I'm Jeremy Sheepard. >> And I'm Daniel. >> We use data to expose deceitful property experts and their marketing BS. >> This is the expert busting series. >> This is part two of the expert busting series. Today we're uncovering under market value.
Let's dive in, Jez. >> Yeah. So, it sounds like a good idea to begin with buying under market value. you lock in some equity immediately. The problem with this strategy is that if you hunt down these sort of undermarket value properties, you are running away from capital growth. Uh the two strategies are opposed to one another.
You can't have both at the same time. And I'll explain why that is uh in a minute. But first, I think we should define some terms. >> Okay, let's have a look. So what we let's start with asking price. >> Yeah.
So that's the one that appears on the ad uh real estate.com.au domain.com.au. Uh so buying under the asking price is not the same as buying under market value. The asking price is quite often unrealistic. Uh and you can buy a property uh for less than the asking price and still pay too much. So, an example would be asking price of 500,000. Under market value B might be we bought it for what?
$480,000. It's under that $500,000 price point that was advertised. >> Yeah. Under asking price. >> Asking price. >> Nothing special about that.
And cheap is simply under the median for the suburb. Uh there's usually a good reason why a property is cheaper than others in the same suburb. Might be on a smaller block or on a main road, something like that. Uh yeah, so buying a cheap property doesn't mean you got a bargain. You can buy the cheapest property in the suburb and still pay too much. Then you've got discounted.
Now the discount is the difference between the original asking price, the one that appeared on the ad, and the amount the property actually sells for. Uh and this is most properties. So most properties sell for less than the asking price. There's nothing special about that. Under market value is a value less than the value estimated by a professional valuer. And it doesn't matter what the agent thinks or what you think or what the seller thinks.
Uh the final say on the value of the property is a professional bank valuer. >> A bank valuer. >> Okay. >> Yeah. because you're going to uh get finance, >> correct, >> to draw down on that equity or you're going to sell the property to someone else who needs finance and so it's always a bank valuer that has the final say. >> Okay.
So, how do professional valuers place a value on a property? Uh what they're doing is they're looking for sales of similar properties nearby that sold recently. So, they're not comparing a mansion with a dog box. They're looking for similarity. They're not comparing the property uh with ones on the other side of the city. They're looking for nearby properties.
And they're not looking at sales from years ago. They're looking for recent sales. So, those those three aspects, recent, nearby, and similar. Now, real estate agents use the same technique. Anyone can, but everyone has a different opinion because we all have different bias. >> Well, it's not going to be ex exact, is it?
Like one property to another property. They're going to be different. Different layouts, like you said, the block sizes, the positioning could be in flood zones could, you know, easements, whatever it might be. There's always something that's going to, you know, give you that sort of difference. But I guess there's two ways. You can have a a professional valuer, a bank valuer, or a desktop valuation.
And I've seen some desktop valuations that are very very different. So you buy a property and the desktop value might be a lot more. Oh great, I've done well, but it might not be accurate to what's actually happening in the market. >> Yeah, that's right. That's a good point. And that's on the next slide.
Everyone's got an opinion. Everyone has a bias. So sellers want to be paid more. Uh the buyers want to pay less. valuers gen they're usually con conservative and of course the agent they don't really care so much about the price they just want a transaction. So the agent's in a a kind of peculiar position.
They want the the seller to be realistic. They want the buyer to be realistic. >> Uh and they want the valuer to agree to whatever the two parties agree to. They just want a transaction to take place >> so they can move on quicker and go to the next deal. That's right. Yeah.
>> And even certain buyers agents would do the same. Try and get the deal done. Let's move on. >> Yeah. And this leads to uh the first problem with this strategy of buying under market value. Are you really sure you know the true value of the property?
>> The way I look at it is I will look at it from there as a range. Okay? So there's a range that I'm willing to pay for a specific property. But from a long-term, I don't like using the word long-term, but like I'm the suburbs the main thing I want to get into. You do that suburb analysis first and the property is when you start getting really granular. Um, but I guess the price points can vary.
