Can You Make Money Buying Undervalued Properties?

Why Buying Certain “Undervalued” Properties May Not Be Such A Good Idea 

Recently I received a text message from someone whom I haven’t heard from in a while. This person was a prospect who contacted me back in 2016. During that time, he had a couple of requirements. But the main objective was only one, to acquire a property that is significantly below market value. Or what you call an incredibly good deal. The idea was to flip it and sell it at a higher price later.

Usually, before I start helping someone find their dream home or acquire an investment asset, I would have a coffee session with them first. That way, I can understand them better and find the best fit solution. Unfortunately, I didn’t manage to meet up with this person. Nor did he reply to my messages. So, I was a little surprised to hear that he is looking buyers for his new place.

The thing that ran through my mind was this. If you have gotten such a good deal, why are you asking me to find clients for you? Wouldn’t it be easy to sell? What happened to the agent who recommended the property in the first place? Wouldn’t he/she be in the best position to market your property?

Why Buying Certain “Undervalued” Properties May Be A Liability Instead

What Are Undervalued Properties and How to Buy Them?

First, let’s define what undervalued properties are. Undervalued properties are those that have selling prices below fair market value. You can obtain the fair-market value prices quickly by asking a mortgage banker. I have written about this in my earlier guide on how to purchase private residential properties in Singapore. The banker is the best way to obtain fair market value. Why? Whenever you are buying a property, you only come up with a deposit. The rest is in the form of loan from the bank where you pay back slowly. In essence, the bank is the majority shareholder. And as such, the bank’s valuation price is the best benchmark to understand the current market value.

With this valuation price, any properties that you acquire in the market below this amount is an undervalued property. It is as simple as that. If it is $10k below valuation, then you would have “saved” $10k. If the property is $100k below value, then the savings is $100k. So, is it possible to acquire something way below the market value and then flip it later? Thereby reaping a handsome profit almost instantaneously?

Perception of Value. Undervalued? Or Just An Adjustment To Actual Market Value?

IT fairs in Singapore are always hugely popular because they offer electronic products at low prices. Most of them are sold at prices below their “original valuation”. However, are they still worth it? Is there a possibility that these products can be sold back at their original prices? Or are they limited demand products where the valuation is in a downward spiral? What is the real reason why these products are lower than their original market prices? If you can answer this question, you would likely already know why some “undervalued” properties are not great investments.

Example Of An Undervalued Property

To give you an idea of what is an undervalued purchase. I will be using a condo in the core central region as a reference. Back in 2011, prices at this condo were going at $2387 psf. With several units transacted at this price, any bankers out there will tell you that they will match the valuation.

A year later, prices went down by $228psf to $2159 psf — a drop of 9.55% off the initial value in 2011. If you translate into unit prices, what was initially available for $1mil is now going for $904,500. This almost $100k savings is a textbook definition of what you can classify as an undervalued property.

However, if you look at the following years after 2012, prices were heading nowhere. Today it is only going for $1963 psf. Instead of bouncing back to the “original valuation”, prices fell further. The reason for this is simple. Once the new transactions in 2012 were completed, this became the latest valuation for the bank. In other words, your entry price is now the new valuation. Interestingly enough, if you bought anywhere else in 2012, you would likely make more money than this “undervalued” property.

Example of Buying Properties At Market Valuation

The case I am showcasing was due to an opportunity that I had working with a lovely couple. There many others with the same experience, but I will use one example to show you. For privacy concerns, I will not be showing you the development name, unit prices or sizes. I will only be using psf and transactional dates as a reference. All the data shown below have similar unit sizes and are of the same bedroom type.

Source: URA, SRX

The unit I have gotten for them was a resale apartment going at $1919 psf. Back in 2018, this unit was transacted at fair market value. Fast forward to 2019, today’s prices are now going at $2236 psf. On paper, they have made a gain of $317psf within14 months. Or a profit of over $200k using their unit size as a reference.

What Does Make Money?

A lot of people think that buying something cheap is the best way to make money in real estate. They believe that undervalued properties are the best way to go and reap an instant gain. However, most don’t realise that what they have bought is the new market valuation.

If you are one of those who have bought the condo mentioned above in 2012, I can tell you that prices for that project will likely remain stagnant and not head anywhere. What is more important is to understand the factors that cause prices to go up instead. Don’t buy something simply because it is cheap or undervalued. Our simple sharing can save you from potential heartaches or even gain a six-digit paper profit in a matter of months.

To understand more on how we help our clients reach their objective, book your free consultation slot, and we will get back to you shortly.

Article contributed by Jerry Wong

Jerry Wong is a realtor with Huttons Asia Pte Ltd. He loves coffee, cookies and condos. Most importantly, he loves connecting people to properties and gets enormous satisfaction when they acquire their dream home or make that capital upside in just a matter of months. Buy Jerry a coffee, and he will meet up with you on a 1 to 1 session to share the following

  1. How certain factors affect real estate prices. (Using historical transactions as references)
  2. Applying lessons from history to determine if a condo has the potential for upside or not. These condos can be those under construction, resale or the very one you are staying in right now.
  3. Or just prepare the toughest question you have on your mind! If it is interesting enough, the answer will be in a blog post and shared with everyone!

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