Prospective home buyers are lured by under market value house advertisements. They are often doubtful as to whether these low prices are real or fake. This is a critical question that requires an answer because it varies for each home. The point is not to get swept away by the low prices and realize this is a huge investment. Discussed below are some reasons why a house may sell below market value.
A House Is Damaged
Some houses become damaged due to a disaster and are sold for under market prices. You must check for these damages and research whether they are easily repairable or not. Sometimes the cost of making repairs is greater than the purchase price. These are houses you want to avoid. A good tip is to have a house inspected by a professional as they will be inform you of the condition of the house and how much it will cost to have repairs done. The actual price of the house will be the sale price plus the cost of repairs. If the combined cost is high, a better idea is to buy a house that is in move-in condition.
Some houses are in bad localities. For instance, nobody wants to buy a house near a landfill, freeway or highly commercial area. So, the first thing to do is investigate the location. Buy it only if it fulfills your needs. Be aware that if you choose a poor house site it may jeopardize the future sale of the home. After all, location is the most important factor in the real estate business.
When a borrower is unable to make mortgage payments, properties go into what is called foreclosure. Banks try to recover what is owed by selling the property to investors. In many cases, the amount owed by the borrower may be higher than the actual value of the property. This will make finding a buyer difficult.
In such a scenario, banks may advertise a base price, which is lower than the market value. The price quoted may not be the actual selling price and just a starting price for an auction. The purpose of quoting a low price is to trigger the interest of as many potential buyers as possible in the hopes that a bidding war fetches more money. A wise investor won’t fall for this tactic. Someone new to investing might though.
There are cases where the borrower is unable to pay the outstanding debt on the mortgage. In these instances, a short sale is permitted. A short sale is where the value of the amount received from sale of property is less than the outstanding debt. Short sales are permitted by lenders to avoid the cost of foreclosure, which is significant money for both creditors and borrowers.
Not all offers made by interested buyers are accepted by the bank. Banks can take a long time in responding to short sale offers, and they may require a fairness opinion before they accept the price. If the fairness opinion, offered by a broker, does not suggest that the price is fair, the banks are likely to refuse.
Summary: If you find a house whose selling price is below market value, try to find the reason for it. Don’t automatically believe that you are getting a good deal and jump to make a purchase.
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