I just know that I want to acquire that property in that suburb as quick as possible because it's a moving market. >> Yeah, it's better to be in uh even if you pay a little too much, uh, at least you're in that market. Yeah. So the I would challenge people that are trying to buy under market value. Um why are you so confident uh that this property is the price you want to pay for it is actually undermarket value. So imagine that there's uh this property is quite unique or there's very uh few sales transactions uh that are nearby that are recent that are similar.
You can take advantage of that lack of information and perhaps make a low ball offer >> or you could be taken advantage of for the exactly the same reason. So, how is it possible that you have found this undermarket value deal uh and nobody else has? Are you really sure or is the vendor and the agent just licking their lips at your very first offer? >> Well, I see it as a bit of a marketing ploy. You'll see it a lot on the socials and I guess that's social proof. I think that's what they everyone says, social proof, but they cherrypick what they want you to see and going, "Hey, I bought this under market value." But you want to see all the deals.
You want to see the actual data because any business owner or marketer can show you whatever you want to see. >> Yeah, it is a very commonly used uh >> undermarket value. It is. >> Yeah. Under market value. You see it all the time, don't you?
Now the second problem is that the new value of the property is what you just paid for it. So remember we were talking about how a professional valuer uh values a property. To know the value of the property, you need to find a recent sale of a similar property close by. So what could be more similar than the exact property you just bought? Uh it's at the same address. >> Uh it was recent.
you just bought it. Um it's the same address, so it's it's nearby. Um so once you have bought the property, the precise value is known at that point in time. So leading up to the sale, nobody actually really knows the true value of the property until it is sold and then we know exactly and it is the price that you paid for it. So you can believe that you've bought it for under market value, but that is now the new market value. So there is no such thing as a you know a discount buy under market value flip it sell it.
So you know you can buy a property you can renovate it and then sell it in a short period of time. That's called a rena flip. >> Why is there not a buy undermarket value flip? Because >> the new value of the property is what you just paid for it. >> I would consider like the undermarket value. Are you going into a market that's potentially not heated or not moving?
Cuz typically when you see that asking price in a heated market, it's going to go above a lot of the time depending on where it is. But um yeah, interesting. >> Well, yeah, that's that brings us on to uh yeah, one of the next points. But um yeah, so there there are some professionals who've actually Oh, I'll just just if I can just back up. Yeah, problem number two. So yeah, everyone knows the precise value of the property.
It's what you paid for it. Yeah. Uh and similarly, you can't buy the property under market value uh and sell it the next month. You can't refinance it because the new value is known right now once you've paid for it. >> Well, not everyone's going to know the pro the precise value of that property right away. It generally takes a bit of time.
on the sold section, it'll have um like if there's that obviously when it goes um unconditional and conditional eventually like you know when the handover does happen that's when sort of the sale date will come through. So there might be a bit of that sort of that I guess that lead isn't correct. So, if I buy property on the 1 of June, I'm not going to know that price um for a while until it actually goes through, you know, call logic or priceinder or real estate. >> Yeah. But if it was so easy to buy under market value and buy a significant degree, then you would know about this strategy where you secure the property for its undermarket value and then sell it again uh before people can find out what the true value is and you stag a profit. But of course there's um agents selling commission, there's stamp duty and so on.
So the margins that we're talking about the here are really quite quite slim. So it's not a huge gain. You think of >> buying 5% under market value. That's quite significant. But in the next 12 months, uh something far more significant might be 15% capital growth or over the next 3 years. So, you're tinkering around with something that is tiny and opposing the opportunity uh of getting good capital growth because in the hot markets you put in a low ball offer and you'll just be laughed at.
