Investing in BMV properties (below market value properties) can prove to be a highly profitable strategy. Below market value properties are properties that are discounted significantly 10-30% below their fair market value due to special circumstance such as rush sale because the seller is in urgent need of cash, foreclosures or tax sales.
By buying significantly below market value the investor gains instant equity. For example, if the property’s fair market value is £200,000 and is sold at a 20% discount, that is, £160,000, then the investor gains an instant equity of £40,000. The investor may take advantage of such an equity either by reselling the property at its market value, or by refinancing the property in a way that would allow him to release some of that equity.
It should be noted, though, that loans with very high loan-to-value (LTV) ratios (90% or above) are not given that easily by banks in times when there is economic uncertainty and the market is not doing well. However, such loans are easier to get when the market is doing well and property prices are rising.
The key for the investor when purchasing such properties is to make sure that indeed the quoted price is considerably below market value. For this reason, the investor needs to obtain a reliable valuation of the property that would indicate the fair value of the property. With such an estimate at hand, the investor will be able to verify whether the asking price is indeed considerably below market.
Also another important check the investor needs to carry out concerns the loans and other liens that the property may be burdened with.
Risks of Buying BMV Properties
The risks involved in investing in BMV properties are the following:
– In markets with falling property prices, when sales are low many sellers will try to lure investors by claiming large discounts. Investors need to be careful and always verify the validity of the discounts claimed by the seller through independent property valuations
– In markets with falling prices, discounts offer a cushion against future value declines. However, such declines may erode completely any perceived equity gains at the time of purchase and transform an originally high-return investment into a low or mediocre return investment
– Another risk of buying BMV properties in falling markets is the difficulty in reselling them because of significantly reduced demand from both consumers and investors
– Finally, in declining markets it is more difficult to determine the true market value of a property as there are only few transactions that can be used as basis for the valuation