Below Market Value (BMV) properties are residential properties that are available below their market value. This is normally because the owners are faced with some financial difficulty and want to or need to dispose of their property quickly and without going through a protracted marketing and sales process. The precursor to this is quite often the threat of repossession.
A whole new industry has sprung up around Below Market Value (BMV) properties in recent years. Property investment chat rooms are full of individuals claiming to have found a Below Market Value (BMV) property at a 10%,15% even 20% below its market value.
As a trained surveyor, my first reaction to this is ‘poppy cock’. There really is no such thing.
The guidance from the Royal Institute of Chartered Surveyors on how a surveyor should value residential property is contained in Appendix 5.1 of the Royal Institute for Chartered Surveyors Appraisal and Valuation Standards (Red Book). The basis for the valuation of a residential investment property is normally its’ market value. Market value is defined in the Chartered Surveyors hand-book as:
‘The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.’
Therefore, if, as an investor, you think that a property is worth £200,000 because maybe a similar property was sold for that last year, and you buy it for £180,000, you might conclude or be told you are getting the property for 10% Below Market Value (BMV). But, rubbish, if the property has been marketed, i.e., advertised by an estate agent, and unless you have held a gun to the seller’s head, the market value of that property is £180,000.
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A Below Market Value (BMV) property could exist if the property were not fully marketed first. This situation occurs where property buyers can access so-called ‘distressed or motivated sellers’ who cannot afford or want to go through the normal marketing and sales exercise. To find out how to access motivated sellers.
It is also true that because of the speed and unpredictable nature of the auction process (you are never sure how many and what buyers you are going to get), it is possible that properties bought through auction could be described as being Below Market Value (BMV)
The Below Market Value (BMV) Property Industry
The new Below Market Value (BMV) property industry has emerged during the current property boom because companies have latched onto the large potential profits of buying property at a discount and then renting these investment properties back to their original owners. In addition, favorable financing conditions have meant that these companies have used the instant paper profits they make on these transactions to borrow additional funds to expand their operations. The industry even has its’ own trade organization called the Property Buyers Association (PROBES), comprising companies that offer to purchase a distressed seller’s property for cash and sort out the legal side of the transaction.
Morally there are arguments for and against these companies who use their ‘negotiating’ skills and the desperate situation of the seller (who often need to get their hands on cash fast;) to obtain a significant discount to the value of the property. They argue that they provide a useful service for their clients; others would say they prey on the vulnerability and desperation of the less fortunate members of our society.
Beware of the Below Market Value (BMV) ‘middle men’
This new industry has given rise to a spin-off sector aimed at landlords & property investors who want to emulate the success of these companies by locating their own ‘motivated sellers’ and purchasing Below Market Value (BMV) properties that they either keep or sell on at an instant profit. Companies and individuals have set up to exploit this property investor-led feeding frenzy. Property investment chat rooms such as Russ Whitney have been taken over by chumps masquerading as property professionals, whose previous job, if they had one, was probably opening the door to a load of drunken teenagers in a city center bar.
These individuals set themselves up as Below Market Value (BMV) gurus and introduced, either offering to sell their full-proof Below Market Value (BMV) finding system or increasingly to sell potential investors so-called Below Market Value (BMV) leads to individuals they have tracked down who are ‘desperate to sell.’
The question is always, why? Why would these individuals pass on leads for so-called Below Market Value (BMV) properties if they are such great deals? The simple answer is that they are ‘chancers.’ If they can sell a few leads for a couple of hundred pounds and then an introducer’s fee for the sale of a property at a couple of thousand, it’s not a bad days ‘pay’!
One only has to look at the whole off-plan debacle for parallels. Here again, naive and overly ambitious property investors were manipulated by unscrupulous middlemen out to make a ‘fast buck.’ The result is that many property investors have been left high and dry, having overpaid for new investments, and are now facing financial heartache for many years to come.
Below Market Value (BMV) dangers
These are not the only dangers lurking with Below Market Value (BMV) properties. Even where a landlord manages to sidestep the middle men and does all their own leg work, there is a little-known hidden danger with so-called Below Market Value (BMV) property, which all relates to the provisions of the 1986 Insolvency Act.
The result is that a landlord who legitimately purchases a Below Market Value (BMV) property could find that several years down the line, and unbeknown to them that the seller has become bankrupt. Suddenly, their trustee is coming after the landlord with a court order to either reverse the sale or claim back the difference between the property’s open market value and the sale price. The Insolvency Act allows trustees of bankruptcy to protect themselves from bankruptcy, giving away their assets or selling them at below the market price. A landlord purchasing a Below Market Value (BMV) property is potentially exposed to these provisions for up to 5 years, assuming no fraud or the parties are associated in any way.
It is possible for a landlord looking to invest in a Below Market Value (BMV) property and is worried about getting caught out by this legal loophole to cover themself. They need to get the seller to Execute a Deed of Solvency and thereby effectively sign an undertaking to say they were solvent at the time of the sale. As part of the transaction, a landlord’s solicitor will then need to arrange an insurance policy. This policy will cover the landlord for the two-year period from the date of the transaction in which they are exposed to the potential that the seller goes bankrupt and that the trustee can make a claim against the landlord to set aside the transaction.
Property investment karma
The older I get, the more I believe in the karma of property investment- ‘what goes around comes around.’ Let’s not forget that much of the promised profit from Below Market Value (BMV) properties is at the expense of desperate and easily exploited individuals who have ended up in financial difficulties. There is some poetic justice in a property investor motivated by greed and prepared to exploit vulnerable individuals to end up with: a ‘crap’ investment property, occupied by dodgy and bankrupt tenants, who are then taken to court by disgruntled trustees and to top it all because of a falling housing market end up paying more than the property is in fact worth.
Chris Horne is an experienced landlord and property professional who now runs the website Property Hawk, a site aimed directly at UK Landlords. The site incorporates free property management software that allows users to print tenancy agreements and FREE FOREVER forms. A landlords magazine focuses on UK residential investment property, such as Below Market Value Property.
