The first and key thing to say on this subject is: You will never buy below market value if you don't have the necessary valuation experience and skills. Time and many transactions improve judgement call instinct. The more of these calls, I've made over the years, the sharper my noise for a good deal has developed, more practice at judgement calls hones your valuation skills.
Below Market Value
A below market value deal, or BMV, is one where you can immediately flip the property for a profit without carrying out any work or adding value.
Note that a BMV is not the same as buying a ‘discounted’ property, which has a reduced price to reflect the costs of the work needed. This is a development margin, and properties with a clear development margin typically get snapped up quickly by established, long-term developers who have better working relationships with agents than you are likely to have.
When you are told you can get a 20% discount on property - you should ask where the starting point was, how was that price arrived at and why are you getting a discount? The other issue most face is that many simply will not have the ability to accurately value a property. So if you can’t accurately value an asset, how do you know how much it was or wasn’t discounted.
Valuations are tricky, even for property traders and RICS valuers and often a judgement call, and the more experience you have doing this, the better your judgement calls tend to be. Accurate valuations derive from a mix of your ability to interpret the information from your due diligence, your business acumen, the quality of your judgement calls, plus you need lots of deal experience in any given postcode.
The key is to buy smart so you’re already financially ahead from the start. Then you can add additional value on top of the instant equity you have created, either through planning or refurbishment. For any average sized house, the ideal strategy is to add bedrooms to bring the property up to a maximum of six bedrooms, which can be developed under Permitted Development rights.
Benefits of buying Below Market Value
Apart from the price advantage, why would you bother?
• Site selection (hedging, retention, reduced ‘hassle factor’).
• Extra time for negotiation and due diligence.
• Value creation in every deal.
• Stress-free compared to auction. Scope out your buying skills. Where do you fit in the business?
• Wholesale (you create your own deals).
• Retail (auction and private treaty).
• Super Retail (investor/buying tenanted).