Month: November 2019

Below Market Value


Go back 4 years and the term ‘BMV’ (Below Market Value) was banded around with another acronym ‘NMD’ (No Money Down). Those were the days whenproperties were bought one day for a low price and remortgaged the very next day for a higher price. This would leave little, if any, of the investors own money in the property, so the financial risk to the landlord was zero, while the banks carried all the liability.Many landlords build vast portfolios via this method of ‘using other people’s money’. It was however those highly geared landlords who crashed and burnt when the risking market burst in 2007 / 2008. Their over-geared houses were falling in value, leaving them unable to remortgage, as many fell into negative equity. As they didn’t have the opportunity to move mortgage lenders because their mortgages came to the end of their fixed or reduced rate period, they found the Standard Variable rates were considerably higher than the original interest rate. Therefore they were required to ‘top up’ their mortgage payments each month with their own money. This strategy was was unsustainable.Their whole model for investment was flawed; in their desire to ‘get rich quick’ they had firstly failed to recognise the cyclical nature of the property marketplace, and instead had started to believe their own hype of being ‘highly successful investors and untouchable’. Quoting the existence of a large property portfolio became purely a status symbol, rather than a true reflection of their financial security, as they believed only in the gambling game of capital growth.With the bursting of the housing market banks soon realised they had left themselves over exposed to these BMV and NMD evangelists, Next Day Remortgaging was closed down overnight and NMD rapidly disappeared from the investors radar and vocabulary.The term BMV however lived on and is still utilised today, the question is what does BMV actually mean? Which benchmark is the BMV being calculated against?In its rawest form BMV is quoted as a % based on the purchase price of the property versus the open market value of the property. i.e. the value that property has the potential to command ‘at that time’ on the open market (There is no doubting that you make your money at the time of purchasing a property).However like all statistics the figure of BMV can be highly misleading. For example, when hearing the success stories of investors or reviewing properties being promoted by sourcing companies you could believe that 30% BMV properties are ‘two a penny’.I.e you purchase the property for 70k and the property is worth 100k.This all sounds highly attractive but a word of caution – often the BMV % quoted does not take into account any worked required at the property to take it to rentable standard. So if we take the same example above – a house bought at 70k, requiring 12k of refurbishment work the property has really been bought for 80k (the refurbishment money has to be funded by your own cash, it cannot be included within the mortgage). This means in this case the true BMV is 100k – (70+12k)/100k = 18% and not the originally quoted 30%.Although still very attractive the reality is this isn’t the initially quoted 30%. But it is an accurate figure.I have seen this over exaggeration occurring time and time again, with refurbishment costs being as general and none descript as ‘property is in need of a new kitchen and bathroom and decoration throughout’ or ‘property in need of some work’.How as an investor you are able to make a sound investment decision with only half the facts is questionable. After all any property bought heavily Below Market Value normally has an element of refurbishment work to be completed, so the equity you thought you had can soon be eaten into.Likewise when looking at the BMV values quoted, some hands free property investment companieshold a second charge on the property, looking for this to be repaid at a later date when the property is remortgaged.I believe this additional charge should also be accounted for in any investing strategy and when quoting the BMV of the property. After all once again it is real money (your money) which has to be paid.I.e.Purchase for 55k with a Second Charge of 10k to be repaid at the second time of remortgaging, the property being worth 80k at the time of purchase. An accurate indication of the true BMV figure would be (55k + 10k)/80k = 21% and not the original 32%.Perhaps it is because I am a cautious investor, or perhaps it is because ethically my desire is to be clear and unambiguous with my Alton Property Partner investors but I produce clear and detailed projection of the refurbishment work, prior to quoting the BMV of the property. These figures are also included in our calculations before an offer is made, so we know as accurately and honesty the BMV true figure. It may not look as glamorous and attractive on the outside, but it means real equity for my investor.Also I have no desire to Second Charge my investors. I charge a fair price for my handsfree investment service;in fact I even base my pricing on the ‘equity delivered to my investor’ after the refurbishment, so base my fees on the true value I have delivered to them. The property is then 100% owned by them. This means they then have the choice to remortgage or sell at any point in the future knowing that the equity achieved is 100% theirs.