Sunday, November 06, 2005

Buying below market value - is it a myth?

6/11/05 http://firstrung.co.uk

"The housing market is well known for its snappy abbreviations. The latest phenonema described in three letters is the apparent successful purchasing of property at BMV, (below market value). The property is then either rented out or flipped, a term used to describe re-selling the property quickly for a modest profit.

Many purchasers obtain property at reductions by preying on distressed sellers. In fact some purchasers have actively begun to market their desire to buy. Small advertisments in the property sections of local newspapers are a popular method. Usually highlighting that the purchaser is a cash buyer and can help stop the threat of repossession. Typically the buyer will advertise that they are willing to pay approx.10% below the current market value, a value that they set in negotiation with the vendor.

There are inherent problems with this method of purchase and the resulting position the re-seller may find themselves in. Firstly in establishing a price there are few benchmarks for comparison. There is no trade data available, other than the various reports available and searching price databases for similar properties, to establish what a below market price for the property actually is. Even the most experienced surveyors are struggling to agree valuations in the current climate.

If the adage of the house is only worth what someone is prepared to pay for it is reliable, then this would surely suggest that the BMV figure is irrelevant. The BMV price is in fact the true value. An argument could be put forward that the purchaser is simply helping to chase values down."

Now I don't know where the 10% figure comes from since anyone seriously involved in property development would be looking for a much bigger reduction. In fact, the average buying price in today's market is only 93% of the asking price - already a 7% reduction. The real point is that you have to follow up a lot of properties (20 to 100) that are being put on the market by distressed sellers to enable you to find a real bargain that will make you money when you renovate and sell.

To find out how a professional property developer finds bargain properties click here.

Chris Bell

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