Can Real Estate be Purchased Below REAL Market Value?

[Don Konipol]

Can Real Estate Really Be Purchased “At A Discount” ?

Most investors buying property think they‘re doing so “at a discount”. The vast majority are wrong. It very hard to purchase a property below market value. First, almost all properties are either placed with a broker for sale or directly listed on the major property sale websites. With this national exposure the investor producing the highest LEGITIMATE bid has just established “the market” price.

I have found some strategies effective in building real wealth through real estate investing

1. Buy truly below market by offering a very fast close, all cash, without the need for financing. To implement this strategy you need to have the full purchase price in readily accessible funds, so it won’t work for the majority of investors. Further, only a minority of sellers will be interested or motivated to offer a significant discount for a 7 day no contingency sale. But, I have used this strategy numerous times when time was much more important than money to a seller. The most extreme example was when I purchased a 60% ownership interest in a $450,000 property for $10,000, that had to close the next day. Within a week I sold my 60% interest to the minority partner for $190,000 CASH. This transaction is of course VERY unusual, but I have done similar deals for 20 - 50% real discount over the course of my investing career.

2. Pay market price, BUT with seller financing, or assumable financing, at a LOW interest rate. Let's go by way of an example. Back in 1978 when I was starting my real estate investing career I purchased a SFR for $55,000 (its current value) with $5,000 down and the seller carrying a 30 year mortgage at 5% interest. Current interest rates were in the 8-10% range. In 1980 mortgage rates hit 17%. I was able to sell the SFR for $62,000 with a wrap around $50,000 mortgage at 12% interest and a pre payment penalty if paid off before 10 years. I actually collected the differential of 7% interest on the $50,000 note (this was an interest only note - not amortized) for 18 years!. So, besides making $7,000 (less closing costs) on the down payment differential, having a positive cash flow for the 2 years I owned the property, I collected $3,500 in interest differential for 18 years, or $63,000. Not bad for a $5,000 investment.

3. Reposition the property to a higher and better use. 4 years ago we purchased a 10,000 square foot building used as a music school. The seller was closing down the school and was selling the building. The sale included a sound stage and all types of equipment. Once we purchased the building we sold the equipment for $60,000. We then used the $60,000 to turn the inside into a small office with mostly warehouse space. Within 6 months of putting the property on the market, we sold the now warehouse facility for $1,075,000.

Let us know your thoughts about purchasing below TRUE market value, and strategies you’ve used to build real estate equity/wealth.