"Buy the lowest priced house in the highest priced neighborhood you can afford."
It's smart to buy at the low end of a desirable neighborhood because your less-expensive home will appreciate on the coattails of your neighbors' sought-after homes. Buying low also gives you some room to fix-up or add-on without exceeding average prices in the area.
If you find a home that's selling under market, be sure to find out why. First, get a professional inspection to make sure nothing major is wrong. Next, check the location. If it's next to a high school, for example, think twice about the traffic and noise next door. If you're lucky, the home may be sound and well-located but perhaps in less-than-optimal condition--something you can put right with "sweat equity." The home could also be priced lower than average because it is smaller than average or the sellers are under pressure to move quickly.