When investing in property, you need more than a comparable valuation
Investing in a property, I believe, should be seen as a buy-and-hold investment. As the market moves through its natural cycle, short-term prices will fall as well as rise. Hold an investment property long enough, and the price will eventually rise above the price you paid.
However, even though investing in property is a long-term play, you’ll want to know that you are buying value. If possible, you’ll buy below market value. This is not only a natural instinct but also a great investment strategy. There are many benefits of investing in below market value property deals, including making a quicker return on your investment.
In this post, I’ll answer the question that needs to be asked of every property investment: “How do I know I’m being offered below market value property deals?”
Ignore the sales spiel and invest on fundamentals
It’s easy to get wrapped up in the romantic notion of investing in property. Slick sales spiel and formulaic television sell the notion of ‘location, location, location’ and “It’s an up-and-coming area”. But promises of below market value property deals based on a future predicted value mean nothing.
When you’re investing in property, base every decision and calculation on today’s market value. No one has a crystal ball. And if you can buy at below today’s market value, you’ll ride the swings in the market with greater confidence.
The most important consideration is to invest in line with the fundamentals. Think shops, schools, transport links, major employment and major investment. I’ve seen many new developments sold with the promise of these things in the future. When the promised new schools, roads, and parks don’t materialise, the development quickly becomes a place no one wants to live. Property prices never take off.
So how do you know the real value of a property?
The most common type of valuation is the comparable valuation. This is the type a surveyor will do. The surveyor simply looks at your property and compares it to similar properties in the same area. They’ll consider things like inside and outside space, age, and build quality. They’ll also compare prices of similar homes that have sold within the last 90 days.
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There are other considerations for a comparable valuation to be made. Properties sold must have been sold:
- ‘At arm’s length’. This means the seller and buyer did not know each other;
- With a traditional marketing programme, with advertising through the normal channels; or
- Under normal market conditions. For example, the seller wasn’t a forced seller or the property wasn’t sold at auction
Will a comparable valuation always be correct?
Comparable valuations are the lifeblood of the industry. They are straightforward to do, and provide an objective price guide. For the most part, they provide a reasonable assessment of value. However, they can also be wrong, because:
- It can be hard to find enough similar properties to compare. Perhaps there hasn’t been enough sales in the last 90 days, for example;
- The prices of sales may be skewed by unknown and unreasonable sales activity, or
- Valuers are human and have bad days, they also have developments they like and don't like so this all comes into play.
A comparable valuation is a guide to value when investing in property − it’s a starting point. It’s also a necessity for financing − the lender will insist on it. For many property buyers, achieving a price below this is buying at below market value.
However, as a property investor, you’ll need to dig a little deeper. You’ll want to discover the real value of an investment property. Only by doing your own research and due diligence can you be sure that you’re investing in below market value property deals. This is what we do here at Gladfish.
We take note of comparable valuations and then get our magnifying glass out. We make sure that the fundamentals are in place to make the investment a good one today. Our due diligence process makes sure that the property has a high chance of being profitable into the future.
When you’re investing in property, always look harder and deeper. Research the area. Speak to local agents. Only invest when you’re satisfied that you are buying real value today. Do this, and your return will be bigger and quicker.