For property investors, below market value (BMV) property is the holy grail. These properties give you instant equity and may mean you’re able to achieve a better rental yield.
Most below market value transactions are time-sensitive – they must be completed quickly and in return, you get the property at a discounted price.
In this guide, I will break down the advantages of buying below market value, how to fund these properties and how you can assess a potential purchase.
The advantages of buying below market value
The biggest benefit to buying below market value is that it allows you to secure a property with a lower deposit.
The trick here is the use of bridging loans, a type of short-term loan, which is secured against the property. Whereas mortgage lenders work from the lower of the purchase price or valuation, this isn’t the case with bridging finance.
Some lenders are happy to lend based on the open market value – the true value of the property – with only a small deposit coming from you.
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How should you finance these properties?
If you’re looking to hold the property as a long-term investment, funding is a 2 stage process. First, you would buy the property using a bridging loan, as mentioned above.
Once you’ve secured the property, you can complete any refurbishment work required and let the property. From there, you would then look to refinance onto a buy to let mortgage as the rate charged would be much lower the bridging rate.
As you’re already buying at a discounted price, and especially where you’ve added value through refurbishment, you may well be able to refinance most, or even all of your deposit back out.
If you’re not looking to hold on to the property, you can just refurbish the property and then market for sale at a higher price.
Some mortgage lenders may be unwilling to lend to the person buying from you if you’ve owned the property for less than six months. This is commonly known as the six month rule.
To avoid falling foul of this, you may want to wait 6 months before marketing the property as a limited pool of lenders for buyers is likely to impact your sale price.
Understanding the true value of the property
A common misconception is that a property is below market value if the value can be increased quickly through refurbishment. What we’re looking for are properties that you’re paying less than the current value in its current condition for.
If the price can be increased further through refurbishment, then that’s a bonus.
To check the current value of the property, use comparable properties close to your proposed purchase. They should ideally be of a similar size and condition.
Never base the price on properties that are marketed but have not yet sold, as they could end up selling for less than they’re advertised at.
Finally, always make sure that you’ve visited the property before agreeing to buy it, and if possible, have a surveyor check out the property.
Big savings on the purchase price can quickly be wiped out if the property needs major repairs such as a new roof, or structural improvements.
By Gary Hemming, Commercial Lending Director, ABC Finance
Gary has over 15 years’ experience in financial services and specialises in bridging loans, commercial mortgages and development finance. He is widely respected in his field and regularly provides expert commentary for specialist trade publications, specialist business press as well as local and national press.