Anyway, this um this next slide uh so there are some professionals who offer a service to find these undermarket value properties and in fact I received some years ago uh marketing from them uh an email newsletter and it contained about a dozen maybe it was 10 of these past successes. Now, they claimed discounts were around $60,000 on average. And I thought, okay, I'm going to analyze these and see whether these were really uh discounted properties. Uh but after I analyzed uh the specific properties that they gave as examples, uh I realized they weren't successes at all. In fact, for one of them, uh, looking at the current values as they were, uh, it looked like the buyer probably paid about $50,000 too much, and these were classed as heavily discounted properties. And on average, the biggest discounts were in the worst markets.
So, the negative growth countered any benefit that they got from buying supposedly under market value. Um, and that's not all. All the in these markets that experienced the good growth, the discount was not a discount. So in some cases, the property was the same value 9 months later. Now, so these are markets where I've noticed, okay, the market as a whole has had some good capital growth, but the value of the property has remained the same, which means that they paid too much. So they didn't actually get uh any any bargain.
They didn't actually buy under market value. >> How many properties did you analyze? Do you remember? >> Uh it was it was around about a dozen. >> Okay. Yeah.
>> It's a small sample size. >> Yeah. And I had to do this manually. So I couldn't automate it for hundreds or even thousands. So just as well it was only about a dozen. But I went to the trouble and I found that the average discount claimed was 12.3%.
uh and I analyze these 9 months after sale. So let some time pass, let some other properties in the same market sell so that we can then uh compare the new value of the property. Um so the the idea is you make a low ball offer, someone else sees that and if it's not a free falling market, they they they miss out. I can't find another low ball like that, an undermarket value, and then normality returns to the market. And then you can revalue your property using more recent sales at fair market value. And supposedly you've you've staged some some kind of profit.
So that's why I left 9 months. >> And typically in like a heated market, you're going to have multiple offers like 10 plus 20 plus like property comes on the market. Um >> Yeah. Yeah. Well, this this is the whole problem. Like in a hot market, >> it's not under market value, is it?
>> You how on earth can you buy under market value, you've got so much competition from other buyers, you are going to have to offer above market value just to get your foot in the door. So, it's the markets that you don't want to be in that you can get these uh undermarket deals. And um yeah, so I I calculated the true discount to only be about 2.7%. And the average suburb growth was actually backwards by 1%. >> Over what period was that? Minus >> uh this was just 9 months following.
>> Okay. >> So on average uh you're only better off after 9 months by 1.7%. Which is quite uh quite ordinary. So here you are you've gone to the trouble of hunting down these. Bear in mind, if someone's going to send out an email newsletter, here's here's your here's some successes. Here's some wins.
Do you think they would have cherrypicked these to be the best of the best or are these, you know, the worst or or in the middle? Obviously, these are the best. And after analyzing them, uh, the best were just inferior to just a bog standard buy and hold. >> Did you get the actual property addresses? Did they show the actual property addresses or not for privacy? >> They didn't.
They didn't show the specific addresses, but they gave details of the property and the market that it was in. >> So, the suburb, the specific suburb, >> the specific suburb. >> And was it one suburb or multiple suburbs? >> Multiple suburbs from around the country. >> Can we name the buyers agent that or not? >> It wasn't a buyer agency.
And yeah, I I don't want to name them, but yeah, >> that's fair. Anyway, the point is that they believed in this uh ability they had to to buy under market value and it really just um highlights the fact that nobody knows the true value of the property until it has been paid for and then that is the the new value >> and at the end of the email did they mention book in for a consultation? >> Uh there would have been some call to action. I can't I can't remember what it was. Now, after having said all that, I will say that it's not impossible to buy under market value. But to be profitable, you you've got to combine that strategy with something else.
Because if that's the heart and soul of your strategy, then once you've purchased, that's game over for your strategy. And now you're owning you're holding this property, what's it going to do? If you don't have capital growth, if you don't have cash flow, uh if you don't have a subdivision or renovation potential, then that's that's the end of it. Uh and you're limited by that small amount of discount that you got. >> I guess the challenging thing is with more and more buyers agents become sort sort of like Uber drivers these days, isn't it? Just you're getting a flood of buyers agents coming through, you know, if you're getting 10, 20, even hundreds of clients and putting them into the one suburb, what's going to happen to the prices?
