It’s no secret the market has been hot for years, and now as we start 2020 there are many concerns about the near future of our real estate market. One strategy I love for first time buyers and experienced buyers alike is forcing appreciation by buying below market value deals in livable condition with good bones, then renovating!
How to Buy Below Market Value
If you want to find below market deals, the MLS has its fair share of opportunities. You don’t need to buy a bank owned or auction property at the courthouse steps to make a great deal. Below market deals can often times be financed, too! When looking for a property, consider a house that might not have great photos or has been sitting on the market a while. Schedule a showing and walk through the home. If you like it, ask if there are any reports available. If so, review the home inspection and gauge the severity of the issues. Below market deals always need work, the question is how much, and how easily can you add value? Every now and then, you’ll find a property that is structurally sound, but needs a facelift. This is the kind of house you want to target.
Valuing Below Market Deals
When evaluating properties, research comparable sales to determine what similar homes are selling for that have been renovated. If you’re seeing properties renovated properties with similar square footage sell for $100,000+ more than yours, you’re on your way to forcing appreciation as long as your property requires primarily cosmetic updates rather than major capital expenditures. Knowing what renovated properties are selling for will help you determine how much you are willing to offer for the property. A scope of work from a contractor is another important piece of the puzzle.
Renovating Below Market Deals
Once you’ve found a great property, have a contractor walk the home with you during escrow. At first, their verbal opinion will be enough to get you started. If they tell you to run, you should probably listen. If they agree that the renovations are mostly cosmetic, ask your contractor to provide an itemized scope of work. Now you have an idea of what the home will cost to renovate, and what renovated properties are selling for. This should give you an idea of what kind of equity your renovations will produce! Updates to the kitchen, bathrooms, flooring, and paint add the most value and provide the best return on your investment. There will inevitably be some deferred maintenance on these kinds of properties, but try to spend the majority of your renovation on those four items, then incorporate some minor low maintenance landscaping. It’s not uncommon to add $50,000-100,000 in equity using this method, and this process of buying below market value followed by cosmetic renovations is known as forced appreciation!