This notion has always been the gold nugget of property investing. What it essentially means is that one realizes profit or capital gain upon purchasing the property because the value for which it was acquired was less than what the property is ‘actually’ worth. Finder.com.au defines the ‘below market value purchase’ as:
One in which you buy a property from a vendor for an agreed price that is below the property’s true market value. Most often, this happens when a parent or family member sells their property for a favourable price. However, there are other circumstances where this could occur.Favourable Purchase Home Loans – finder.com.au
However, the term ‘below market value’ is a little obscure because the real or ‘true’ market value of a property is realized upon the sale of that property; essentially we do not know how much a property is worth and what its ‘market value’ is before it is sold. As Jeremy rightly observes, “technically, it is impossible to buy under market value”.
Jeremy Sheppard, the creator of my DSR score, suggests the following in an article for My Investment Property magazine:
Buying a property under market value, as opposed to buying at a discount, is buying a property for a price that is less than the perceived market value for that property at the time of purchase.Buying under market value – yourinvestmentpropertymag.com.au
This means that buying ‘below market value’ is more a matter of opinion than it is a matter of fact—that fact that a property sold for less than it is worth cannot be objectively determined as one has no avenue of knowing and subsequently having a widespread consensus on the plausibility of the two figures (i.e. the actual worth of a property and the selling price).
On the other hand, a more acceptable way of buying below market value would be to purchase a property from a vendor who has run into financial difficulty, such as a developer whose development is no longer financially viable or a home owner who has lost their job. Information on such deals can be found on the National Mortgage and Deceased estate database (www.NMDdata.com.au). As of 30th of April 2020, their fees are at $379.00 for an annual subscription.
However, there is no use in realizing capital gain upon a purchase to have it ‘eaten away’ by inflation or opportunity cost, that is, a loss realized from buying in an area with little or no capital growth. So, buying below market value takes its full effect if the property purchased is not only purchased at a discount, but is also purchased strategically in an area which is positioned for growth. It can be said that this would be indicative of compounded capital growth—initial capital gain realised upon the pruchase is compounded by capital gains associated with the growth of the area where the investment porperty ‘lives’.
In response to the above, at HtAG, we offer a little bit of a different take on the buying below market value notion. Firstly, by focusing on real time data used in highlighting investment quality of suburbs, one deals with what has been one of the major issues with the property advisory sector, namely the gaps in the subjective opinion of advisers and the advice given on the back of conflicting interests.
For example, it has been a long-established truism that some property investment advisors push their clients into investing in areas within which they have a vested interest (i.e. such as being paid additional referral fees and bonuses from developers whose developments they promote). It is also the case that developers and real estate agents will sometimes highlight an overestimated valuation and one which is above the sale price with the aim of portraying the property as a better investment opportunity pertaining to the option of making an immediate ‘profit’ from the purchase. As mentioned previously, obtaining an impartial information founded on data science thus mitigates issues arising from conflict of interest and gaps in individual knowledge.
More importantly, the market cycle metric that HtAG’s data science team have recently developed, becomes a very useful tool in ascertaining the bottom or a trough of a particular area thus providing clients with the ability to time a purchase in such a way that they buy at the bottom of the cycle subsequently taking advantage of the imminent growth. Furthermore, this information can be buttressed with HtAG’s confidence ranking option which highlights the accuracy of our algorithm and the subsequent projection for a particular area. It is important to note that at HtAG we are proud of our 95% accuracy in high confidence areas when compared to past market movements.
Combining this information (i.e. market cycle metric and confidence intervals) with the projected capital growth for the area, our customers can not only buy in an area that has ‘bottomed’ but also in one that has investment grade potential resulting from the forecasted future growth thus minimizing the risk of the capital growth being ‘eaten away’ by idle localities.
As such, the takeaway would be this: one can never really buy below market value because market value of the property is determined when the property is sold. On the other hand, making a decision to purchase a ‘distressed sale’ property has to be done in line with the growth potential for a particular area to minimize the risk of initially realized capital growth being ‘eaten away’.
At HtAG, we believe that having information on when an area will ‘bottom’ (as well as how long it will stay there), combined with the projected capital growth for the area, permits clients to buy properties for as cheaply as possible (it is important to point out that HtAG provides market cycle analysis metric which highlights previous bottoms of the area inclusive of the associated values) while also being able to consider how hard their money will be working for them in the future.