>> Well, that makes it really competitive. So, good luck trying to buy under market value there. >> But they're like, you've got that, okay, they bought a property for a certain amount and they got another offer in, you know, for the next week and it's consistently driving those prices up if there's a lack of supply potentially >> potent. So, you're talking about them making the market >> sort of. There's got to be something in that. >> There has to be a big buyer advocacy that can do that.
>> But there's some big ones out there >> and they would all their clients well a lot large number of their clients would need to be in the same price point at the same point in time. >> That's right. But I think the price point's the difference, isn't it? >> Yeah. And then you'll have people saying, "Oh, I've already bought um in this state. I'm paying too much land tax.
What else can you do?" That thing. >> Yeah. >> Diversity. >> Yeah. Okay. So, this slide here um >> discount versus growth.
>> Yeah. So, the best suburbs for buying undermarket value properties, they actually have the worst potential for capital growth. And the best markets for growth have the worst potential for buying undermarket value. So the bigger the discounting, the less demand uh there is in that market and the more likely prices will actually go backwards. Uh swap it around. Conversely, the more growth there is in a market, the fewer properties there are that are selling under market value.
So every undermarket sale is a kick in the groin to capital growth. So the the definition of negative growth is where the majority of sales are under market value. The definition of positive capital growth is where the majority of sales are actually above fair market value. So you can see that the two strategies are completely opposed to one another. All right. Yeah.
So, the best market to invest in is the one where it's actually impossible to buy under market value. You make a a low ball offer and you're going to be laughed at. You're just not going to get even the foot in the door. Um, so they're getting offers, these agents are getting offers uh all the time in a hot market. Uh, it's what the definition of capital growth is. >> And a lot of it can be subject to a walkthrough.
like a property can, you know, come onto the market and that same day or the next day, bang, under offer because they've got 10, 15 offers already through the door. So, if you try and lowball it, uh, bad luck. >> Yeah. Well, there's there's agents that have got uh maybe a small queue of buyers who saying, "Look, if something comes up, uh, can you let us know?" And they might even be going and visiting the property before it's listed for sale. >> That's what they'll do. So they'll obviously have the relationship with the agents and then they'll obviously um receive an email I guess with the the properties that are coming up that are going to be on the market so they get first crack at it.
>> Yeah. Yeah. Can you imagine with that level of competition trying to also buy under market value? It's uh >> just pushes the prices up. >> All right. So uh I did some analysis.
Um this has all just been fluffy talk uh until we get to the data. So I did some analysis of discounts. Now this is from 2010 to 2024. What I did was I I calculated the difference between the original asking price and the eventual sale price for uh yeah hundreds of thousands of transactions of sales. Now note that this is the discount not buying under market value. So this is the difference between the asking price and the sale price.
But they could all have sold for um fair market value or even over market value. We don't actually know how many of these were under market value. It's uh it's possible that they could um you know to buy for less than the asking price but still pay more than what the property is truly worth. So some of these calcs will be inaccurate is what I'm I'm just um uh warning. Uh anyway, I looked at these high discount cases. So a high discount case I classified as suburbs with at least a discount of 10%.
So that means the uh the average discount is uh quite significant. You might have properties where the asking price is uh 500,000 but they sell for 450,000. So there's a 10% discount. But um the average in this case for all of those was 12.2%. So the sale price was 12.2% 2% lower than the asking price. So that's the set of high discount cases.
>> So between 2010 and 20124 was it every property around Australia that you looked at that was above 10% like how much I guess >> I took it at the suburb level not an individual property level. So a whole bunch of properties would sell in a particular month and what was the average discount at that point in time. >> So these aren't handpicked. >> Not individual properties. No. >> Okay.
