The truth about below market value properties
Not another three letter acronym
There’s lots of talk in property investment circles about buying below market value (or BMV) properties. This fascination with buying below market value properties and BMV property deals appears to stem from the idea that buying below market value can help you grow a portfolio quicker by “baking in equity from day one”. Personally, I blame Robert Kiyosaki of Rich Dad Poor Dad fame for all his talk about no money down deals. And although it’s certainly true that buying below market properties is theoretically possible. And, it can help you to grow your portfolio quicker. It’s not an easy thing to do at all. In this post, we’re going to look at what a BMV property deal is, what it’s not, and show how buying BMV can help you.
An introduction to BMV property
Buying below market value properties is possible
To buy a property below market value first requires knowledge of the property’s market value. This is generally defined as the estimated sale price of a property agreed between a willing buyer and seller. It assumes the property is marketed properly and each party is fully aware of the characteristics of the property being sold. Crucially, it assumes that neither party is in an undue hurry to achieve a quick sale that could distort the sale price.
To see why buying BMV is possible, it’s useful to take a look at where the definition might not hold. Firstly, this includes any circumstances where the seller is keen to achieve a quick sale. For example, this might include a seller facing repossession. It could also include a seller undergoing a stressful event like a bereavement and wanting to wrap up the sale of a property as part of settling a family estate. Secondly, it also includes situations where the property has not been marketed well. This is more common than you’d think and can force sellers to reduce the price to achieve a sale. In these situations, buying below market value properties is very much possible.
But don’t believe all the hype
At this point, it’s worth acknowledging that there is a degree of subjectivity in all of this too. The market value of a property is an estimate, not a fact. And all valuations are ultimately just opinions, as they’re based on assumptions. Even a professional valuation carried out by a qualified surveyor is only expected to be accurate to within 10 per cent. The acceptable bracket can also be larger than this in more challenging circumstances. As such, it’s important to take what most investors and estate agents say about BMV opportunities with a pinch of salt. Yes, it’s all about securing a property for the cheapest possible price. However, at some point you need to ignore the hype and make up your own mind what’s right for you.
How buying below market value properties helps you
There are two ways that buying BMV can help your investment progress. One is more short term, and the other is more medium to long term.
Buying BMV property will improve your financials
Firstly, securing the property for lower than its market value will help improve the financials on a deal. Whether you’re looking for a BTL investment or a holiday rental, buying BMV will improve your yield and your ROI. Likewise, if you’re thinking about flipping properties for a profit, then buying BMV will increase your profits from the project. This is the immediate short-term benefit of buying a property BMV. These benefits are available from day-one, without any waiting necessary.
It builds equity you can tap into later
Secondly, securing a property BMV builds equity in from day-one. Say for example you manage to buy a property worth £200,000 for £180,000. That is, you secure a 10% discount to its market value. Let’s assumed that you financed the deal using a 75% LTV mortgage. Then, you’ll have put down a £45,000 deposit and taken out a £135,000 loan. However, because the property is really worth £200,000, you actually own £65,000 of equity on day-one. That is, your equity is £200,000 less your outstanding loan of £135,000. This is equity you’ll be able to tap into later (say when you remortgage) to expand your portfolio.
In practice, any equity you generate by buying BMV will likely be tied up in the property for several years. That’s because it’s almost impossible to get your lender’s surveyor (who’s likely to err on the cautious side with their valuation) to agree that a property that you just bought for £180,000 is really worth £200,000. However, if you combine this strategy with a refurbishment, you may be able to justify an immediate increase in value. Otherwise, you will need to wait at least a couple of years to extract this equity.
Where to find BMV deals
There are lots of ways to buy property BMV and plenty of places you can hunt for deals. Common strategies include buying repossessions and buying property at auction. You could also consider using a property sourcer. With most of these approaches, there’s usually some advantage that you are leveraging to secure the property BMV. This might be an ability to complete a deal quickly or bulk purchasing power. It could also be your ability to take advantage of a network of contacts. There’s lots to talk about with each of these strategies. So, we’ll return to some of these strategies in future blog posts. For now, we’ll leave our discussion of BMV property there.
Reversal
If you can achieve it, buying property below market value is one of the best things you can do to help grow your portfolio and your wealth. However, these deals are hard to achieve. After all, why would anybody willingly sell their property for less than it’s worth. And they’re certainly less common than the property gurus may lead you to believe. So, to provide some counterbalance, I want to stress that you shouldn’t let an obsession with buying BMV hold you back and prevent you from investing at all.
In the long run, buying a good rental unit at a fair price is still likely to be a positive for your finances. It’s usually better to take some action than none at all. At a certain point, you need to stop obsessing over getting the best deal possible and simply make a move. There’s a quote from Warren Buffet that’s relevant here – “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. Put slightly differently, it’s important not to let an obsession with low prices and BMV deals prevent you making an otherwise great investment.
For more on below market value properties and BMV property deals
That brings us to the end of this post on buying below market value properties and BMV property deals. This post is based on a chapter from our book, The Property Investment Playbook – Volume 2, which is available on Amazon. If you enjoyed it, why not check out the book.
Until next time, best of luck with your future property endeavours.