Properties with rotten window frames, avocado-coloured bathroom suites and life-endangering electrics are what estate agents claim “have potential”. Unmodernised homes may make a sorry first impression on potential buyers, but beneath the peeling paintwork lies real opportunity. As house prices have fallen, the cost of these homes has dropped far lower than their modernised neighbours.

According to the agent Savills, neglected homes are selling for 10-35 per cent less than fully renovated ones in some of London’s most desirable postcodes. Savills’ Fulham office reports a 35 per cent price difference between modernised and unmodernised; the Kensington office suggests a disparity of between 10 and 25 per cent, depending on the street. Not surprisingly, given that mortgages remain elusive, Savills agents report that buyers of these homes tend to be cash-rich.

“Undoubtedly, if you want a bargain at the moment, it’s best to buy unmodernised,” says Ed Mead, of the London agent Douglas & Gordon. “When the market crashes, the first casualty is condition. In a very good market, the condition of a property is immaterial, but in a difficult market it’s all-important.” Indeed, as James Hyman, partner for residential sales at Cluttons, points out, it hasn’t always been like this. A few years ago, when the market was strong, the gap in prices between fully refurbished homes and those trapped in a 1970s timewarp was wafer-thin, if not non-existent. This was because of a shortage of stock and a desire by buyers to mould their home from scratch.

“Back then everyone wanted unmodernised, as everyone was property-mad and fancied themselves as interior designers,” Hyman says. “Now the market has changed and there is less cash to carry out building work, so buyers are able to renovate only if they negotiate a big discount. We are typically seeing reductions of 25 per cent.”

Manuela Conti, 28, sold her modern house in Forest Hill, London, and opted for something she could put her “own stamp on”. She bought a four-bed house in Sydenham for £328,000 with her friend, Louise Brunhoj — they knocked £2,000 off their original offer when they discovered damp — and are now ripping out walls on the ground floor to create an open kitchen/dining room, putting in new kitchen units and new bathrooms and sanding down the floors.

Conti, an estate agent, estimates the project will cost her £30,000, since “nothing has been touched here for over a decade”, and she will have to put in double glazing. “It’s a lot of money but I hope to sell it on in a few years and make a profit.”

One example of a good-value “needs work” house that has recently sold is a four-bedroom house on tree-lined Courtnell Street, in Notting Hill, West London. The house, a probate sale through Bective Leslie Marsh, was in need of complete renovation and sold for £1.35 million. At the same time, an equivalent four-bedroom property on Artesian Road, only 50 yards away, that needed no interior work sold for £2.15 million.

Outside London similar deals are available. Tim Wardley, Connells’ divisional managing director, looks after Northamptonshire, Oxfordshire, Wiltshire and the northern Home Counties. He puts the difference between a house with potential and a finished product at about 12 per cent. “If someone is wanting to move into a better area, then buying a property that needs doing up does seem to be a good idea,” he says.

Cathy Butcher, 42, and her husband Patrick, 41, who have two children under the age of 11, spotted an opportunity when they bought a dilapidated five-bed, double-fronted home through Savills. They paid £1.7 million for the home, which measures 3,920 sq ft, in Balham, southwest London.

The house has been converted into flats and is in need of gutting and complete renovation. The budget for the work is £300,000, and it will likely take a year, during which time the family will rent in the area.

It’s a huge investment, but the Butchers think that the property is well worth the effort. It backs on to Wandsworth Common and offers uninterrupted views of woods and grassland, and there is ample opportunity for wildlife-spotting and weekend strolls. Assuming that its value once renovated is similar to the £2.5 million fetched by a house on the street last year, and setting aside £100,000 for moving costs and any contingencies, the home should eventually be worth about £400,000 more than the Butchers paid for it.

Cathy Butcher, an accountant, says: “Even if you buy a property that has been done up, you always end up doing more work to it than you plan to.”

Finding the unmodernised property to buy is often the hard part, of course. Auctions are a good route, and one estate agency, Unmod London, specialises in homes crying out for a makeover. Dominic Agace, of Winkworth’s, suggests that one property in five the agency sells is unmodernised, while Lindsay Cuthill, of Savills, puts the figure at one in ten. But, if the market continues to pick up, buyers may find their potential profit at risk. David Adams, head of residential at Chesterton Humberts, warns that the shortage of stock risks forcing buyers into competitive bidding.

All agents agree that it is crucial that buyers are realistic about costs and the time it will take to build before they commit to buying an unmodernised property. Get these calculations right, however, and buying scruffy could pay off handsomely.

For further information:

Chesterton Humberts 020-3040 8240, Savills 020-7731 9400, Cluttons 020-7584 1771, Bective Leslie Marsh 020-7221 4805, Douglas & Gordon 020-7225 1225, Unmod London 020-7223 3338

Times recommends

• Second homes: credit crunch casualty or money-spinner?
• How I built my own sliding house
• Top 10 incentives for house buyers