Why do properties sell less than their worth?
Warren Buffett, one of the most successful investors of all time, famously said, “Investing is all about buying dollar bills that are selling for 10 cents in the market.”
This philosophy highlights the importance of identifying and acquiring assets at prices far below their true worth.
In the stock market, prices fluctuate daily due to greed, fear, and speculation.
Investors can capitalize on these fluctuations by identifying undervalued stocks.
However, the real estate market behaves differently.
The massive ticket sizes of real estate deals and lower liquidity make sellers and buyers inherently cautious.
Yet, even in the Nigerian real estate market, properties often sell for far less than their intrinsic value.
Surprising as it may seem, this situation is far more common than most people realize.
Here’s the question:
Why do 40% of properties in Nigeria sell for less than what they are truly worth?
This article explores the reasons behind such undervaluations, delving deep into Nigeria’s economic, cultural, and market-specific dynamics.
Whether you’re a beginner or an experienced investor, understanding these factors will help you identify and capitalize on opportunities in the Nigerian property market.
Market Valuation vs. Intrinsic Value(properties)
Before identifying undervalued properties, it’s essential to understand two critical concepts:
- Market Valuation: This is the quoted price of a property based on current demand and supply conditions.
- Intrinsic Value: This represents the true worth of the property based on factors such as location, development potential, land value, and future economic trends.
In this case, the Nigerian real estate market lacks the transparency of a stock exchange.
Unlike stocks, no centralized systems are tracking real-time prices.
Valuation becomes more subjective, often leaving room for discrepancies between what a property is worth and what it sells for.
This gap creates opportunities for astute investors to acquire properties below their intrinsic value.
Seller Distress: The Need for Fast Cash
One of the primary reasons properties sell for less than their worth in Nigeria is seller distress.
In an ideal market, both buyers and sellers are patient.
However, sellers often face urgent financial needs, forcing them to prioritize speed over price.
Key Causes of Seller Distress:
Financial Duress
Many Nigerians live paycheck to paycheck or rely on informal loans.
Job losses, delayed salaries, or business failures can quickly lead to financial crises.
To raise cash urgently, sellers often liquidate their properties at a discount.
Medical Emergencies
The high cost of healthcare in Nigeria can force families to sell valuable assets to fund life-saving treatments.
For example, a homeowner might sell a ₦50 million property for ₦35 million to settle hospital bills immediately.
Divorce and Family Disputes
Family disagreements, particularly during divorces, lead to hasty property sales.
Both parties prefer a quick settlement rather than waiting for the best price.
Debt Repayment and Loan Defaults
Rising interest rates and fluctuating economic conditions make it difficult for borrowers to repay loans.
Creditors often pressure sellers to liquidate assets to clear outstanding debts quickly.
Emigration Pressure
Many Nigerians seeking greener pastures abroad sell their properties urgently to raise funds for relocation.
Investor Takeaway
When Sellers face distress value speed over price.
Investors who close deals quickly, often with cash payments, have a significant advantage.
Ignorance of Property Value
In a transparent market, sellers know the value of their assets.
However, in Nigeria, property valuation remains largely informal, leading to widespread ignorance among sellers.
Why Sellers Undervalue Their Properties:
Lack of Professional Valuation:
Unlike developed markets, professional valuers are not widely used in Nigeria.
Sellers often rely on hearsay or rough estimates, leading to undervaluation.
Undervalued Features
Sellers may fail to recognize unique features that increase property value. For example:
- Proximity to major roads or new infrastructure.
- Larger-than-average land sizes.
- Development potential for commercial use.
Desperation to Sell
Sellers who lack market knowledge may accept the first offer they receive, unaware that their property could command a much higher price.
Big Takeaway
Knowledge is power.
Investors who thoroughly research property values can capitalize on seller ignorance by negotiating favorable deals
Foreclosure and Bank Repossessions
Foreclosure is another major source of undervalued properties.
When property owners default on loans, banks repossess their homes to recover debts.
However, banks are not real estate investors they prioritize quick recovery over maximizing property value.
The Process:
- The bank seizes the property after a prolonged loan default.
- The property is listed for auction or sale below market value.
Why Foreclosed Properties Sell Below Value:
- Banks Focus on Loss Recovery: Their primary goal is to minimize losses, not to wait for the highest bidder.
- Negative Perception: Foreclosed properties are often viewed as “problem properties,” discouraging buyers and driving down prices.
- The urgency to Sell: Banks prefer quick liquidation over holding non-performing assets.
Big Takeaway
Foreclosure auctions and bank sales present lucrative opportunities for investors willing to navigate the process and refurbish distressed properties.
Poor Market Conditions and Economic Realities
Nigeria’s economy significantly impacts real estate prices.
High inflation, currency devaluation, and rising unemployment create weak demand, forcing sellers to accept lower offers.
Economic Challenges:
- Inflation: Rising costs of goods and services erode purchasing power, reducing buyer interest in high-ticket properties.
- Naira Depreciation: Currency devaluation makes it difficult for buyers to secure financing, especially for luxury properties.
