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.

[Jay Hinrichs]

where I have done below market is :

Land with Timber.. just scan MLS listing agents have no clue as to timber value.

buy land for cash log timber resell.. this works in most all areas that has marketable timber.

land flipping..  finding land that relatives bought years ago.. inherited owners just dont know what it is or have even seen it.. dont want to pay tax.. and will sell for quick cash at signficant discount to market.. buy and then market and resell..

Of course hoarder houses and rentals that have been abused or burnt out landlord syndrome this happens every day in every market.

[Don Konipol]

Quote from @Wade Wisner:

Hey Don. I am glad that you posted this topic as I am always looking for new ways to buy at below market prices. I have used several methods that have been quite fruitful over many years. Firstly, I try to find properties that the sell no longs wants or needs. Estates, probate, REO and burnt-out landlords have been very profitable for me. I have purchased apts. in foreclosure because the lender did not know that they had negotiated a non-recourse loan with the owner. The lender Bank was being bought by a larger and needed the non-performing loan off of the books made the deal even sweeter. I purchased a larger Self-Storage/Office property in FL where the son's of the original owner wanted bright shiny new office building, not Dad's old junk. They also did not know that their SS mangers were kiting $5K per month of rents so the rent roll made no sense and I got the bonus of the missing $$'s. I also purchased a multi-parcel farm property in TN where the trust who owned the property was out of money and needed cash to continue. They financed my purchase and I sold off the property in parcels and doubled my money. I have also purchased resid. and comm. properties where the landlording/property management was really poor. They either had below mkt. rents or high vacancies and bad reputations and with super managing them I significantly grew the cash flow. Remember NOI, or net operating income is the basis of market value in rental property.

I look for properties where the owners don't much care and just want money and then I pay cash with quick settlement.  It takes work to find them, but they are out there.  

Thanks for “sharing” your investment techniques.  I think my main point, which you’re experience lends support to, is that while there are below market deals out there, it requires a continual effort of being “in the market” and looking at 100s of deals to negotiate the rare below market purchase.  MOST transaction aren’t BELOW market, although I’d venture that 85% of those buyers BELIEVE they’re purchasing real property at a discount.  What they’re getting is property that they’ve either mis appraised themselves or someone else has led the. To believe the value is more than the market says.  

This can easily happen when the person valuing the property does not account for differences in the subject property and those chosen as comparables.