BMV is NOT the Holy Grail in Property

I am on a LOT of deal sourcer mailing lists and so I also get a lot of emails with 'fantastic, not-to-be-missed, BMV deals'.

Many of these deals claim to offer BMV or Below Market Value opportunities. Many property investors, and newbies in particular, see BMV or getting a discount up-front as the Holy Grail in property.

After all, we make our money when we buy right?

Well, maybe not as right as you might think, as I explain in this podcast episode here: Truth or Myth: We Make Our Money When We Buy?

Getting a GENUINE discount from the REALISABLE MARKET VALUE can certainly help, no doubt about that. However, when a deal sourcer presents you with a deal with a BMV discount and charges you for the privilege, is it all it is cracked up to be?

Often it's not and here's some of the reasons why...

As professional property investors, we should be able to negotiate better than average discounts when compared to the general market. The discount from a property's listed asking price has averaged around 4% to 5% across the UK over the long-term. Sure, it varies by region and stage in the market cycle, but let's keep it simple and stick to the average for illustration purposes.

If we are skilled in what we do...and we should aim to get skilled if not...then, we should be able to beat the average Joe who just copies Phil off the Telly by offering a few quid below the asking price, without a clearly articulated rationale for the seller to be able to accept our offer (sorry Phil, I'm probably massively dumbing down what you do there, but it's just a story!). So, for me this means aiming to get say 10% or even 15% discount to equivalent comparable sales values through a professional approach, without having to use lots of the so-called Black Hat, Guerrilla or Ninja strategies that you see banded around the property community.

The best way of achieving a discount like this are to establish both 'seller motivation' and then use 'leverage', as promoted straightforwardly by Paul Ribbons in his book 'Hustle Your Way to Property Success'. Some clues to seller motivation are: listing price drops, an empty property, long time on the market, previous fallen through sales, poor condition, or just dirty, smelly properties and so on. Examples of leverage in this context are: being a cash buyer, highlighting problems with the property and their associated costs to fix, a demonstrable track record of successful fast completions, meeting the underlying seller needs, etc.

However, getting a discount when you buy, in my experience, is usually only half of the story.

What's the other half, I hear you ask? Forced appreciation is the other half.

Forced appreciation is a fancy way of saying the additional profit / equity you add by improving the value to a property over and above natural house price growth. Think of improvements like refurbishment, extension, conversion and so on. These are all examples of ways in which we can beat the market growth by getting a increase in the end-valuation above the cost undertaking these improvement works requires.

Let me pause there for a moment and share with you the summary of a BMV deal opportunity I received today. I will avoid revealing the source, but it contained the phrase 'Instant Equity of ￡14,250' and the figures presented looked something like this:

• Market Appraisal       ￡95,000
• Purchase Price:         ￡80,750
• Mortgage at 75%:     ￡60,562
• Deposit at 25%:        ￡20,188
• Rental Income:         ￡500
• Mortgage:               ￡206
• Management:           ￡50
• Insurance:                ￡20
• Cash Flow/Profit:    ￡224 pcm
• Buying Costs
• Legal Fees               ￡1,500
• Finder’s Fee            ￡3,995

This suggest a 'BMV discount' equivalent to that 'Instant Equity of ￡14,250' or 15% from the market value, which does sound attractive doesn't it? It is clearly ahead of the average 4% to 5% discount from the listing price for sure.

To be honest, I am not going to dispute the market appraisal of ￡95,000, as I saw the comps (equivalent sales prices of similar property sales) and they back that up. However, it is the presentation of the numbers and the apparent investment proposition returns implied that caught my attention.

The most obvious thing, of course, is that Finder's Fee at just shy of ￡4,000. The sourcer offers a service that can save us time and in some cases also allows us to leverage their professional contacts and negotiation skills. Everyone needs to be fed, I get that and in fact, I have paid deal sourcers to help me locate good property deals myself...it's just that there are good and bad sourcers, and then good and bad deals, even from the good sourcers!

Next, we have the legal fees, which in this case are effectively double what they should be as the buyer pays both their own and also the sellers, so that's ￡750 that might have been avoidable, but in return for a great discount, I can live with that.

