Property Flipping Back in The Old Days
Back in the past, I’m sure you have heard of people flipping properties. You can go to a showflat and book a condo unit for $1 million. Then you resell it person B for a higher price. Person B then resells it to person C again. In some instances, the flipping can go up to 6 times with the last person buying the unit at $1.5million. Everyone made money on every flip except for the last buyer.
If you think about it carefully, there is nothing logical about the entire process. First, why did the last person buy at this price? And why did you sell it to person B? Wouldn’t it be better for you to resell it to the final buyer and get all the gains? Or was the logic clouded because emotions fueled the entire process? Where everyone wants to flip and make money?
Arbitrage Happens Because Not Everyone Has the Same Information
Unlike today, it was difficult for consumers back then to get access to all the transaction data in the market. And because of the differential information distribution, some people have more knowledge than others. This difference created an opportunity to take advantage of the price difference within the market itself.
In economics and finance, this term is called Arbitrage. Here is the definition is taken from Wikipedia.
“Arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalise upon the imbalance, the profit being the difference between the market prices at which the unit is traded.”
How Some People Use Arbitrage to Their Advantage
Back then, some agents capitalise on this arbitrage and use it to earn two commissions instead of one. How they carry this out is very simple. The agent knows seller A who wants to sell the property. After advertising the property, the agent found two buyers. Instead of helping seller A get the highest possible price; the agent sells the property to one buyer first. After the purchase, the agent will now recommend the 2nd buyer to take over. Due to the lack of information; everyone thought they got a good deal. Of course, in today’s context, this is a conflict of interest and a violation of the Code of Ethics and Professional Client Care. Doing something like this will most certainly cost you your real estate licence.
Why There Is No Arbitrage Today
On the other hand, because there is so much information today. We are gearing towards an arbitrage-free market. This flood of information makes it impossible to pick out truly “undervalued” properties. Why? If I am a seller of a property, I can go online and find out my valuation almost instantly. There is even a service on SRX where I can track my property price. With so many tools available to sellers, it is virtually impossible for them to price a unit way below market value.
How to Truly Find Undervalued Properties
If you have read my earlier article on first-mover advantage, you will realise two things. Firstly, not all first movers have advantages. Secondly, what may seem like an “undervalued” purchase may lose almost $100k the next year. Why?
A lot of people assume that buying something cheaper than what the previous owner paid for is a good buy. They think that due to the pricing difference, the value can only go up in time to come. They fail to realise that in an arbitrage-free market, undervalued properties do not exist. What you are purchasing is the real market value of the product. What is more important at the end of the day is to understand the future demand for your purchase. If there is going to be more demand, prices will increase for your property. If demand is lesser, prices will fall. It is as simple as that.
So how do you predict the future demand of a property? Are there any ways to identify them? Although there is a lot of information now readily available online, you will still need to analyse and make sense of them. Sometimes too much analysis can lead to paralysis and the opportunity will pass you by. Instead of figuring out what to do next by yourself, why not speak with us today? Pick up the crucial pointers and find out why our clients get that capital gain in a matter of months. Book your free consultation slot, and we will get back to you shortly.
Article contributed by Jerry Wong
Jerry Wong is a realtor with Propnex Realty. 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
- How certain factors affect real estate prices. (Using historical transactions as references)
- 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.
- 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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