Below Market Value - Part I

October 06

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BMV is still one of the hottest buzzwords being spoken about in property investment. It has been over a year since I last wrote about this, though, so I hope you will forgive me for restating some of the things I wrote before.

The idea is that you can buy a property for less than it is worth.

On the face of it, this makes no sense whatsoever, from at least two different viewpoints:

• Some would ask who would sell a property for less than it was worth?
• Others would say that surely the sale price DEFINES the market value for a property, since that was the most that the vendor could get for it?

The answer to both these questions is that Market Price is a value that is easy to set only in certain circumstances - namely that the market in question is liquid and transparent.

The first of these - liquid - is easy to define. It means that for anything that someone wants to sell, a buyer can be found; and for anything someone wants to buy, a seller can be found. It says nothing about the price that the buyer might have to pay, nor the seller might have to drop to - but does say that a buyer will be out there. In addition, the transaction can be immediate (or as fast as makes no difference), with little in the way of transaction costs.

The second of these - transparent - is slightly more subtle. It means that all the information needed is available to all parties. This means that the potential buyer can see not only every property on the market at the moment (with asking prices), and every property that has been sold recently (with actual selling prices) but also every other potential buyer, together with what they are currently bidding!

The best example of a transparent market is eBay - if you are looking for a widget, you can see every widget currently listed with eBay, plus the recently closed auctions for widgets, and the highest bids from other buyers. Indeed, much of the effort around eBay at the moment is in technologies making it possible for people to put in a last minute bid (a snipe bid) which gets in so soon before the closing that no other bidder has time to respond

So the question I pose is - is the property market liquid and transparent. The answer to both of these is undoubtably NO.

There are liquid and transparent ways to sell a property - auctions spring to mind - but these reflect such a tiny proportion of all property sales, that it has become commonly-received wisdom that auction prices do not reflect accurate market values.

Hopefully that argument goes to answer the second objection - and supports my belief that it IS meaningful to talk about BMV, because inefficiency in the market means that it is possible, from time to time, to buy property for less than the open market value (OMV.)

The first question - why would anyone in their right mind settle for less than the property is worth? - also needs addressing.

However, the answer often boils down to SPEED of transaction.

For most people selling their house, time is no great pressure. They put their house on the market at about the same time they start looking for a house, and assume that it will take about the same time to find their next house as it will to sell the current one.

Indeed, many people put their own house on the market BEFORE they go house-hunting, because they figure that it is easier to get a good price for their next house if their own is already sold. (And to a large extent, that belief is true - many estate agents like what they see as cash buyers.)

However, there are a small number of people who are not in this situation. Who, because of their circumstances, value a fast sale. And I mean value a sale, in the sense of prefer that to real pounds.

Given the choice of two sales, which would you go for?

• Offer of 180,000 from Mrs. Jones, who is about to put her own house onto the market, and will buy yours once that is sold.
• Offer of 160,000 from Mr. Harrison, who has cash ready.

Obviously, it depends on your circumstances. If you have found your dream house but need to move fast, and 160,000 is enough, then perhaps you will go for it. But for most people, the extra 20,000 will be worth waiting for. (For most UK households, 20,000 is higher than the after-tax annual income.)

That was the good news - that BMV exists.

Now for the bad news - finding BMV deals is labour intensive. It is NOT a strategy for the passive investor.

There are three parts to finding the BMV deal - finding the vendors, and then closing the sales. This newsletter, I am going to talk about one way of finding the vendors.

It IS possible to find them through estate agents, but very, very difficult for the new investor. Most estate agents already have contacts with a small number of investors who can move fast to help those vendors. Breaking into that circle takes, in many cases, years. One reason I recommend dealing with estate agents is to set that years-long process in motion.

Far more common, however, are the direct techniques, and these broadly fall into three groups.

1. The flyers
2. The newspaper ads
3. The personal contacts

Flyers are the most time-consuming, but widely reported as being very, very effective in many areas. You design a flyer, get a few thousand printed, get them posted through a few thousand doors in your target area, and wait for the phone to ring.

Designing a flyer is an area that needs some attention - you are NOT looking to advertise the fact that you buy houses Below Market Value... instead you are looking to advertise the fact that you can help in certain situations.

There are two schools of thought about flyers - one is that only the headline matters, so you want a simple flyer that reads:

• Facing repossession? I may be able to help. Call Mark on 555-1234

The other school of though is that you want LONG COPY, and a list of areas where you might be able to help. For example:

• Facing repossession? Going through a divorce? Credit card problems? Creditors hounding you? Expecting the baliffs? If you own your own home, and need to raise cash quickly, then I may be able to help. Call Mark on 555-1234
• (except that it actually goes on for several hundred more words.)

Which works better? Well, there is an easy way to find out!

Instead of printing 10,000 of one flyer, print 5,000 of each, and stick them through alternate doors. However, and here is the cunning bit, instead of writing call Mark on them, you write call John on one, and call Dave on the other.

Then, when someone phones asking to speak to John or Dave, you know which flyer has caught their attention.

The downside of this technique is that you then have to explain that John / Dave are on holiday, but you work with them... the slightly less tortuous alternative is simply to register two different phone numbers and see which calls most, but this ups your expenses. (Though, to be fair, IT solutions make it much cheaper than a few years ago, if you have broadband.)

The combination of direct marketing with testing (seeing which approach works best) has been very, very succesful

More about other ways of marketing in the next newsletter...

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