Below Market Value - Part IV

December 06

This is the fourth, and final, part of the mini-series about Below Market Value property in the UK.

In part one, I spoke of that fact that because of certain differences between the property market and other types of market it is possible to buy property below market value. I also spoke about the use of the leaflets as a way to attract motivated vendors, and also to work out what form of adverts actually work for you.

In part two, I spoke about newspaper adverts, personal contacts and estate agents. I explained they can bring below market value properties to you. We also discusesd how it is important to use the test approach to your leaflets first, before you start spending money on newspaper ads.

In part three, I ran through the research work you need to do in between receiving a phone call from someone who needs your help, and going to visit them. (Ironically, there was a big type - I said TomeTrack instead of HomeTrack.)

In this, the final section, I am going to be running through what to say when you meet the troubled vendor.

The first thing to do is to get your head straight. You are there to offer help, and to offer a solution, not to browbeat someone into saying yes to your offer. If I believe that a vendor would be better off putting their property on the market with an estate agent, I tell them so.

The next thing to do is to build rapport, and this starts with what you are wearing. You often find that the people who are in difficult situations financially feel that they are victims, and have been ripped off by the establishment. (This term pretty much extends to anyone who wears a suit.) As such, I make a point never to wear a suit - I tend to wear chinos and a sports jacket - so that I look approachable and serious, but not part of the traditional establishment.

Then I make sure that I build rapport with the person - rather than jumping straight in and talking about money, I will start out by talking about the most interesting subject in the world - THE VENDOR. That is to say, that I will look round the living room and find something to admire (photos normally give away hobbies), oh and always accept that cup of tea.

The reason for doing this is to make sure that the vendor is comfortable with you as a person, and realises that you are a human being who is genuinely interested and wants to help (if you are not, by the way, you will quickly discover that it is very hard to fake, and probably find that BMV does not work out for you!)

Then I explain how we work - namely that we are a business, and need to make a profit - normally a ten per cent profit. I then explain that in order to make an offer on the property (an offer that will give me my ten per cent profit), I need to run through a number of things:

1: How much they owe.

You need to get this up front, not just the mortgage owings but any other secured (and ideally unsecured debts.)

If they are mortgaged up to the hilt, then it is better to explain straight away that you are unlikely to be able to make an adequate offer, and that they may be better allowing the courts to repossess them and declaring bankruptcy.

If, however, they have relatively low mortgages, then there are a whole bunch of other options avaialble to you.

One key trick is with overdue credit card debt. You can explain that, if they agree to your offer on the house, you can also help them negotiate with their credit card lenders to write off some of that debt.

2: The market value of the property

• I already know this from the HomeTrack report (which I will normally bring along to show the vendor.)

2a: The value of the property that market rent would sustain

• I show the typical rents (which in my areas I know), and the interest rates an investment buyer would have to pay, and thus calculate the highest price that an investment buyer could pay.
• I only show this, obviously, if it is LOWER than the market value. In the market in 2006, it often is lower.

The vendor may counter that they want to stay in the property. However, I can explain that I would love them to stay in the property, but my partners and I have to be protected in case they fall behind with the rent and we need to find an alternative tenant.

3: The costs that I would incur if I were to buy the property and then re-sell it through an estate agency.

By the time that stamp duty (buying and selling!), legal fees, and estate agency costs have been added, this normally comes to about 6-10%.

4: The costs of bringing the property up to let-quickly readiness.

This involves walking round the property, and explaining that modern tenants expect newly decorated properties, so I have a sheet for each room that has a series of tick-boxes of what work would need to be done. Then, I also have a pre-printed sheet of estimated costings for each piece of work. (There is real psychological power to having this professionally type-set and looking like a formal document - if it looks like I am making up the figures, they may well be challenged - if it looks like the figures are set, then chances are they will be accepted.)

Again, the reasoning for this is that, even if the vendor wants to stay on, if they were to fall behind, this work would need doing.

You should always err on the side of caution when it comes to estimating that work. There are often unforseen problems and costs can over-run dramatically. If costs under-run dramatically, then dropping the vendor an unexpected thank-you cheque as a bonus does wonders for your referral business!

Once you understand the value, and the costs you would need to incur, you need to take off your ten per cent for profit, and explain that that is the offer on the table IF the vendor want to stay on at full market rent.

HOWEVER, and this is where the creativity comes in, you can often offer the vendor a dramatically reduced rent in exchange for a much lower sale price.

If, say, the price you were prepared to offer were 135,000 and market rent were 700 per month, you could give them a choice:

• You buy for 135,000 and they rent back for 700pcm OR
• You buy for 120,000 and they rent back for 600pcm OR
• You buy for 100,000 and they rent back for 450pcm

In many cases, they already have an idea how much they want to spend on rent. So you can explain that you can tailor the package for that. However, there are two things to make sure they understand:

1: That the rent will go up in line with inflation each year 2: That this is only possible if their mortgage and other borrowings are low enough to let them sell out at the 100k figure, so they MUST make sure you have all the info.

Finally, do not expect everyone to say yes. Many people are just looking to get multiple offers on the table, and you will only ever get BMV when the vendor is genuinely in difficult circumstances and you are able to help.

This is just the feature article from the December 06 newsletter. Subscribe for market comment, forthcoming events, and more.

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