Everyone loves a sale – the opportunity to buy at a discount. If you’ve ever attended any property training or read any investing books, you’ll understand that buying property at a discount is the fastest way to grow your portfolio and keep your investing momentum. But how do you know that you’re getting a property below market value?
Does BMV Mean Anything?
Below Market Value (BMV) is such an abused phrase in the property investing world, that it has very little meaning. The absolute worst use of this phrase is when it is used to describe the difference the asking price and the purchase price. This is the same approach that your high street retailer like Next uses – just because they didn’t sell a pair of jeans at £80 last month, it doesn’t mean that they are now a bargain as they are only £60. It’s not a real discount. It’s not really below market value – it’s just worth less than the overblown asking price. In fact, the market value is the price that a group of people are prepared to pay for the amount of stock.
If you don’t have time to understand the value and pricing of jeans in the open market, you might justify the purchase by the terrible information you’ve been given by the vendor. It’s a pair of jeans, and your time is valuable. It’s okay.
Hopefully, you don’t buy investment properties in the same way you buy jeans. There’s some due diligence required.
How To Ensure Real Discounts
There’s a simple way to make sure your due diligence is accurate.
You buy properties in an area you know, in an area that you’ve bought property in before.
You know the real value of investment properties, you know the cost of works to bring them up to standard and you know the value when they’re completed.
You buy in a homogenous area – one in which houses can easily be compared. If you have a cookie cutter process to transform an ugly duckling into a swan, you know how much to pay for your duckling.
Here are a few ways you know that you’re purchase isn’t below market value:
- The vendor accepts your offer straight away. Sometimes at Fossey Taylor we buy a property six months after we view it, after two other sales have fallen through. We might not be the best priced offer (well we certainly hope not to be) but we guarantee we’ll purchase – we’re a safe bet.
- The purchase price is compared to the price of the instruction. The ticket price is immaterial – it’s just a marketing figure. It’s the price the house isn’t selling at.
- There are no strong comparable sales for property as it is ‘unique’ or there isn’t a market for the type of property you’re buying. Clearly this is different if you’re buying a large development. At Fossey Taylor we buy hundreds of single let properties and houses to be converted into HMOs. We buy homes that are like the property next door and down the street. It reduces risk of not knowing the value immensely.
How to ensure you don’t pay too much of a property:
- Have a formula, stick to it. It’s as simple as that. If a vendor comes back and asks for £500 more than the number at which the deal works, we walk away. We have a formula for a reason – we know in advance what return a property will give – we have yield and discount targets – and we know this when we make an offer.
- Make enough offers on enough properties. Viewing properties and offering on them is a full-time job (in fact several full-time jobs for our team of Fossey Taylor buyers) It’s a numbers numbers numbers game – you have to make offer after offer and be persistent to get them accepted and ensure your discount.
Whether you buy discounted properties yourself or you buy from a deal sourcer, you need to make sure your discount is real. If you’d like to see exactly how we do it, come along to one of our Discovery Days and we lay out the exact process that works for us, and show exactly which areas to invest in.