You already believe property buying works as an investment or you would not be reading this. You may be brand new to property investing or you may have some experience in other niches of property so let's start by being clear on exactly what the Below Market Value (BMV) niche is all about and why it works.
In a nutshell it's all about identifying distracted sellers (often called motivated sellers), and looking for a way to help solve their problem, that will also be profitable for you. You will often hear this called a 'win-win' deal.
The trade-off for providing the homeowner with a solution is that they will agree to sell their property to you at a discount to Market Value. Most investors in the BMV niche will be looking for a minimum discount of 20% in order to make the arrangement profitable. Obviously selling their home for only 80% of its market value is not going to be attractive or feasible for everyone – hence the need to work only with suitably motivated sellers.
The most common reasons for a seller to be motivated are due to a broken Chain, divorce, emigration or re-possession, amongst others. The fact that we can offer to buy their property quickly without the complication of a chain can be very attractive if the motivation level is high enough.
The potential rewards in any deal for us as the investor can be:
* Instant Equity
* Long Term capital growth
* Rental income (often called 'Cashflow')
* Or even Cashback on completion of the purchase, if the discount was big enough
The largest hurdle facing BMV Property landlords over recent years is cash flow. The aim is to buy a property and to be able to have sufficient rental income to pay off the monthly mortgage debt, service costs such as repairs and insurance, AND still make a profit each month. But whilst Property prices have shot up, rental figures have not. This means often transactions do not 'stack up' and increasingly it is necessary to achieve a greater discount at the outside to make the deal a win-win for the investor.
Building in this profit from day one also lessens the risk involved. Property is very forgiving in that history shows that it always increases in value over the longer term. Buying at a discount of 15-20% + means that even if there is a crash in property prices, a BMV investor should not lose out should they need to sell a property on.
Another important aspect of the BMV property market is that more than ever it is about people rather than property. The vendor has a problem and if you can provide the right solution then he or she will want to do business with you. The property is purely a vehicle at the center of the transaction – it is the people side of things that underpins the whole thing. As with any transaction, people buy from people they know, like or trust. For this reason it is more important that a BMV investor has excellent people skills than detailed knowledge of the property. You are more likely to be dealing with the vendor directly, and very frequently, through a transaction compared to traditional property sales and purchases where solicitors and estate agents tend to do all the lending for the interested parties.
In summary, buying property only from motivated sellers, in an ethical way, works because it allows you to help other people whilst lessening the risk to yourself by building in your profit when you BUY.
(c) 2008 John Rattigan