Below market value (or BMV as it has become known) has always been the coveted golden chalice for most investors over the years - the very idea that one can invest in a "bargain" investment for less than it is worth and theoretically gain an instant profit in the process sounds ideal.
Of course, this is often quickly filed under the "too good to be true" section of most peoples minds, and in many cases correctly so. However, the perfect below market value deals do exist, but they are reliant upon the initial definitions of market value in the first place.
The property market as a whole is a confusing place at the best of times; pricing is invariably in the eyes of first the seller, then the buyer, and then (just to mix it up a bit) the mortgage provider - all of whom will have a different idea regarding to what a given property is worth based upon what they know, or what statistics they have access to.
There are of course statistics available to give you some idea of property prices from several sources: The Royal Institute of Chartered Surveyors, The Land Registry and The Investment Property Databank to name just few. The problem with much of the statistical data available to the public, however is that it can be very general - one (although extreme) example is the average house price.
Whether it is a country average, county average or even city average price, the figure itself is of no value when it comes to actually measuring what something is worth. All an average house price figure serves to show is how much values in general have risen or fallen over a period of time - not what they are actually worth.
Not so long ago in the US a popular method of property investment was "flipping" which entailed finding a property in a below market value situation, placing a deposit on it, and selling the property on as soon as possible to take advantage of rapidly rising prices. As we all know now, many investors found out (to their cost) that this kind of game is akin to gambling on the market continuing to rise at a rate that is rarely sustainable, and, when the market begins to retract - fingers get burnt.
More recently we have seen a number of below market value "gurus" offering leads and deals and a magic path to riches by plying you with properties that are apparently so cheap they are being given away - the reality usually being these things are rarely what they seem. On the whole, many of these gurus are actually making their money from the "training" material they sell to you and the deals and leads they supply - not from the property investment side of things at all.
So how does profitable below market value investing work?
As with all investments there are several variables which need to be taken into consideration before rushing in to any kind of BMV deal.
Possibly the most important one is how the "market value" price that is being used for comparison is compiled in the first place.
For example: If a 3 bed semi is quoted as being 10% below the average UK house price, this would be very misleading. To clarify, a 3 bed semi in Yorkshire will have a different price than a similar sized equivalent in Harrow, and quite substantially so.
In essence the key is to find out what similar properties have actually sold for in the same area (as opposed to what similar properties might be "valued" at by agents, or be listed for). This can involve a bit of leg work to get this data, but it does pay off in the long run.
It's one thing going out and hunting for a bargain on your own, even if the property is to live in rather than for pure investment, everyone loves a good deal. If however you are aiming to use below market value property investing as part of your investment portfolio, and are seeking advice on deals and offers and so on, a few factors need to be considered when taking advice (whether the advice is paid for or free).
If someone is offering you no end of properties that appear to be vastly below their market price you should be asking "why?" Surely if all these deals are so great the promoter would be involved themselves and have some exposure too? Generally if you dig a bit deeper it is rarely the case that they have any exposure to the deal at all. Many promoters of BMV make their money externally from the property deals themselves - whether that be through mortgage referral fees, "training" seminars, charging the seller fees to "promote" their property to vast numbers of prospective investors and so on.
If on the other hand you have a situation where a promoter has a vested interest in a below market value property deal in the form a joint venture agreement you have a very positive situation indeed. If the deal is structured properly, with a joint venture agreement, the promoter has nothing to gain until you as the investor see returns from the investment.
BMV Rules of Thumb
- Check on what the "comparison" market price is - have any properties of a similar nature actually been sold recently at that price?
- Ensure that the comparison being used is a feasible one - i.e. local statistics that are up to date.
- If it sounds too good to be true - check it out. The very nature of this investment philosophy is one that will spark doubt. If you have doubts, check the facts - no facts should mean no deal, no matter how good it sounds.
- Promoter involvement - is the entity offering you a deal involved? If so, at what level? If they have no involvement with the deal at all - it's unlikely to be that good is it?
- Exit strategy - if you are investing with the aim of liquidating and taking profit over a fixed time span, does the investment in question permit you to do this? Or, are you just hoping that there will be a sufficient number of buyers on the other side to get you out of the deal?
- What would you pay for it? If the deal came to you at the market value claimed - would you still think it was a good deal then? If you do, then you could be on to a winner, if not, question again the actual "market value".
Below market value investing can be lucrative provided you look at all the angles and variables involved - no investment is easy from start to finish, if they were there would be no recessions.
- Wednesday 09 March 2011