Buying property below market value
There is a lot of buzz about buying property below market value (BMV), but it’s often not as straightforward as it sounds.
To put things into perspective, for every property that is sold below market value, somebody is selling a property that they own for less than its true value. In reality, few people will choose to do this if there is another option available to them. This means that these opportunities aren’t as easy to come by as many ‘property experts’ would have you believe.
That said, property does change hands BMV regularly and there are investors out there who manage to secure these opportunities often.
A true below market value opportunity represents both an excellent investment opportunity and an excellent lending proposition.
Borrowing against open market value (OMV)
For below market value purchases, there are a select few lenders who will lend based on the OMV, meaning you could complete the purchase with very little physical outlay.
These transactions are funded with bridging loans, as a short-term solution to secure the property. From here, investors tend to either refinance to a buy to let mortgage, refurbish the property or sell it for a profit.
In these situations, we’re able to fund a maximum of 80% of the true open market value.
How is the OMV decided?
During the bridging loan application process, when buying a BMV property, the lender will always want a full valuation report. This will be produced by a RICS surveyor who will produce the report after a physical inspection of the property.
The opinion of the surveyor is key, and the lender will always base their lending decision on the value that they place on the property.
A surveyor will value the property based on the expected value that the property would change hands on the date of the valuation based on an arm’s length transaction.
In order to be as accurate as possible, they will look at recent transactions in the local area to estimate the likely prices of future transactions.
Can I get a 100% bridging loan?
When buying property well below the true open market value, you may be able to borrow 100% of the purchase price.
Where your discount isn’t enough to warrant 100% funding, you can offer the lender additional security by way of an additional charge over another property. If there is enough equity in the additional property, you will often be able to borrow 100% of the purchase price.
Can I borrow against OMV when buying at auction?
While it may be possible to grab a property bargain at auction, surveyors tend to report the purchase price at the level of the winning bid at the auction.
This is down to a belief that an auction represents a true test of the market as the property is placed in front of a room full of property investors who are looking to buy. If the property was being sold for less than it was worth, another investor would bid.
While this may not be true in every case, it is usually accepted by lenders. This means that while funding the whole purchase price at auction is possible in theory, it is unworkable in reality.
We can fund 100% of the purchase price for these transactions where additional security is offered.
Can I add value through refurbishment?
Yes, it is possible to buy a property BMV and add value to it. In these situations, our lenders are happy to offer additional funds to cover the costs of refurbishment, subject to overall LTV restrictions.
That said, there is a distinction to be made between the value at present and the value when refurbished. When borrowing against the OMV, a lender will consider the LTV as the property currently stands and won’t take into account any value to be added through the planned refurbishments.
Our guide to buying unmortgageable property is a great starting point if you’re looking to purchase a property for refurbishment. Or to keep leaning more about short-term funding, read out guide to property investor hunting licences.