest in recovering the outstanding balance of the loan.
The homeowner is motivated as he can exit the property with his financial situation fairly intact, as long as his financial obligation to the bank is satisfied. In this case, the property may sell for less than market value.
Bank-Owned or Post-Foreclosure
Banks do not want to be in the business of owning real estate, so any foreclosure which leads to a Real Estate Owned (REO) property is not an ideal situation. A REO property has already been processed as a foreclosure, so the title is clear and tenants and their belonging have been vacated.
Since these properties did not sell at the foreclosure auction, a bank may hire a contracting company to come in and perform an assessment or repairs. However, in most cases banks will offer the property “As Is”, expecting the buyer to perform his own due diligence with an inspector before making an offer.
In this case, the property will be offered at below market rates, as the condition of the home will most certainly not be “turnkey”. This is to a buyer’s advantage, as closing fees, down payment interest rate and rehab costs can all be negotiated in a bid to get a REO asset off of the bank’s balance sheet.
How to Find Undervalued Real Estate
The overriding strategy for finding an undervalued home is learning how to identify properties that are more valuable to you than they are to the competitive set of prospective buyers. Put another way, you need to understand how to discover homes that meet your unique flexible set of criteria that have low levels of interest (AKA reduced competition) from other buyers.
Perhaps the best position to be in when making a bid on a home is to be the only bidder, who is not in a hurry, when in turn, the home seller needs to sell quickly.
Here are ways to find homes that have low interest, that are still valuable properties.
Key Strategies for Reducing the Competition
- Be Patient
- Search When the Competition Is Low
- Expand Your Search Criteria
- Develop an Eye for “Ugly Duckling” Poorly Staged and Listed Homes
- Identify & Leverage Your Competitive Strengths
Being able to wait patiently, while saving money on a monthly basis, is a tremendous advantage for a homebuyer. Not being pressured to make a quick decision will give you bargaining power and discipline to walk away from situations that do not sufficiently meet your requirements and budget.
With patience and time, you can “always be searching” and each prospective property will serve as an education to help you confidently and intuitively know the “best fit” for your needs when encountered.
Search When the Competition Is Low
Properties for sale during non-peak times of the year (e.g. late fall and winter) can indicate that they are more likely to be distressed sales. Selling during the offseason signals that it is more important for a property to be sold NOW versus selling it later for a more optimum sales price.
The off-season will also garner fewer bids from iBuyers, as the real estate market is more difficult for their bidding algorithms to model and predict with smaller historical data sets.
Expand Your Search Criteria
Though it is good to recognize what your key requisite features are for a home, we recommend “loosening” your search criteria to discover “diamonds in the rough”.
Examples of expanding or “loosening” your home search criteria include:
- Reducing your minimum square footage
- Reducing your minimum number of baths
- Reducing your number of minimum bedrooms
- Expanding the number of prospective neighborhoods
A Real-Life Example of Reducing Minimum Baths from 2.5 to 2
Here is one simple tip that worked brilliantly for us when finding our current home: we reduced the minimum number of bathrooms of our search from 2.5 to 2. It turned out that there was no need for a half bath, in the home we eventually purchased, as there is easy access to the full guest bath from the main living area. Additionally there is a privacy door that allows access to the vanity, sink and mirror, when the bath main area is in use.
Another example of “loosening” your search criteria is to reduce the minimum total square footage of a house, while maintaining a sufficiently large lot size. This “smaller house on a larger lot” scenario can “bake-in” long-term flexibility to be able to expand the size of your home if and when necessary. Conversely, a “just large-enough house on a small lot” could trigger a need to sell a home prematurely for a growing family.
Develop an Eye for “Ugly Duckling” Poorly Staged and Listed Homes
Being able to “see through” clutter and outdated décor is a powerful skill to develop, as many buyers will decline to visit or consider a property based on low-quality photos and unprofessional staging. Use this pervasive “Instagrammable” group behavior to your advantage! In other words, don’t be distracted or discouraged by ephemeral traits.
We recommend learning from the best pre-sale renovation firms and professional house flippers, so you can easily detect which home sellers and real estate agents do not follow their expert techniques! The most successful house flipping pros know that if a property does not show or list well online, it will not generate sufficient interest for an optimal sales price.
When interest in a property is low, this will grant you time and opportunity to use a professional virtual staging or virtual renovation service to create visual comps of potential future modifications and upgrades, if necessary to assuage your concerns.
