Below Market Value Property (BMV) Dangers
BMV dangers !!!!!!
The property investment world is a large industry with participants from all walks of life, countries and backgrounds, from a single person with one property for retirement purposes through to institutional investors holding hundreds of units and everyone in between.
With numerous pension scandals hitting savers hard over the past 20 years, property investment has been a safer and more logical path to secure a person’s future.
This increased activity and interest has paved the way for the property education sector to explode. With the age of the internet, social media and social selling, these “educators” have the ability to get in front of an audience never before possible. There are multiple sales strategies used to entice people on to the courses. Key words and phrases used are:
- Become financially free through property
- Work just 5 hours per week in property and be financially free
- Replace your income with property in just 90 days
- Buy property with NO money
- No Money Down (NMD) property investing
- Invest in property with other people’s money
For all intents and purposes, these courses are just the new age of “get rich quick” schemes. History has shown us that these schemes come and go with almost 0% chance of success for the attendees. The brutal reality is that almost all attendees come away losing in excess of £10,000+. This of course begs the question, if you are going to become financially free or buy property with no money, why would you spend, or even worse, get into debt for £10,000+? You are starting £10,000+ in the negative. That £10,000+ is almost a 25% deposit on a Buy To Let property in some regions, which will return a 6%+ yield.
Although many of the above selling points for the courses are achievable in theory, the practical application is a much bleaker story. So, one way the “educators” teach the attendees to make money is by “sourcing” or “packaging” property deals. This comes with its own problems. An attendee of a £10,000+ 3-5-day course does not have the experience to recommend or broker any property deals. At Calidad Property we have two decades of experience within the property, development and construction sector, and we are still learning every day.
At the moment there seems to be two major issues with the way these supposed property investments are “sourced” and “packaged”:
- Sourcing; attendees of said courses are taught to focus on sourcing Below Market Value (BMV) deals, which in theory will show a potential instant equity gain for the investor. The theory sounds amazing and a potentially attractive, easy to sell product which they are told they can charge a “sourcing fee” of anything from £1000-£5000. A BMV deal is relative and open to many interpretations, for example, if a property has been advertised by an estate agent for £100,000 and a “property sourcer” secures the property sale at £75,000 showing an apparent 25% BMV, this sounds great, but add the potential £5000 sourcing fee on and it is now 20% BMV!!
Then we must look at whether this property is actually BMV; a BMV comparison involves multiple avenues of research and evidence. A simple search of Rightmove and Zoopla’s current and sold listings is an extremely weak way to conduct due diligence. A property must be a carbon copy with respect to size, condition and overall structural integrity. Aside from new build developments it is extremely hard to find carbon copy bench mark examples and comparable properties. Without in-depth local comparisons, the On Market Value (OMV) is something very hard to determine, especially by someone who has no or limited experience. It is also extremely important for a complete comprehensive costing to be completed should a property require any improvements or upgrades, someone with limited experience will not be able to provide this with any authority or certainty. Additionally, a property may be advertised at a certain price, but research must show that this particular property is actually worth the asking price, it is common practice today for estate agents to overprice properties merely to get the listing, this produces an overpriced property in the first instance so any negotiations to secure the property at a BMV price will involve substantially reduced offers which are highly unlikely to be accepted under normal circumstances, this leads neatly on to the second point of “packaging”.
- Packaging; The packaging of a deal is the point where all the particulars of a deal are laid out. These particulars show crucial information for any potential buyer/investor to consider when making any property investments. Unfortunately, through lack of experience “property sourcers” are taught to focus on certain areas for selling points. The first being the BMV discount and potential instant equity gain, as explained in point 1, this can be an extremely difficult figure or value to quantify with extreme confidence and generally will only involve some quick research through online portals such as Rightmove and Zoopla. Whilst these portals do provide some valuable information, this alone cannot be relied upon to support true values and discount.
The second being ROI (Return On Investment), this figure is generated using a simple calculation based on the amount of cash deposit placed against the expected rental return (minus mortgage payment). ROI is mainly used as the percentage figure is almost always significantly higher than any yield percentages, for all intents and purpose it is a good marketing technique. What is commonly excluded from this calculation is the other immediate and ongoing costs which are involved as these will severely impact the percentage figure shown for the ROI and not make for good marketing. Immediate costs which are generally excluded are; Stamp Duty Land Tax, legal fees, survey fees, refurbishment fees and any applicable buyer’s fees. Ongoing costs can be; management fee, buildings insurance, gas safety certificates, selective licencing fees, maintenance costs and any void periods which could happen.
When considering all these points it highlights the old saying “all that glitters is not gold” and personal due diligence is extremely important.
When considering all the above additional costs, any initial high percentage BMV discounts or high percentage ROI’s are significantly reduced and expose the potential investments true figures, which unfortunately 99% of the time, do not make for a sound investment. At Calidad Property, we display ALL applicable immediate and ongoing costs from the outset to ensure complete transparency.
The final point I would like to share, which is a little-known fact but can be detrimental to any property investment, is the motivation behind a vendor agreeing to sell a property at BMV and the following potential implications for an investor.
The danger an investor faces when purchasing a BMV property investment is the motivation behind the seller to sell their property BMV. The vast majority of BMV deals are initially obtained by local “sourcers” posting signs in their local area offering the “we buy houses for cash fast, any age & condition” service. In reality they are not buying themselves, they are looking to package the deal and offer it out to investors with an impressive BMV discount. The danger comes with the motivation of the vendor, if a vendor is willing to accept a much lower than market value offers on their property, then the question why? Needs to be asked and the full reason understood. If the vendor is in financial difficulty then the sale can be classed as a ‘distressed’ sale. Almost all lenders today will not accept a distressed sale and refuse finance. This is for a very good reason, should the vendor fall into bankruptcy, investigations could be made into the property purchase and the value at which their former property was purchased for. Many past cases have seen the purchaser/investor be pursued for the additional monies which would make to sale value up to the market value at the time of purchase, wiping out any equity held in the property whilst costing significant legal fees and not to mention the most valuable commodity we have, time.
All investors must be aware of their purchase and be in full information.
If you would like to discuss any current or future investments, please contact us