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All you need to know about Below Market Value Property

 

So what exactly is below market value (BMV for short) and what do you need to know before delving into the market of under priced deals.

 

Some experts will argue that below market value does not exist, citing the moment the property is purchased that is the market value. And we would be inclined to agree with them, I know what you are thinking.. Strange for a company that has based its brand around the term BMV.

 

A more accurate term for most of the stock that is labeled BMV would be trade price property. As generally the deals are below the estimated full market value because they need further investment after purchase to realise the potential, full market value. In more simple terms there is an opportunity to add value to the property and create a profit margin through further investment. .

 

These types of properties are great deals and suit a lot of investors with a range of strategies including buy to sell (flips) and buy to hold/buy to let. What they are not is instant equity/profit on the moment of purchase. They are simply trade price properties sold at the market value that investors are willing to pay.

 

Of course it is possible to make small gains on this type of property and resell them at a margin, but typically not the 20% expected from a BMV deal. With true BMV houses simply re-listing them with better marketing and a longer window of time allowed for sales progression will turn a profit.

 

To make an instant profit from a trade price property you would need a less savvy investor or someone who is looking to live in the property. A buyer looking to make a home with some sort of emotional attachment would be willing to pay a higher price than you. However extracting that margin without doing any work in a short period of time is difficult.

 

Banks are wary of lending on properties that have been purchased in the last 6 months and the underwriter will scrutinise a valuation above the previous sale price. Unless the buyer is paying cash or can afford for the loan to be based on your initial purchase price, you may find turning a quick profit of 20% almost impossible.

So what should be classed as below market value.

 

We believe true BMV property offers instant equity without further investment in the fabric of the building. This type of deal occurs when vendors are looking for more than just the monetary value from the sale. They may be looking to

  • Remove the responsibility and stress of owning the property
  • Remove the running costs of the property
  • Release cash quickly for an immediate need

 

In almost all cases of BMV sales, timescale will be a major motivating reason behind the quick disposal, normally occurring due to:

 

-Death

-Divorce

-Debts

-Disaster

 

Obviously these are all extremely testing times and care needs to be taken when dealing directly with vendors in these situations.

 

In some of these cases such as divorce and debt it is possible to pick up a property which needs very little work and could be instantly placed on the lettings market. But accessing the margin from the BMV purchase still faces the challenges we discussed earlier.

 

The quickest way is to purchase the property with cash and then remortgage in six months. Six months is the period most mainstream lenders observe before allowing finance to be raised on a purchase. If you opt to do this be prepared and have evidence as to why you were able to purchase under the normal value. It also helps if you have comparable sales evidence at price levels you are claiming.

 

How to find BMV deals

 

BMV property is out there and great deals are done every day creating equity and boosting yields. Most below market sales do not need the coverage offered by mainstream portals. Instead these deals are done via a sourcing agent or simply by knowing your area and learning when to recognise a possible opportunity. Search ready sourced BMV Deals

 

Estate Agents

Estate Agents can also be a great source of deals and I recommend you make it clear to your local agents when you are in the market for new deals. Build up a relationship with the team in the office and always provide feedback whenever you view a property.

 

Sourcing Agents

Enlist the services of a sourcing agent and let the deals come to you. Property sourcing agents know how to spot opportunities and will normally have the relationships with the local agents. They may bring a lot of trade price deals to you which as we discussed earlier are still great investments. Finding an agent in your chosen investment area to work with is a great strategy especially if you are looking for multiple deals.

 

A sourcing agent will give you back your time and should be able to bring you many more BMV opportunities than if you tried to do the sourcing for yourself. If you are considering this route we have a directory of agents by region. It is important to do your due diligence on an agent, especially before parting with any money.

 

Find agents sourcing property for investors in popular areas of

Property Sourcers London

Property Sourcers Manchester

Property Sourcers Birmingham

 

Trade Price Property Vs BMV Deals

Trade price deals are easier to find and easier to refinance. This is because you will have evidence of the money and work that has gone into developing the property after the initial purchase.

The down side is you do need to actually do the work. You also need to be good at estimating the cost of the work involved and have the teams in place to carry out the renovation.

 

True BMV deals created instant equity upon purchase without doing any work at all.

But the downside is releasing the profits is more difficult and may take more time.

 

Which type of property deal should you concentrate on?

The answer to this is whatever fits your own overall strategy and capital allowances. If you have the ability to refurbish property and create equity I would concentrate on using other metrics to measure the deal.

 

For example let’s look at a two scenarios, while looking at these I will assume the goal is to conserve capital to grow a portfolio of residential rental properties.

 

Property 1

Worth an estimated £100K on the open market being sold quickly for 20% BMV costing you £80k  and netting you equity/profit of £20k

 

Vs

 

Property 2

Worth an estimated £100K on the open market being sold through an advertised deal for £65k. Requires £20K worth of work taking no more than 4 months

There are comparables to justify the £100k potential value and you will photograph the property before. You will also keep documented expenditure records.

 

The risk with property 1 is that you are only able to refinance at the purchase price of £80k and with a 75% mortgage that would return 60k of your capital and leave a potential 40k in the deal.

 

If property 2 goes to plan you should be able to achieve the valuation of £100k at month six and have £75k returned by way of a 75% LTV mortgage. This property also has its risks as even with the evidence the lenders could take some persuading. There is also the chance that the work costs more than you expect and erodes your margin.

 

Conclusion

Hopefully you now have a good idea of what BMV is and how to find more deals. From looking at the scenarios I hope you agree that investors should focus on more than just the percentage of discount. As this figure alone is not enough to warrant a purchase or the ruling out of a deal.