Undervalued property in emerging real estate markets is often confused with property that is sold below appraised value. The two are nothing alike and it’s critical for those interested in real estate investment to know the difference.
A property that is sold below appraised value is just that: A property that, for whatever reason, you were able to acquire at a price below what it is appraised for.
An undervalued market is an entirely different matter, and is a much better deal in the eyes of the forward thinking investor. There are many markets at any given point in time where the entire market is undervalued. It bears repeating: The entire market is undervalued.
Let’s break it down. As a market emerges, it has a spurt of population growth. This growth is typically brought on due to job growth. Job growth is typically sparked by the local economy, the taxation of the community, and perhaps by proximity to railways, roadways, waterways or other reasons. It is said that for each professional job created, there are two unskilled labor positions created as well.
When an area experiences this growth in population and jobs, the average income typically rises (simple principle of supply and demand). When job creation grows, companies compete for quality
people, which leads to higher salaries.
Higher salaries equal higher median incomes. When the median income grows to the point of surpassing the ability to pay for the value of the median home (the median home price), the value of the market place is declared undervalued.
In simple terms, the lending standards typically say we should spend roughly 30 percent of our income on housing. When a marketplace only requires, say, 20 percent of the area’s median income to pay for that median priced home, we declare that area to be undervalued. Many more complexities can go into the equation, but I believe you get the general picture. So if an area is undervalued, it makes the investor who is looking for capital growth very excited.
Why? Because he knows that the area can rise significantly in value before getting overheated in price. He also knows that as an area continues to grow jobs, the average income will continue to climb, stretching the duration of that growth even longer.
If you would like to find out more about these great markets, check out our Real Estate Dashboard Report!