Funding below market value transactions
Updated: Feb 19, 2020
By Daryl Norkett
For any property investors who have attended one of the many great networking events on offer in our sector, you will have no doubt heard much about below market value deals – “BMV”. This is where a buyer is able to negotiate a discount from the usual market value, making a profit simply on the purchase. The obvious question from any lender will be; why has the seller been prepared to ‘give away’ this money? The answers can be many:
A ‘motivated seller’ where the sale of this property facilitates another life or business change that benefits them overall and so a lower offer is accepted in return for a quick, chain free, completion.
Auction purchases where an investor has been fortunate enough to spot an opportunity that others have missed, or simply got a bit of luck, perhaps in a less busy room. It’s also common for those experts in this arena to target properties before auctions to secure a deal before the day or after an auction looking through those lots that didn’t sell
Properties in probate where the beneficiaries set to inherit the asset want a quick and easy sale, often the whole process can be seen by them as a hassle – particularly if they live a long distance from the property
Tired or derelict stock that has ended up with an agent – whilst estate agents sell most of the stock in the UK, these are usually ‘shop window’ transactions and property in need of development or refurbishment doesn’t always look the part so instead is introduced ‘off market’ to local contacts of those agents
Landlords selling portfolios (perhaps to exit the market after the section 24 mortgage interest relief changes) and would prefer one transaction to reduce fees, effort and time in the selling off process – this is often called a ‘block investment’ purchase
This by no means an exhaustive list of reasons as to why someone may be willing to offer a discount on their property sale and plenty of other scenarios can come up. Once you’ve validated that you do have a genuine below market value purchase price, based on considering similar sold properties in the area, how do you fund it?
Let’s consider an example deal to look at the main options:
Specialist Buy to Let Mortgages
Most of the specialist buy to let mortgage lenders will have some appetite to consider a below market value transaction, assuming they deem the discount ‘reasonable’, with often up to 25% considered. Whilst an attractive proposition from a cost perspective – with typical 5-year fixed rates around 3.5% - these products often limit the loan size to 75-80% of the purchase price. It can also take 2-3 months for a BTL mortgage to complete which is not always conducive to a BMV deal where speed is often desired.
Loan Amount - £56,250
Cash Required - £42,750
‘Stretched’ Bridging Finance
A number of bridging finance lenders now consider lending up to 90% of purchase price, subject to not exceeding 70% of value for genuine BMV deals. This can work well for properties where most value is added through the negotiation of the discounted purchase price as opposed to those where a refurbishment or development is planned.
Loan Amount - £67,500
Cash Required - £31,500
‘75% of Cost’ Refurbishment Loan
This method of calculating loan size works on a cost basis which means that the loan helps to fund all of the costs associated with the deal rather than just purchase price subject to being at no more than 75% LTV on the post-refurbishment value of the property. This works particularly well where there is an element of refurbishment required – for example replacement kitchens and bathrooms as it helps to fund some of this cost.
Loan Amount - £74,250
Cash Required - £24,750
By working with a specialist property finance partner who can take the time to understand the deal and your plans for the property, the best fit can be found for your transaction. None of the above include finance costs but by taking a wider look at the deal, a purchase that might have needed £42,750 of investor cash to fund can be reduced to £24,750. The end result for this property is the same, but just think what your, or your clients, property business could do with an extra £18,000 cash in the bank?