Buying a property below market value - advice from lettingfocus.com

• Posted by Michael Aglony
• 25 April 2008 at 00:00

THE OPINIONS AND INFORMATION GIVEN WITHIN THIS BLOG ENTRY REPRESENT THOSE OF THE AUTHOR AND ARE NOT NECESSARILY THOSE OF MORTGAGES FOR BUSINESS.

BUYING PROPERTY AT BELOW MARKET VALUE – ADVICE FROM LETTINGFOCUS.COM

Why the credit crunch makes it easier to buy property at below market value or BMV by David Lawrenson

Property expert David Lawrenson of lettingfocus.com looks at buying below market value, the specialist finance available to landlords to help them to do this including  bridging finance and re-financing and when  - and where you could use such finance to get a property bargain.

Many people are struggling with the effect of the credit crunch. People now face having to re-mortgage onto much higher mortgage rates -which will really put the squeeze on - forcing many to sell up.

Making everything worse is the credit crunch - which could not have come at a worse time.

Add to all that, many lenders have failed to pass on the Bank of England’s recent base rate cuts in a desperate bid to improve balance sheets.

Remortgaging borrowers are also finding that lenders have tightened up on their lending criteria so borrowers with poor credit ratings are finding money hard to come by.

And it’s not just the heavily indebted who are getting a shock. It’s now clear that the odd missed credit repayment will now not be overlooked either.

At the same time, many lenders have realised that many of the mortgage loans they did for new build properties (many made to landlords) were perhaps a little reckless. Beset by falling flat prices and sluggish rents, most lenders are reining back or exiting entirely from making loans on new or recently built flats.

It all makes for a grim picture for many property owners.

Ideal Situation for Below Market Value (BMV) Players

But these dark clouds are manna from heaven for investors who buy property below market value.

Professional investors know that with property you make the bulk of your money when you buy and debt ridden property owners equals “motivated sellers” who will listen to offers.

Buying property cheaply often comes down to buying from someone who is facing one or more of the three Ds – death, debt and divorce.

Today, a lot of our opportunities are from word of mouth - from people I have bought from in the past who have recommended me to other people.

But getting the financing to work is a key thing.

Many players looking for property bargains will use bridging finance to get the deal done without using any of their own money.

Here is how it works...

Financing BMV Deals

Suppose you find a property which is valued at about £300,000 but the owners want a quick sale and will sell to you for only £240,000. You raise a bridging loan for the £240,000 and then complete the purchase. At the same time you apply for a remortgage supported by a valuation for £300,000 on which you apply for a mortgage loan of 85% or £255,000. This scenario would give you instant equity plus a bit extra which can go towards purchase costs and the cost of the bridging loan.

Case Study

In one recent deal, a BMV operator I know bought from a vendor who was wishing to sell fast to raise finance to clear his debts after his grandson’s business venture had failed. “The old couple had tried to help their grandson by raising money but following the business failure, the creditors were knocking at the door seeking to repossess,” he says.

“The deal I set up was a typical win – win deal that met everyone’s goals. The people could stay in their home, there were no estate agency fees to worry about and as they sold without vacant possession there was no HIP either”

Mortgage Lenders are Wary

However, as the credit crunch tightens its grip, lenders are getting more wary of back to back mortgage loans like this.

Many mortgage lenders will want to see 3 or 6 months ownership of a property first.  And as the purchasing solicitor will be acting for the mortgage lender too, they will want to see the owners name on the land registry before they agree the mortgage loan. Naturally, as the buyer is paying a bridging loan rate of 1.5 to 1.75 per cent per month (on top of a bridging loan fee of say, 1%), they will want to get the remortgage in place as quickly as possible.

Mortgage Express has the best understanding of these types of deals and the biggest chunk of the market for mortgages arranged on the back of bridging loans -which with Mortgage Express can often be done on the same day or the day after the bridging loan is taken out.

The Future of BMV

There will always be a market for these types of deal to help out struggling home owners, though the current economic environment means there is very strong  demand for solutions to people’s financial problems.

However, people will always need to sell fast for a variety of reasons – often because of sickness combined with consumer debt.

Many people often get overcome with debt but want to stay in their own home. In these circumstances selling to an investor and then renting back the property makes great sense because no one in their community needs to know they have been in financial trouble and they just continue living in their home with no black mark on their credit.

Bridging loan financing is still available for investors - though mortgage lenders restrictions on rent to interest ratios means that often 80% loan to value may be the best you can get today.

The Council of Mortgage Lenders naturally says that struggling home owners should talk to their lender first. However, as lenders will ultimately repossess, this is not a viable solution for many. And what guarantee is there that the lender who repossesses will get a good price for the property anyway?

For many people selling to an investor who has access to bridging finance and a remortgage will be the best way forward providing a win win deal for both investor and seller.

The seller gets to sell their property fast and does not pay any estate agency fees nor even need to get a Home Information Pack. It can be a very persuasive deal.

www.lettingfocus.com

This article is copyright of David Lawrenson and LettingFocus.com 2008 and may not be used or copied without the copyright owners permission.

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