>> Yeah. Because what I need to do then is look at the capital growth that those suburbs had. >> Uh the properties they don't transact frequently enough to say, "Oh, here's here's the capital growth that that property had." you want to see what was the capital growth of that market in the years immediately following this high discount situation. >> So the first bit the high discount cases there the ones that had the higher discounts like let's say 12% only had growth of 13% over 3 years well below the national average that period >> so around about 4% peranom >> and the ones with a low discount average discount of 7. So pretty much if the property's uh marketed on the market for let's say 500,000 and it sells for roughly the same amount, the growth has been 25% over that 3year period. So pretty big difference.
>> Yeah. Yeah. Um a noticeable difference. But if you add uh the discount of say 12% plus the capital growth of 13% this is for the high discount rates you're getting around about 25%. >> And similarly if you add 7 with 25 you get around about 25%. So you might be thinking >> uh there's not much difference.
Uh what you gained on the discount you lost in the growth and what you gained in the growth you lost in the discount. But this is discount. It's not undermarket value. The undermarket value would be a lot lower than a discount of 12%. So the discount savings in these calculations are greatly exaggerated. So bargain buyers uh would have actually been much worse off compared to uh pursuing just simply pursuing capital growth >> because it's just natural, isn't it?
A propertyy's on the market for 500 and then I get it for 450 and I tell all my friends I'm a legend. Got the property undermarket value. that um it was priced too highly in the first place. >> Yeah, it could have easily been. Yeah. >> Well, it would have been.
You'd think. >> Yeah. >> 90% plus probability it was. >> That's right. Vast majority of cases. >> All right.
So, I just want to cover one other topic and that is of distressed sales. So, a distressed sale is one where uh the seller's primary objective is not top price. It's something else. Maybe they want to sell very quickly. So, a couple of examples, a mortgage e repossession, that's when the bank uh forces the owner to sell their property because the owner has missed payments. Um they they've run into a bit of financial trouble.
Uh a divorce settlement might uh result in a a lower price. That's if both parties simply want to get out uh and get rid of each other. Uh there might be some spite involved there. uh a deceased estate. That's when the sale uh of the property occurs after the owner has died. So, it's the next of kin and they might not care much about the price.
Maybe there's some dispute among siblings or whatever. Um and uh sometimes you've got the case where the seller has committed to a purchase elsewhere. So, they're moving from their current home that is on the market and they've already committed to the purchase. They put a deposit down. it's gone unconditional. They can't back out now.
They need the sale proceeds of their current property to go into the sale of their next property. And so they've they're under time constraints. >> Uh so those are those are the cases of a distressed sale. Now uh just want to point out that um just because it's a distressed sale does not mean the property is going to sell under market value. Just because uh there's a divorce doesn't mean that both parties don't want maximum price. It's just there is potential for an undermarket sale.
Uh now you might be thinking that you'll find one of these opportunities. Um but there's a few things that you should be aware of first. So number one, as I've got there, they're not common. Uh but investors looking for them are common. M >> so there's going to be quite a significant degree of of competition and uh as I mentioned uh just because it's a a distressed sale doesn't mean that it's going to go cheaper. Um probably the most important point here is there's no such thing as a distressed sale in a hot market because let's say you need to sell quickly in a hot market.
you just put the property on the market and it's gone because you've got a a lineup of buyers that are waiting to swallow up that property. >> So, >> yeah, it's interesting with a um like an agent might just want to get rid of the property right away and pretty much tell the seller, look, you know, this is the best one. Just run and take it. >> Best offer. >> Best offer. Like right away go, okay, thank you very much.
Get the deal done because it just burns them more time to get that extra 10 or 20 or 30,000 more. So, that first one they might take right away potentially. So, I guess in a hot market, you got to move very quickly with your offers >> if if you're a buyer. Yeah. If you're a buyer. So, agents agents make their money from turnover.
>> They they want uh as quick as turnover as possible. And >> I think with a seller, just sit back and let the offers come in. >> Yeah. You want to at least uh allow time for people to have a good look at the property, have a think about it, at least come and visit for >> what's an extra like what's one or two two weeks, you know? Like there are times where property moves within one day. >> Yeah.
