One of the biggest mistakes I feel I have seen new investors make when new to property, is that they solely rely on sold prices when making a decision on the value of a property. This can be a financially fatal mistake and mean that you potentially could leave thousands of pounds on the table.
Now I am certainly not saying that sold prices should not be looked at, however it should only be one thing in a list of other things that you do when researching whether a property is a good buy.
A really good example of this is a property that I purchased back in 2009. It was a two bed flat about ten minutes from town and I still remember getting the call to this day. It was from somebody looking to sell their property within 14 days and so the essence of speed and timing was very apparent here. I got the call one afternoon and as always made an appointment to go out and view the property. The property, if I am honest, was not in the best area of town but I still wanted to go out and have a look to make my own conclusion. After viewing the property I was pleasantly surprised and it did not seem as bad as I had been told, (which is another lesson I learned, to always make your own mind up and not listen to the stereotypes as they are not always true). I made my way home and began to go through the rigorous due diligence that I went through with every property I look at. I told the vendor that I would call back within the next 24 hours with an offer for the property which I subsequently did.
After doing my due diligence I realised that I could only pay a maximum of £25,500 for the property if it was to be a cash sale. This was based on this fact, and also the level of refurbishment that was required to get the property to the required rental standard. The vendor informed me that he would accept this offer if I could do it within the 14 days preferably before. This was because he had some debts he wished to pay off and wanted a lump sum to contribute to another property he was buying with his partner. I also agreed to pay his legal fees for the purchase so he would walk away with the agreed amount and not have other costs involved.
This worked out as a win/win situation for both, which I mentioned earlier was such an important thing to remember. There was actually another sale on the property next to mine in the block and this property actually went for £38,000, rather than the £25,500 I had paid for mine. The benefit of knowing your area well and others around is that you can get information from other sources and I was told on the grapevine that this was actually another investor buying this property. This made me realise once again that sold prices were not the only thing to rely on as they do not always show the full story or the full value of the property. Because the investor was experienced, he knew he was still buying a discounted asset at £38,000 with a high yield as the property was worth £50,000-£55,000 in good condition. He was still going to make a very good return. Had he relied on just the sold prices then he may have walked away as mine was lower, not really knowing the true circumstances behind the sale. Had he done this he would have lost out on a very good investment himself. Sometimes there are anomalies and sold prices are lower, especially in areas where it has mainly been investors buying.
Summary: The sold price is just one aspect when trying to work out the value of a property. When there is a downturn in the market, it is likely that sold prices at the lower end of the market will be low due to the fact that it is investors who are mainly buying. Use this as a guide and not an absolute view of value as these properties are often bought at a discount already, and the property may still be a good investment even if there are sold prices lower than yours.