Below Market Value

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Mark Alexander founder of Property118.com

Mark Alexander founder of Property118.com

We all love a bargain don’t we, especially a property which is being sold below market value.

However, just because something is cheap doesn’t mean it’s a good investment.

Married men reading this will sympathise with me on this one. How do you feel when your wife arrives home from the sales laden with carrier bags? We all know that sinking feeling when she walks in with a big grin on her face and announces that she has saved a fortune don’t we?  The reality is that she’s probably spent a fortune on crap which the shops have reduced in price because they can’t sell it at full price for love nor money!  However, those of who stay married tend have learned to smile politely, say “yes dear” and offer supportive comments whilst desperately searching for words which will encourage her to take some of it back and discourage her from buying more in the process. The message is this, it’s easy to get sucked into buying what we believe to be bargain. Now let’s be honest with ourselves chaps, it’s not just the ladies who can be charmed by slick sales people, influence of peers of the hype of a sale is it?

Why do people sell property below market value?

Nobody would choose to sell something for less than it is worth. That’s not to say there are no bargains to be found though. The main reason people will accept a low offer is time pressure.  Decisions can often be irrational and emotional in these circumstances. Below are some examples:-

  • found another property which they don’t want to miss out on
  • relocation for work purposes
  • to deal with probate and to share funds amongst the beneficiaries of a deceased estate.
  • a developer who is coming to the end of a new site. This is a very similar scenario to shops putting the tail end of the stock in the sale to shift the sizes that people didn’t want. 
  • divorce – some people end up hating each other this much that they don’t care how much money they lose so long as their partner loses too.
  • mortgage company repossessions. Mortgage companies work to time scales to sell repossessed assets. Don’t assume that all repossessions are bargains though. The mortgage company has a duty to sell the property for as much as they can. If a property ends up in an auction it still doesn’t mean that it’s a bargain, it just means that it has not been sold by an estate agent within the prescribed time scale and there may be a very good reason for that.
  • financial difficulties. Be careful with this one because if the vendor goes bankrupt within two years the trustee in bankrupt can reverse sales below market value. It is possible to purchase indemnity insurance to underwrite this risk in some circumstances. ask your solicitor about that if you think you might be buying from a financially distressed vendor.

What is a bargain in terms of a buy to let property investment?

We all have our own opinion on this but mine is this:-

1) The achievable rental income will be sufficient to service mortgage interest at 5% plus the lenders margin based on borrowing 75% of the purchase price PLUS (and this is very important) that there will still be enough surplus rent to pay for ongoing maintenance, licences, letting and management costs, insurance, ground rent and service charges if applicable.

AND

2) Comparable properties in the area have been sold for considerably more during the last 6 months.

Beware the sharks

One of my favourite sayings came from a very good commercial finance broker friend of mine. He said “you can’t polish a turd but you can roll it in glitter”

Sadly there are several people in the property business who prey on naive investors who are either lazy or believe they can outsource their due diligence to save themselves time.

What is due diligence?

In a word, evidence. People who don’t do due diligence are committing a crime against their financial welfare. Given that every property can be rented at the right price I am only going to go into due diligence which I consider to be an absolute necessity. Everything else is personal to every buyer.

1) Visit the property and have a look around the area so that you can compare what you are thinking about buying to other alternatives. I’m always amazed when investors don’t do this. If you don’t have time then send a person you totally trust. That person must not have any financial interest in the sale so if you are dealing with a property sourcer don’t trust their word alone. Even though they are supposed to be acting for you, remember, if the sale completes they will get a fee from you or the vendor, sometimes both!

2) Check sold house prices in the same post code. What similar properties sold for over 12 months ago is completely irrelevent. Look for comparable sales in the last 12 months. This is very easy to do as Rightmove have a sold house prices section which is free to use. All you need to do is enter the postcode and search. The link to the page on Rightmove offering this service is here.

3) Check rental values. Talk to letting agents and ask them to produce a Rightmove + comparables report for you. Advertised prices are not necessarily a good guide to what you will receive. If competition is strong you may need to reduce your rents by 10% or more to ensure your property lets quickly so do bear this in mind.

4) Run the numbers through this landlords calculator. You may need some help from a letting agent and/or a mortgage broker to be able to complete some of the figures.

5) Either get some professional legal training or employ a solicitor or licensed conveyancer to give you advice before you commit to a contract to buy, especially if you are buying a auction.

Other considerations

A property which is genuinely being sold for significantly less than recent comparable sales may still not be a good long term buy to let investment if the potential rental income doesn’t stack up or if the property can’t be let legally. Every property has it’s price and rental demand exists for every property at the right price too, however, there is a balancing act to be taken into consideration between price, type of property and returns. For example, we know that some people will pay rent for a bed in a shed. They do this because they need a roof over their head and lack of funds means they can’t afford anything better. Rental yields will be massive but that doesn’t mean we should all rush out and invest into beds in sheds does it? The other end of the spectrum is Prime Central London properties which sell for millions but that does not necessarily reflect well in rental returns. For this reason, the vast majority of property stock in the UK private rented sector appeals to those on step one and two of the property ladder. The average value of a buy to let property tends to be slightly below the average UK house price.

Want to learn even more?

My buy to let property investment strategy is documented and constantly updated in the Advice section of this website. To get back to the main menu >>>

 

Landlords Buy to Let Property Investment Strategy

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