Buying a property below market value enables property investors to purchase properties at lower value, which is hugely beneficial in the long term. It means that significant profit can be made from property flipping or generally as prices rise over time.
Getting a house below market value doesn’t require expert intervention.
The key to getting really good deals is buying from motivated sellers. The current property boom means that below-market properties are scarcer. This blog post explains how to find them.
What is below market value?
The Royal Institute of Chartered Surveyors (RICS) defines market value as “the estimated amount for which a property should exchange on the date of the valuation between a willing buyer and a willing seller in arm’s-length transaction after property marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”
“Without compulsion” is the key part of buying an apartment below market value.
If someone wasn’t compelled, then why would a property be available for less than it is worth?
This therefore means that buying a property below market value is difficult.
It is difficult to know if the property is cheaper because of the seller’s need to sell or if there is a problem.
Some people say “there is no such thing as below market value”. Some people make the argument that since it was sold for that amount, it is therefore the market value for the property.
In a nutshell, if a person wants to buy a house to sell again in the same market it is reasonably be expected to achieve a higher price.
Thus, below market value properties do exist.
Why do properties fall below market value?
There are a number of reasons why properties may be priced below market value:
- The seller is looking to move properties quickly without investing in marketing efforts or doing inspections. Estate agents work on commissions and so while most tend to watch out for the seller’s interest, others want to get their commission and move on.
- The estate agent isn’t accustomed to the market. They may be new in the area or operating outside their zone. This can course them to seriously underestimate the value of a property.
- When the property is being auctioned it is common for a property at auction to have a reserve price that the seller is prepared to accept and this price may be lower than the market value but good for the seller. For example, lenders may auction repossessed properties to recover their monies, which may sum to an amount below market value.
- The seller is under pressure and needs to part with the property quickly. It could be so that they can sell and move into their dream home, it could be because of divorce issues, or other financial trouble.
- The investor has gone broke and needs to part with the property quickly. This can be an opportunity for negotiation.
Should you buy below market value properties?
In short the answer is yes.
But you need to be careful. No one willingly sells their property below what it is worth without a good reason,
Even when being given a compelling reason it is extremely recommended that due diligence takes place. Lying can be commonplace in this scenario, so with below market value properties do twice as much research as you would normally do.
That said, with BMV properties things can still be missed. It is also important to not take the price tag of surrounding properties as a good indicator of value. These might be the selling price for a number of reasons.
Another thing to be aware of is the ‘get-rich-quick’ property guru’s who have a thousand below market value properties to offload to you because they’re very nice people. They know that a lot of people want to buy a house below market value and can sometimes use that and people’s experience to make a quick buck.
Whilst it is true that there are some companies who do generally support with helping you buy a property below market value, there are many who do not. And there are many who thought that they bought a property below market value that ended up being a nightmare.
What are the benefits of below market value properties?
More value for your money: You can afford a potentially better property than your funds insight otherwise been able to purchase.
Lower loan requirements: Reducing the price of a purchase often means reducing the amount of your house loan. Since that payment is ultimately paid back with interest, below market value properties could save you more than just the original price difference in the long run.
Better capital growth: Since you’re starting with a purchase price below the true market value, you’re potentially benefiting from an immediate capital appreciation represented by the difference between the price you pay, and the true market value.
Better potential rental yield: Rental yield is calculated by comparing the purchase price with the rent a property would bring in. Since the quality and thus potential rental price, of the property is the same no matter the price you pay, paying less means an improved rental yield from the start.
What are the challenges of below market value properties?
Potential problems behind valuation: It may be there’s a reason behind the significantly lower valuation which you aren’t aware of, such as poor infrastructure, hidden faults, or an undesirable local area.
Can be a sales trick: The BMV tag can sometimes be a sales trick used by unscrupulous sellers to entice you to buy.
May end up paying more: If you don’t pay attention to current market valuations for similar properties, the BMV tag could mean you end up paying more.
How can you buy properties below market value?
This step-by-step guide can help you find properties that are below market value:
Decide what property you are going to buy.
1.) Note down the size of the type of property you are looking to buy.
2.) Note down any special features of the property which may affect the value e.g. good condition, rewiring need.
3.) Research what price similar properties are to the one you are planning to buy that had sold within the last 3-6 months.
4.) Find similar properties which have been sold, but haven’t appeared on sold property price lists.
5.) Ask the agent who sold the property to tell you if the property sold for ‘near the asking price’ or below. The agent cannot legally tell you what it sold for, but can only give you an idea.
6.) Once you know what prices are sold for locally, you can start looking for BMV deals.
7.) Always visit the property you are purchasing – never buy unseen, whatever reasons you are given.
8.) Properties are sold below market value at:
b. Through property sourcing companies
c. Direct from the buyer
d. Estate agents (with sellers requiring a quick sale)
9.) Have two or three properties to compare and make offers on.
10.) Make an offer approximately 10-20% below the real property’s value (i.e. not off a marketing price).
11.) Make sure the offer is subject to a RICs surveyor’s valuation who is qualified to do Residential Valuations.
12.) If the offer is accepted, send in the RICs valuer and if in poor condition ensure you have a building survey with a valuation.
13.) Instruct a legal company and ensure they are aware you need to purchase the property quickly and are buying at a legitimate discount – especially if you are securing a mortgage to purchase the property.
What to do next?
Touchstone Education are the UK’s leading property investment education provider.
Wealth Through Property is the ultimate 2-day property course, which guide students in the wide range of income streams available in the market and how to get involved and take property portfolios to the next level.
To find out more information call our team on 01302 897131 or email email@example.com.