Then, there a few things that are not mentioned on the acquisition side or could be open to question, such as:

Stamp duty - that's missing and that's ￡2,400 give or take...there's no escaping from that regardless of how the deal is sourced.

Broker, lender & survey fees - none are stated and given that a mortgage is illustrated, we should allow for these. Guides on a property like this might be ￡500 broker, ￡1,000 lender and ￡400 survey, but of course they can vary. That's ￡1,900 in finance-related fees to cough up.

Property Refresh - there is inevitably something to do with the property, even when a property is described as in good condition, so budget from ￡500 to ￡2,000, even without doing a full-on refurbishment.

Management and insurance are a little on the low side, I may add VAT to the management fee and ￡20 a month could rise with a fully encompassing, all-risk landlord's insurance policy, but let's leave these as is. The rent level assumed was also at the top-end of the quoted range, but hey, I'm feeling lucky today!

However, do you notice how the figures above show a 'cash flow / profit' of ￡224 per month?

On the rental side of things, the big omissions are these:

Maintenance - we do need to make some provision for repairs and maintenance (R&M). I typically allow 5% of the annual rent in a new / fully refurbished property, and up to 20% if I am taking on an older property that has not had a major upgrade for some years. So, 10% is a fair average assessment and in my opinion would be in this case, so that's ￡50 per month. Some years it will be lower and others higher, but it is best to factor an average level of R&M into your numbers and then actually set this sum aside somewhere. Note: this does might not provide for major periodic expense items such as a new roof.

Voids - inevitably there will be periods of time when the property is empty, and so not receiving any rental income. For example, after buying, between tenancies and during major updates. The NLA's published data for the average void period is 3 weeks per year, so I tend to use that, unless I have a reason to change that assumption (e.g. increase it for a low population area or weak demand or reduce it for...actually don't reduce it!). So, that's another ￡30 a month, give or take as well, again set that sum aside just in case.

Opex - finally, there are lots of itsy-bitsy operating expenses (opex) that crop up along the way, which we can forget to take into account. Examples include, safety checks (gas, electric smoke / CO detectors), licensing fees (where relevant), additional agent fees (new tenant / re-let fees, etc.), accounting fees, property / agent travel, finance renewal fees, replacement appliances, print, postage & stationery and so on. If your property is leasehold (this one is not), there will also be ground rent and service charge to factor in too. You could argue any number here and it could vary, but ￡500 to ￡1,000 per year would not be unreasonable to allow for. Let's provide another ￡50 a month to cover our opex then.

OK, so if we adjust the numbers to take all of that into account, I make the costs of getting into the deal ￡30,510 instead of the ￡25,683 implied by the sourcer.

I also make the net cash flow just under ￡95 per month rather than the ￡224 per month figure quoted by the sourcer.

By way of interest, this equates to a pre-tax return (ROI) on investment of 3.7% instead of that implied by the sourcer of 10.5%.

Oh, and that ￡14,250 of instant equity...well, if we sold the property for it's market value, assuming nobody chips us down on price and the lender does not charge an early repayment charge, the resulting profit is likely to be around ￡2,000 after deducting selling costs!

Don't get me wrong, I am not out to 'dis the sourcer' as such, I am merely demonstrating the reality of critiquing a property deal and highlighting that BMV is not necessarily all it's cracked up to be at times.

So, is there a better way then?

Yes, I believe so and that's simply to combine an achievable level of discount when we buy with forcing the appreciation by adding value through improvements. I show people how to do this all the time to improve their returns on Buy-to-Let (BTL), Buy-to-Sell (BTS) and Buy-Refurbish-Refinance (BRR) projects.

However, we also deliver these sorts of projects on a plate, mostly available from the open market at no extra cost, through our Deal Tips Service, you probably want to go and check that out right now as it genuinely does help you to save time, save money and make profit! And if you would like a copy of the spreadsheet I used to quickly assess that sourcer deal, a couple of samples of our Deal Tips or even the free training video of how to find these deals yourself, just get in touch.

Note: no property sourcers were harmed in the writing of this article ;)