- Job Losses: Economic downturns lead to reduced income, forcing distressed property sales.
Underdeveloped Infrastructure and Inconsistent Policies
Infrastructure and government policies play a crucial role in real estate valuation.
Key Issues:
- Poor Infrastructure: Properties in areas with bad roads, irregular electricity, and water shortages sell below their potential value.
- Arbitrary Demolitions: Inconsistent government policies and unplanned demolitions reduce buyer confidence.
Unclear Land Titles: The lack of clear land ownership records makes property transactions risky.
Big Takeaway
Undervalued properties in underdeveloped areas may become valuable once infrastructure improves.
Creative Improvement Opportunities
Investors can capitalize on undervalued properties by making strategic improvements that increase value.
For examples:
- Retrofitting Homes: Convert large family homes into multiple self-contained units for rent.
- Commercial Conversion: Transform residential buildings into office spaces or shops in high-demand areas.
- Fixer-Upper Projects: Buy dilapidated homes, renovate them, and resell them at a profit.
Big Takeaway
Creative improvements can unlock hidden value and maximize returns.
Information Asymmetry
Nigeria’s real estate markets lack transparency.
Insiders with access to government development plans often acquire properties before the general public becomes aware of their value.
Here are the strategies to Identify Undervalued Properties in Nigeria:
- Monitor distress listings and auctions.
- Build networks with agents, banks, and lawyers.
- Use professional valuers.
- Study development plans and market trends.
Overlooked Development Potential
Many properties with significant development potential are undervalued because sellers fail to see long-term possibilities.
Here are some examples:
- Unused Land for Subdivision
Large plots of land in growing areas can be subdivided into smaller, highly profitable plots.
- Commercial Rezoning Opportunities
Residential properties near commercial hubs can be rezoned for businesses, exponentially increasing value.
- Underutilized Spaces
Properties with large backyards or empty floors can be repurposed for rental units, event centers, or small business
In this case…
Savvy investors can:
- Identify underutilized properties with development potential.
- Obtain necessary zoning approvals.
- Develop the property to maximize value and cash flow.
Here is a real-life example:
An investor purchases an undervalued 2,000 plot for ₦10 million, subdivides it into smaller plots, and resells each at ₦5 million, achieving significant profits.
Currency Exchange Pressure for Diaspora Sellers
Nigerians living abroad often sell their local properties to fund foreign ventures or emergencies.
With Nigeria’s fluctuating exchange rates, such sellers may undervalue properties to secure immediate funds in foreign currencies.
Why Diaspora Sellers Undervalue Properties
- Urgent Financial Needs
Diaspora sellers prioritize converting property sales to stable currencies(e.g., USD, GBP) and accept lower prices to complete deals quickly.
- Lack of Local Market Knowledge
Living abroad disconnects sellers from Nigeria’s real estate trends, leading to undervaluation.
- Currency Devaluation
The devaluation of the Naira makes sellers anxious to liquidate Nigerian assets before further losses.
Here is the Opportunity:
Investors can identify diaspora sellers through agents, embassy networks, or property forums and offer immediate cash at discounted prices.
Here is an example:
A diaspora seller lists a ₦50 million property for ₦35 million to secure quick USD conversion.
An investor seizes the opportunity, knowing the true local market value.
Title and Documentation Issues
One of the significant challenges in Nigeria’s real estate market is poor title documentation.
Many properties have incomplete, unclear, or disputed ownership documents, which reduces their market appeal.
Why Documentation Issues Lead to Undervaluation
1. Fear of Litigation
Buyers often avoid properties with unclear titles to prevent future legal battles, which forces sellers to drop prices to attract interest.
2. Unregistered Land
Properties without valid Certificates of Occupancy(C of O) or land titles are undervalued because buyers cannot secure loans using them as collateral.
3. Family Disputes
Properties tied to family disagreements often sell for less as sellers prioritize quick liquidation over lengthy resolution processes.
Here is the Opportunity:
Investors who understand property title regularization processes can:
• Buy undervalued properties.
• Fix the documentation issues through proper legal channels.
• Resell or lease the property at full market value.
A real-life Example:
An investor buys a ₦15 million property with a missing title for ₦10 million, invests ₦3 million to fix the title, and resells for ₦35 million.
Sellers Facing Property Management Challenges
Some property owners sell below market value due to the stress and costs associated with property management.
Common Challenges
-
Tenant Troubles
Non-paying tenants, property damage, and legal eviction battles force landlords to sell properties cheaply to escape stress. -
Maintenance Costs
Properties requiring frequent repairs or extensive renovation become financial burdens for owners, leading to distressed sales. -
Remote Landlord Issues
Owners who live far away struggle to manage their properties effectively, leading to disinterest and undervaluation.
Investor Opportunity
Investors can:
- Buy distressed properties at reduced prices.
- Renovate or improve management systems.
- Generate positive cash flow through proper tenant screening and professional management.
Example:
A landlord sells a ₦20 million rental property for ₦15 million due to tenant troubles.
An investor purchases, renovates, and hires a property manager, turning it into a profitable asset.