What is property “below market value”?
This refers to any type of purchase that it below its usual market price. This works to your advantage, especially if you have a budget that you’re working with. Some investors find great properties at a bargain. As our experts will tell you, a property is only worth it if you can do something with it. Don’t purchase it because it’s at a low price. You have a checklist that you should be using in order to find the property that suits your goal.
Seasoned investors know where to go looking, how to negotiate, and can see the value in any type of property. What if you’re just starting out? Well, here’s a handy guide to get you started.
- Distressed properties
- Attending property auctions
- Find motivated sellers
- Why is finding a property below market value so important?
A distressed property happens when the owner of a home is behind on bond payments. These properties are also usually neglected because the owner is unable to maintain it. This results in a property that is in dire need of a makeover. So why would anybody jump at the chance of purchasing a distressed property? They’re usually below market value and sometimes, you may find these in a great location.
Why are properties in distress?
There are numerous (and sometimes very sad) reasons why. It’s either due to:
- A separation or divorce
- Severe medical conditions and owners can’t afford the bills
Seasoned investors will tell you that a distressed property can sometimes be a profitable diamond in the rough. There are three different types of sales that take place during the distressed property process:
Bank assisted sales
During this process, the bank will assist a property owner who has fallen in arrears with bond payments. Investors usually look at these properties first because they’re likely to be excellent investment opportunities.
In most cases, the bank assisted sales will also be easy on your pocket. You’ll be able to purchase the property for up to 50% discount (perhaps even save on transfer duty) with certain banks if the bank nominated attorneys are used. Due to the urgency, you can also look forward to a quick sale process. This is good news if you want to get started on renovations as quickly as possible.
Sale in execution
The property is put on auction and the public sheriff determines the reserve price of the property. The property is usually below market value, which perhaps provides investors with extra cash in case you need to use it for maintenance and renovations
In this instance, an owner has usually fallen into financial trouble and needs assistance. When the monthly instalments on a home loan can’t be paid, the bank will get a court order to sell the relevant property. The measure will only be taken if there is no other alternative i.e they’ve exhausted all financial options.
Property in possession
The bank will repossess the property if it fails to be purchased at an auction. The property is likely might sell below market price and marketed through real estate agents. As with sales in execution, the process is usually fast which means that the sellers are extremely motivated to get the house off their hands.
How to spot a distressed property?
If you’re driving around a neighbourhood, these are the signs you should be looking for:
- Properties that look like they’re in neglect
- The lights are usually not turned on during the night
- If it has a yard or massive front lawn, the weeds are usually overgrown
- Broken windows
- The walls are in need of a good coat of paint
- Uncollected mail
Make a note of the address and find out whether the property is available for sale. Sometimes, the property may look distressed but the owner is not looking to sell. They just don’t have the time or money to maintain the home.
Why you should be looking at distressed properties
If you’re new to property investment, this is a great starting point. Try finding distressed properties in really good neighbourhoods. The extra cash from your budget can be used for maintenance because the mortgage rates will below. Once you’re able to sell the property, you might be able to make a profit.
Attending property auctions
The other secret to finding a property in South Africa below its value is property auctions. Only real estate professionals and investors were allowed to attend these auctions in the past. Today, it’s open to the public to encourage everyone to get involved in the property space.
Auctions can be live (at a venue) or they can be conducted on an online platform.
Why is a property put on auction?
Property is put on an auction if it’s repossessed by the bank. This happens because the bank wants to recover the bond repayments.
Different types of property auctions
A quick online search or newspaper ad will direct you to a property auction. There are four main types of auctions you’ll come across:
At auctions like this, there’s a certain reserve price put on the property. The sheriff can reject your offer, even if you are the highest bidder. In cases like this, bidders are usually unaware of the reserve price. The best practice here is that you bid on an item by entering the maximum amount you’re willing to pay.
The starting amount at the auction would start off below the reserved amount, which allows everyone the opportunity to bid. Most sellers prefer this method because they don’t want the winning bid to go to someone who entered an amount lower than the reserve.
This is the most common type of auction you’ll find yourself at: the property is awarded to the highest bidder. A foreclosed property is usually sold at an absolute auction or any other circumstance where a property needs to be sold immediately. There’s no reserve price, so you’ll bid the amount you’ve budgeted for.