Another trait of an “ugly duckling” listing is undocumented upgrades to a home, which can give a slight advantage to a human buyer versus an algorithmic iBuyer.
Identify & Leverage Your Competitive Strengths
Before searching for “ugly duckling” listings, be sure to “itemize” what is less important to you than the majority of prospective buyers. An example scenario could involve a property not having a modern kitchen, in which you identify with one of these scenarios:
- You prefer to upgrade your kitchen above and beyond current standards of newly renovated kitchens
- You have the means and are amenable to going through a major kitchen renovation, such as not needing to live in the purchased home immediately
- You can envision that just a few simple upgrades would do the trick, such as paint and cabinet refacing
- You deem that a modern kitchen is simply not a top priority for your lifestyle
Other example scenarios of “competitive advantages” could include:
- Having a reputable and experienced home inspector and/or general contractor to thoroughly review the “bones” of a prospective house, and upgrade potential
- Being able to live elsewhere until major upgrades are completed before moving in
- Having a network of quality and available contractors to complete renovations in a timely fashion (similar to professional house flippers)
- Not needing to sell an existing property to purchase a new home (non-contingency buyer)
- Not needing a child-friendly home, e.g. high counters; unfenced yard; steep stairs; hard surfaces; sharp corners; balconies; etc.
- Not needing nearby higher-quality public schools, if opting for private education or home schooling
- Not needing extra parking space or large garage
- Not needing a large tub or luxury spa master bathroom
- Not needing a large lot or backyard that requires maintenance
- Not needing extra storage or closet space
Common Traits of Overvalued Real Estate
To discover undervalued properties, it is also helpful to be able to identify overvalued properties. Half the battle of finding a good value is staying clear of property that is listed well-beyond historical pricing or current comparables.
Overheated markets, often called “bubbles”, have a way of turning normally rational individuals into frenzied, illogical automatons, who have escalated their commitment beyond reason. (See Study.com for an interesting lesson on Escalation of Commitment). There are countless stories of buyers who “dug in deep” with their offers, determined to win, only to have overbid beyond their financial means.
We find it disheartening that many buyers who overbid on a property rarely take increasing property taxes, inflation, or future job loss into consideration. If you were to bid at your absolute maximum offer price, then you leave no room for life’s unhappy, unexpected circumstances, such as illness, unemployment, or recession. Stay clear of overvalued real estate by knowing your limits and refusing to go beyond your maximum offer price.
Knowing when to “bow out” of a deal is a rational strategy for purchasing real estate. Setting an absolute maximum price, based on your overall finances, will allow you to live comfortably for years to come.
Overvalued real estate can be identified by one of these obvious traits:
- Multiple Bidders
- Seller’s Agent Sets Low Price to Ignite a Bidding War
- Listing Price Does Not Reflect Local Market Real Estate Comps
- Property is Advertised as “Turnkey”
Once you engage in a situation with multiple bidders, it becomes a contest of egos for all involved. No one wins a bidding war except the seller, as this type of escalation is the hallmark of a seller’s market. The emotional commitment that ensues during a bidding war can create financial upheaval for the “winner”.
When a bidding war begins, know when to walk away, as this is truly one of the first traits of an overvalued property. Bidding the property beyond its current market value can have you “upside down” on the mortgage the minute the cyclical real estate market hits its next trough.
Seller’s Agent Sets Low Price to Ignite a Bidding War
Setting an unusually low listing price is a strategy that sellers’ agents employ in order to attract multiple bidders and thus ignite a bidding war. Although the practice should be illegal, sadly it is not, and is encouraged by various real estate web sites. Remember bidding wars are dangerous traps that only benefit the seller, as all irrationality is lost on escalating a home’s price beyond its actual market value.
- How to Price Your Home to Start a Bidding War
- Strategies Real Estate Agents Can Use to Ignite a Bidding War
- Bidding Wars On Houses: How Buyers Can Win Them And Sellers Can Start Them
- Incite a Bidding War: How to Get Multiple Offers on a House in 2022
Listing Price Does Not Reflect Local Market Real Estate Comps
A seller’s agent with dreams of a hefty commission may overprice a home relative to the comparable sales in the neighborhood. If the median asking price for a property is significantly higher than comparable sales, then the property is overvalued.
Property is Advertised as “Turnkey”
Though there is nothing wrong with a home being accurately described as “turnkey”, keep in mind that these modern updated properties have been in high-demand in recent years, and have typically command premium pricing.
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- Brick & Batten Virtual Exterior Design Services
- Homes for Heroes
- Property Radar
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