Investing in BMV Properties
By buying significantly below market value the investor gains instant equity. For example, if the property’s fair market value is $200,000 and is sold at a 20% discount, that is, $160,000, then the investor gains an instant equity of $40,000. The investor may take advantage of such an equity either by reselling the property at its market value, or by re-financing the property in a way that would allow him to release some of that equity. The key for the investor when purchasing such properties is to make sure that indeed the quoted price is considerably below market value. For this reason, the investor needs to obtain a reliable appraisal of the property that would indicate the fair value of the property. With such an estimate at hand, the investor will be able to verify whether the asking price is indeed considerably below market. Also another important check the investor needs to carry out concerns the loans and other liens that the property may be burdened with. The risks involved in investing in BMV properties are the following: - In markets with falling real estate prices, when sales are low many sellers will try to lure investors by claiming large discounts. Investors need to be careful and always verify the validity of the discounts claimed by the seller through independent property valuations - In markets with falling prices, discounts offer a cushion against future value declines. However, such declines may erode completely any perceived equity gains at the time of purchase and transform an originally high-return investment into a low or mediocre return investment - Another risk of buying BMV properties in falling markets is the difficulty in reselling them because of significantly reduced demand from both consumers and investors
- Finally, in declining markets it is more difficult to determine the true market value of a property as there are only few transactions that can be used as basis for the valuation
Thus, in the case of below market properties, for financing purposes, banks will consider as base value of the property its discounted sales price. Under such circumstances the buyer of a BMV property still needs to put from his own money 15 to 25% of the sales price of the property. However, when the market is strong and the bank lending policies are less tight, in advanced and mature real estate markets like the UK and the US markets, there is a way to purchase such properties not only with no money down but even with cash back. This is feasible because during good times there are banks that are willing to offer re-mortgages, or re-financing, on the same day the property is purchased. This is not feasible when the market is in bad shape as no bank will enter into such a scheme, and they will offer re-financing only after at least six to twelve months from the purchase of the property. The good thing about re-mortgages is that they are based exclusively on the market value of the property and not the purchase price, even if the property was purchased the same day. With re-mortgages available on the same day of the purchase, the investor can use a regular loan with let’s say an 80% LTV and a bridging loan for the remaining 20% of the price to purchase the property, then re-finance the same day with let’s say an 85% LTV based on the market value of the property and repay the bridging loan and even get and some cash back. Here is a numerical example of this technique: Market Value: $200,000 Same-day Re-mortgage at 85% based on the Market Value of the property: $170,000 = $200,000 x 0.85 Cash back: $3,800
Recommended Book
|
