Buying Below Market Value

[Seth Mosley]

I have read this term, for example, "buy it 30% below market value" or something similar a lot on BP.

My question to you all is, isn't market value relative to what people would sell it for anyway? So how do you know or determine that you are getting a deal at 30% market value, after all, market value is a bit up and down in real estate. Wouldn't the price you get it for technically be market value?

Is it based off the current comps? Or how do you figure this?

Thanks

[Bill Gulley]

@Seth Mosley you are correct! You can Google the definition of "Market Value of Real Estate", select any appraiser site, accounting or legal site, just stay away from the RE investor sites and gurus, and you'll get the correct definition.

It includes what a buyer and seller, having equal of similar knowledge, agree to as a price after the property has been exposed to the open market. I feel these are the more important aspects but get the full definition.

There is no mention of condition standard for any asset sold at it's market value except when assets are sold at a salvage value. Assets are sold in their present condition, whatever that may be. In RE, you buy the land that includes improvement attached, whatever they may be.

So, yes, if a property has been advertised with so much as a sign in the yard, for a reasonable period of time and you agree to buy at any price, then you are most likely buying at its market value, keeping with the rest of the definition.

When investors say "I bought it under market value" what they are saying (maybe) is they bought it at a distressed value, when the requirements set out to establish market value were not met.

"Buying under market" was pretty much coined by gurus, easy to understand, sounds sexy, and then they add "and made $25,000 that day!" Which is also not a true statement. It's Enron accounting. Investors that are not incorporated publicly have no accounting requirement, except as required for taxes which doesn't require a certain method.

Real business owners follow Generally Accepted Accounting Principles (GAAP), your bookkeeper or account will even if you aren't a public traded company.

When you buy at any price, your book value is the price you paid, after a year (when the market has changed) you may carry an asset at its appraised value or estimated market value. So, no money was made by buying, you have to sell to "make" the money.

We use "After Repair Value" (ARV) to state the "Expected Market Value" after repairs have been made to a distressed property, one that is not in its best marketable condition.

So, there really isn't such a thing as buying under market value, but buying at a distressed value at a distressed sale for a distressed property. The proper terminology in real estate. :)