How to Spot Underpriced Real Estate Assets

You don’t have to be the world’s best investor to know that buying low and selling high is a successful strategy, regardless of what area you are investing in. However, when it comes to real estate investing, identifying underpriced assets can open the door to huge returns. In this article, we’re going to explore the process of spotting underpriced real estate assets, from understanding what we mean by underpriced to investment hacks that will add to your ROI.

What do we mean by underpriced?

The first thing to clear up is that underpriced does not necessarily mean cheap. Any property below what’s considered the average in a certain area could be described as cheap. But digging deeper, you may realise that there’s a reason for this, and as a result, the property could be accurately priced.

Whether a property is underpriced or overpriced is extremely subjective too, it may depend on the information you have available. For instance, plans around local infrastructure developments can impact a property’s value. Until someone informs you of these plans, a property may appear overpriced.

It’s also important to consider the difference between intrinsic value and market value. While the market value of a property can be disputed, there shouldn’t be too much variation in valuation from one professional to the next.

On the other hand, intrinsic value can drastically vary. A home close to a train station is great for young professionals who commute to work but a retired couple may not appreciate the noise pollution and added footfall during rush hour.

How to spot underpriced property?

Use data to identify emotional sellers

We’ve just spoken about the difference between intrinsic value and market value, and data will tell you when there’s a large discrepancy between the two. If you’re weighing up property in a certain location, make sure you are staying on top of the housing market in this area and more specifically, any changes to the average market value of properties.

While sellers will also be aware of this information, emotion can easily take over. For example, a seller in need of a quick sale could lead to an underpriced property. A property that has recently had its valuation lowered could indicate frustrated sellers that are looking to offload their property in a hurry.

Carry out a replacement cost analysis

While requiring more work and investment, damaged property provides a great opportunity to make money. To identify the potential for making money via damaged property, a replacement cost analysis is required.

The replacement cost will tell you how much money is required to restore a property. To determine the total cost, you’ll need to combine the replacement cost with the property’s selling price. To identify whether the property is underpriced though, you’ll need to estimate the property’s true value once repairs, renovations and replacements have been carried out.

Look to the future

A profitable property is one that rises in value over time. That’s why the key indicator of whether a real estate asset is underpriced or not, is the future. In the property game, historical date and current trends are important but it’s data related to the future that you should be more concerned with.

Plans around transport links, schooling and hospitals are crucial as they make an area a more attractive place to live. Be aware of anything that could bring new jobs to an area too, such as a new warehouse site nearby or if a global business is looking to set up an office within a commutable distance.

Be mindful that desktop valuations often don’t take such data into account and instead work off historical data and current valuations. If you are using a desktop valuation tool, try to use a hybrid tool that combines available data with the skilled expertise of a human valuer, such as Validate’s Desktop+.

Final thoughts

Spotting an underpriced real estate asset doesn’t happen by chance. Don’t fall into the trap of thinking that the best property investors are simply lucky. Identifying opportunities comes down to effort, research and knowledge. Like most things, if you are prepared to commit time and effort to the property market, you will reap the rewards. And given the nature of the industry, these rewards can be extremely lucrative.

For more information around making money through real estate, check out our home decor section which features various articles that will help you understand how to add value to your property.