‘You make money when you buy’ is a well-known investment principle and currently, Nairobi is a buyers market. In real estate transactions, there are three concepts of buying that buyers are often used to mean the same thing. However, they are completely different ideas.
Buying ‘under market value’ is often confused with buying at a ‘discount’ and ‘buying at a bargain.
Buying at a Discount
Buying at a discount means paying for less than the original asking price for a property. It is usual for real estate agents to add an extra amount to the expected sale price. This is so that buyers like us can feel better about ourselves after successfully negotiating the seller down to the price he was going to sell at anyway! It’s human psychology.
Buying at a Bargain
Buying a bargain can be different from buying at a discount. During negotiation, it is possible to get a discount and yet still pay above the sale price that the seller would otherwise be willing to accept. In that case, you will not have bought at a bargain even though you get a discount good enough for you. And buying at a bargain is also different from buying under market value. For example, it is possible to pay more than the asking price and still get a bargain if the seller doesn’t appreciate the potential of the property.
Buying below Market Value
Buying a property below market value, as opposed to buying at a discount, is buying at a price that is less than the perceived market value of that property at the time of purchase. The ‘perceived’ value is subjective based on who is looking at the property. Technically, it is not possible to know the actual market value before a property has been sold. Once sold, the market value is the price the property is sold for.
What is usually referred to as market value before a transaction has taken place is a mere perception of what someone would be willing to pay for the property under current market conditions.
The most common method of determining market value is by finding the sale prices of comparable properties that have sold recently in the same area and making necessary adjustments based on that. So market value is obtained after the fact. In effect, buying below market value means buying at a price that is less than the perceived value at the time of purchase.
If you are looking to buy at a bargain, your opinion is the only one that matters. But investors looking to profit from buying properties below market value should put their own opinions aside. There are only two opinions that count: the opinion of your lender’s valuer and the opinion of the next buyer. This is because the amount you can borrow on the property depends on the opinion of the lender on the value of the property. And how much you can sell for comes down to the next buyer’s opinion about the value of your property.
In most cases, clean opportunities to buy ‘below market value’ comes from a distressed seller.
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