BUYING PROPERTY AT BELOW MARKET VALUE – ADVICE FROM LETTINGFOCUS.COM
Why the credit crunch makes it easier to buy property at below market value or BMV by David Lawrenson
Property expert David Lawrenson of LettingFocus.com looks at buying property Below Market Value, BMV and Sale and Rent Back.
Credit Crunch
Many lenders have failed to pass on the Bank of England’s recent base rate cuts in a desperate bid to improve balance sheets.
So at the same time as many people are struggling with the effect of the credit crunch, they are also having to face re-mortgaging onto much higher mortgage rates when their initial mortgage deal ends.
Remortgaging borrowers are also finding that lenders have tightened up on their lending criteria so borrowers with poor credit ratings are finding money for new mortgages hard to come by.
And it is not just the heavily indebted who are getting a shock because it is now clear that the odd missed credit repayment will now not be overlooked by lenders either when they are considering mortgage applications.
At the same time, many lenders have realised that many of the mortgage loans they previously wrote for new build properties (many made to landlords) were perhaps a little reckless.
Beset by falling flat prices and sluggish rents on oversupplied city centre flats, most lenders are reining back or exiting entirely from making loans on new or recently built city centre flats.
It all makes for a grim picture for many property owners and for those landlords who bought the wrong type of investment property.
Ideal Situation for Below Market Value (BMV) Players
But these dark clouds are manna from heaven for investors who buy property below market value (or at BMV) as it is sometimes known.
Professional investors know that with property you make the bulk of your money when you buy and debt ridden property owners equals “motivated sellers” who will listen to cheeky offers.
They know that buying property cheaply often comes down to buying from someone who is facing one or more of the three Ds – death, debt and divorce.
Many property investors looking for property bargains previously used bridging finance to get the deal done without using any of their own money.
Here is how it worked.
Financing BMV Deals
Suppose you found a property which is valued at about £300,000 but the owners want a quick sale and will sell to you for only £240,000. You would raise a bridging loan for the £240,000 and then complete the purchase.
At the same time you would apply for a remortgage supported by a valuation for £300,000 on which you applied for a mortgage loan of 85% or £255,000. This scenario would give you instant equity plus a bit extra which could go towards purchase costs and the cost of the bridging loan (which would be at least 1.5% interest per month on top of a set up fee.)
Case Study
In one recent deal, a BMV operator I know bought from a vendor who was wishing to sell fast to raise finance to clear his debts after his grandson’s business venture had failed. “The old couple had tried to help their grandson by raising money but following the business failure, the creditors were knocking at the door seeking to repossess,” he says.
“The deal I set up was a typical win – win deal that met everyone’s goals. The people could stay in their home, there were no estate agency fees to worry about and as they sold without vacant possession there was no HIP either”
Mortgage Lenders are Wary
However, as the credit crunch tightened its grip and arrears on these loans increased, lenders got more wary of financing back to back mortgage loans like this and in early 2008, the last lender that did this type of business - the Mortgage Express (RIP) - finally pulled the plug.
So today all mortgage lenders will want to see 3 or 6 months ownership of a property before they will consider doing a re-mortgage.
The Future of Below Market Vaue (BMV) Deals
But despite the pull out of the main mortgage lenders, there will always be a market for some types of clever financing deals to help out struggling home owners at the same time as allowing investors to buy property from the "soon to be repossesed" with "no money down"
Indeed, those who sell seminars on how to do BMV say they have some Baldrick Like " cunning schemes" in place though it is too early to evaluate these yet.
For property investors with a cash pile available to help finance buying property at below market value, these are great times.
People will always need to sell fast for a variety of reasons – often because of sickness combined with consumer debt. And it seems more and more people are getting overcome with debt but want to stay in their own home.
Sale and Rent Back
For many people selling to an investor and then renting back will be the best way forward providing a win win deal for both investor and seller.
The seller gets to sell their property fast and does not pay any estate agency fees nor even need to get a Home Information Pack. It can be a very persuasive deal.
However, these Sale and Rent Back or SARB deals may have finally had their day because the government has now imposed strict very controls on the way such business is conducted making it impossible for small operators to function in the future.
About David Lawrenson and LettingFocus
I’m David Lawrenson from property mentors LettingFocus.com.
LettingFocus.com offer unbiased landlord information because unlike most people in the buy to let and property “advice” business we never link to any property company, developer or bridging loan financier.
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