Minimum bid auction
The biddings will proceed at a specified price. Not to be confused with a starting bid, the sheriff will set the auction at a minimum bid and bidders will need to place bids above this amount in order to be successful.
It’s guaranteed that you’ll find a property below its value. There are usually unfortunate circumstances surrounding the sale of the property – divorce, failure to pay monthly bond repayments, etc.
What to do before you attend an auction
Most property investors look out for auctions if they’re looking to add to their property portfolio. As a new investor, keep the following in mind before you attend:
Conduct research on the property
You need to know what you’re getting yourself into before you start placing your bids. Most auctioneers will provide you with a bidders pack but you can start on your own research. Try and discover what the neighbourhood is like, the demographic, and crime statistics. This way, you’re able to discover if the property is worth the investment.
View the property
As you would in a normal sales setting, scout the property to see if it’s worth the investment. Take a look at the property condition to determine the amount of maintenance and renovations that need to be done.
Have your finances in order
As an auction buyer, you need to be certain about the funds you have. Don’t get greedy and bid beyond your allocated budget. Remember to make sure that you also have enough for the auction’s commission fee.
Find motivated sellers
A motivated seller is someone who is willing to negotiate the selling price of their home. Why are they so motivated to sell? A number of reasons such as relocation, a divorce settlement, or death.
Different types of motivated seller
The term ‘motivated seller’ should already imply that the seller is willing to sell the property at any given rate, right? Not quite. There are different types of motivated sellers:
The ‘desperate’ seller
This type of seller is a property investor’s dream, as the seller is extremely motivated to let go of their property. Perhaps the property has been on the market too long and the whole process has been frustrating. As a buyer, you have a great chance and snapping up the property and at a reasonable price.
The tricky seller
This seller may not be satisfied with the property and is looking to sell it fast. This is great but be careful, you may need to do an inspection of the home. Why? The house may need extra repairs or renovation and if it’s not included in your budget, the property may not qualify as ‘below market value’.
The savvy seller
Sometimes sellers use the term ‘motivated seller’ to initiate a bidding war amongst property buyers. This is why you ask questions to determine why they’re selling their home. In this case, you need to have the proper financing ready to go when you approach them. This shows the seller that you can afford the house and may set you apart from the other buyers.
How to find a motivated seller?
It may state on the listing: ‘motivated seller’ or ‘bring all offers’. However, just like finding the ideal property, you’re going to have to do some sleuthing to find a motivated seller. Once you determine this, you can gauge whether they’ll be open to negotiations. Here’s how to spot them:
The owner mentions they are moving
While viewing the property, the owner mentions they are relocating to a new country. This may indicate that they’re looking to get things moving fast. They don’t have time to wade through the arduous process of selling and may be willing to negotiate terms that benefit both parties.
The owner has a change in life status
Using the same procedure, try to determine more information about the sellers from the real estate agent. If they’re going through a divorce, this also means that they may be willing to negotiate. However, this depends on the divorce settlement. If the sale of the house is part of the divorce agreement, it may be difficult.
The house has been empty for quite some time
This indicates that the owner has already moved and may have found it difficult to find a buyer during the process. As a property investor, this is ideal for you because this means they’re willing to sell the house below its value.
How to negotiate with motivated sellers
Now that you’ve found the ideal listing, it’s time to negotiate with the motivated sellers. Although they’d like to sell the property fast, it doesn’t mean that they’re willing to sell the house at just any price.
The first step is to determine the price and terms. Everyone, including the motivated sellers, will have conditions during the sale process. Your job is to have all the following facts on hand:
- What you have to offer
- The actual market value of the property
- Whether you need to renovate or repair the property
In most cases, if there are repairs needed on the home, the buyer will consider covering the repairs and maintenance, which should bring down the selling price. Once you have all this information, you can present terms and conditions that will have both parties feeling satisfied.
If you’re still struggling to come to an agreement, leave you contact details and then follow up within a few days or weeks.
Why is finding a property below market value so important?
In order to succeed with the property investment sector in South Africa, building a profitable portfolio is important. Finding property below its market value is a good way to get started. It’s the best investment and allows you some leeway if the property is still in good condition.
The experts at Think and Grow Rich: A Lifetime of Riches in Property have successfully built their portfolios by starting small. We’re providing you with the chance to do the same. We host free property investment seminars around South Africa. Discover how to negotiate with motivated sellers, and which locations you’re likely to find a distressed property. Book your seat today before they fill up!