Maybe in a soft market where you get an offer straight away and and it's a very cold market. Yeah. You got to take that. But in a hot market, of course, um yeah, let them line up. >> Mhm. >> Yeah.
Uh Yeah. And lastly, I just want to this this ethics challenged. So, um it's a lot easier to kick someone in the teeth when they're already on their knees. Actually, Jez, before we move on, like what if there's zero offers >> in a cold market? >> This property is just going to sit on the market. Correct.
That's all that'll happen. So, there's no offers. Would you reduce your price? So, let's say, how would it register as being maybe under market value or discount? Is it the initial price or is it if there's a price adjustment? So, let's say the agent puts it on for 500, no one's buying, and they bring it down to 450.
What would be the calculated >> discount? discount then based on >> it's based on the original the >> on the 500. So they've priced it way too high cuz that's what the agents are going to do, aren't they? You can get this much for your property. Look at the recent sales, everyone. Go to real estate.com.
Look what's sold recently and that gives you a good gauge. Don't believe a real estate agent blindly. >> That's right. >> That's not hard. Jump on real estate, you know, go in the map section, look at the last one to three months and get a bit of an idea than just believing. >> Mhm.
>> Okay. because they can cherry pick. But that's Yeah, I think that's the thing. Zero zero offers. Um it's priced too high. >> Yeah, that's right.
And then there might be some some sort of price adjustment. And so that was the calculations that I did. Where are the soft markets there where the biggest discounts are? So your opportunity for capital growth is is reduced. >> What if they have it at 500,000 and they take it off completely and then go with another agent? So let's say it's pulled off real estate.com.
I doubt that would happen because it'd cost them more. But and then they bring it on for$450. Would the new price then be 450? That would be calculated on. >> That's right. It's it's counted as a new listing.
>> Uh and then what you've got is is u more listings than sales because it's now been listed twice, but there it's only been sold once. >> So it would come up in a different measure of demand relative to supply. It wouldn't be in the discount specific. From the data perspective, I guess from your you see it come through is like what a line item in the data and then that would be removed and then if it comes back on at a lower price, it'll have that you'll know it's 450 and sells for 400. It'll be based on that 450 price, not the 500 as an example. >> Yeah, that's right.
>> Okay. All right. Perfect. >> Uh yeah, so I was talking about these uh uh challenges to one's ethics, you know, kicking someone in the teeth when they're on their knees. So, you know, property investors, we're hated by tenants. We're uh portrayed poorly in the media.
The government's having a crack at us, too. Um, so yeah, I'd just like to make perhaps a worthless plea that people don't choose these sort of distressed sales. Um, it's a little bit vulture-like, you know, pursuing people in these uh difficult situations. And the degree by which you get a discount uh is the degree by which you someone else is hurt. >> If you can buy this property genuinely under market value because they're in a difficult situation, you've taken advantage of them. The amount by which you have taken advantage uh of them is well I yeah I I would just prefer it if property investors didn't do this.
But I understand that it's the wealth creation industry. people are after money and uh probably a vain attempt there. But anyway, that's up to that's up to each individual to make that decision. But these are some of the problems that you're going to run into if you are in the pursuit of distressed sales. >> And I think from my perspective, just be careful with what you see on the socials saying great, you know, we bought this fantastic property for this client under market value. How do you know it's a fantastic property because of what a specific yo yield or growth forecast?
And like you don't know what someone's telling you or these companies are telling you is actually true to you. That's a great property, but give it three to four 5 years. Judge me on that. Don't judge me on, hey, I bought a property. Great. Like I could throw a dart and buy a property.
>> At the point in time you buy a property, it's just a property. It's not until you've seen it for 2 3 4 5 years. then you know if it was a great property. >> Great episode Jeremy. So or expert busting series I should say. But um thanks for tuning in everyone and in our next episode we'll be exploring what will be exploring Jeremy.
>> New versus old. >> New versus old. See you then and take care.