BUYING PROPERTY AT BELOW MARKET VALUE – ADVICE FROM LETTINGFOCUS.COM
Property expert David Lawrenson of LettingFocus.com looks at buying property Below Market Value, BMV and Sale and Rent Back.
Back in 2008 as base rates fell, many lenders failed to pass on the Bank of England’s cuts in a desperate bid to improve balance sheets.
Three years later lenders margins over base rate remain high which means many people cannot re-mortgage onto better rates once their current mortgage deal ends.
Remortgaging and new borrowers alike 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 new mortgage applications.
At the same time, many lenders have at last realised that many of the mortgage loans they previously wrote for new build properties (many made to landlords) were perhaps a little reckless. (We had been warning about this since 2000!)
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 TIMES FOR BELOW MARKET VALUE (BMV)
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 can make a lot of money when you buy. For them, 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.
In the old days, 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 IN THE OLD DAYS
You would find a property valued at about £300,000 but the owners wanted a quick sale and would 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 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.)
However, as the credit crunch tightened its grip and arrears on loans arrnaged like this increased, lenders got more wary of financing these "back to back mortgage loans" 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 6 months ownership of a property before they will consider offering a re-mortgage.
FutURE FOR BELOW MARKET VALUE (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 repossessed" 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.
The latest kid on the block is the so called Property Lease Option. We expect many would-be tenant-buyers to lose their shirts on some variants of these. (Around the year 2012 you will start to read about them in the papers!)
But away from the "all too clever schemes" for other more ethical property investors with a cash pile available to help finance buying property these hard times are also potentially 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 was the best way forward - providing a potential win win deal for both investor and seller because the seller got to sell their property fast and did not pay any estate agency fees. It was a very persuasive deal.
However, these Sale and Rent Back or SARB deals offered sellers no long term security and have finally had their day because the government has now (rightly) imposed stricter controls on the way such business is conducted making it all but impossible for small operators to function in the future.
ABOUT LETTING FOCUS
At LettingFocus.com we work mostly with organisations who sell products and services to the private rented sector - giving them consultancy advice to help them improve what they do. See our Home Page for more information.
We also provide advice to landlords too. Private landlords may find the following pages useful. ....
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