The Below Market Value Illusion

June 05

If you have been around Property Investors over the last 2-3 years, you will have heard the term BMV - Below Market Value.

The term refers to buying a property for less than it is worth.

When people hear this, they normally respond in one of two ways. Either they think this is an excellent idea, and start looking for the best techniques to buy BMV, or they express a complete disbelief that any one would sell up for less than their property was worth. Both of these viewpoints has a lot of merit.

Like all property buzzwords, there is a lot of real insight in the term, and a lot of mis-information that has spun up around it as people try to take advantage of the desire for BMV.

Let us start with the good news. BMV does exist.

Now for the bad news. Most so-called BMV deals confuse a discount from asking price with a discount from true market value.

So, why would anyone sell at below the true market value of their property? It all hinges of what we tend to mean by Market Value.

In shares, the market value of a share is established by, well, the market. You can go to your broker and ask him or her to buy 100 BP shares, and he or she will give you a price. This is possible because BP shares are liquid, fungible, and transparant.

Liquid means that a market exists for them. Which is to say that at any time, some people are willing to buy BP shares, provided the price is right, and others are willing to sell them, provided the price is right. Of course, different people have different ideas of what the right price is for buying and selling, and the prices move up when more people want to buy and are willing to pay a bit more than previously, and fewer people are willing to sell at the previous price. As the buyers offer more, the sellers decide that selling would be a good idea after all, and the price moves up.

Fungible means that the two shares are identical. If I have 100 BP shares that I am willing to sell, and my brother has 100 BP shares that he is willing to sell, then the ONLY thing that will help you determine who to buy from is which of us will sell at the lower price. There is no particular benefit to having my shares rather than his, because in terms of what benefit they give, they are identical.

Transparant means that everyone in the market can see the prices at which everyone else is willing to buy, and willing to sell, and the prices at which they are actually buying and selling live.

For assets like properties, none of these conditions applies.

Properties are illiquid, in that there is no guaranteed buyer for a property, even if the price is low. Nor is there a guaranteed seller for the property you want, no matter how much you may be prepared to offer. Two flats in the same block are not actually identical - one may have a different floor, or aspect, or decor. Finally, there is no immediate visibility of every property for sale, even if you visit every estate agent in the town, someone may be trying to sell privately, or willing to sell but not yet advertising, and property sale prices are not available for some while after sales have gone through.

As such, it is impossible to tell PRECISELY what the market value of a property is at the time you are making an offer. At best, you can get a general idea of what other properties are selling for by asking what other offers have been made, but this is where the number one mistake is made. Many, many, people confuse ASKING price with MARKET price. Getting a discount on ASKING price is NOT the same as buying below market value.

The next mistake that people make is by assuming that because they have got a further discount because the property was in poor condition, this represents a BMV purchase. Again, this is a mistake. A property in poor condition has a lower market value, reflecting the fact that whoever buys it will need to spend money and time sorting out the problems.

So, does BMV actually exist, and if so, who would sell?

The answer is that BMV has nothing to do with the property, and everything to do with the vendor.

This is because, as an investment purchaser, you are offering the vendor three things.

• - MONEY
• - SPEED
• - SECURITY

Money is obvious - it is what most people focus on in the sale of a property.

Speed and Security are where investment purchasers can find an edge.

If you were selling your house, and the estate agent said that there had been two offers, which would you choose?

• - OFFER A, for 165k, from Mrs J, an investment purchaser, who had the deposit funds in cash, and a broker lined up confirming that the mortgage offer would go through in 28 days.
• - OFFER B, for 175k, from Mr K, who lives in a smaller house the other side of town, and has just agreed to put his own house on the market to raise the funds to buy yours.

The answer depends on your circumstances. If you have put up your house for sale, working on the theory that once it was sold, you would go and live with your parents, and then start looking for a new place, you might be tempted to wait and see whether Mr K was able to sell his house quickly, because the extra 10k potentially made a difference.

If, however, you had already made an offer for your dream house a few weeks ago, and the vendors were saying that if you did not exchange soon they would re-advertise, and the lower offer from Mrs J was enough to give you the funds you needed, then you might be tempted by OFFER B.

In my experience, over ninety per cent of vendors will hold out for the higher offer, and be in a position where the extra money is worth waiting for. However, in a very small number of cases, the vendor is looking for the speed of sale, rather than the extra cash. The trick to buying BMV is identifying these vendors.

There are all kinds of techniques for trying to discover this, from simply asking, through leaflet drops, through simply making very low offers, and seeing whether there is any interest.

If you look here you will see a link to the free course from Parmdeep Vadesha. Deep is, in my view, the UK expert on buying BMV. His free course is well worth a look, and if his writing style appeals, then consider his paid-for course as well. Alternatively, Deep regularly comes to the PNC events, so check when he is next due to speak to hear him live.

This is just the feature article from the June 05 newsletter. Subscribe for market comment, forthcoming events, and more.

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