To help you build on your property knowledge, I have created a range of "Understanding" articles which will take us through the range of property investment strategies taught within Millionaires Together.
In this, the first one, we gain an understanding of the Creating Equity Strategies (BMV- Below Market Value and AMV- Adding Market Value).
I hope this is helpful to you in your property adventures and remember you can ask me any property question, any time :)
I hope this is helpful to you in your property adventures and remember you can ask me any property question, any time :)
Creating Equity gives you (or your sourcing client) a head start on traditional Buy To Let investment.
We are gaining the equivalent of multiple years of capital growth in a short window of time by the use of:
1) Below Market Value or
2) Adding to Market Value or
3) More usually a combination of both.
We are gaining the equivalent of multiple years of capital growth in a short window of time by the use of:
1) Below Market Value or
2) Adding to Market Value or
3) More usually a combination of both.
For example if you are aiming to acquire properties at a 20-25% discount, in most areas you will do a lot more deals if you consider opportunities at 10-15% discount (BMV) that also have 10%- 15% potential added value (AMV).
This equity creation means that profit can be released upon resale (BTS) or that a portfolio can be grown faster by the use of equity as deposit either on acquisition (Little Money Down) or on revaluation & refinance (Money Back Out).
This equity creation means that profit can be released upon resale (BTS) or that a portfolio can be grown faster by the use of equity as deposit either on acquisition (Little Money Down) or on revaluation & refinance (Money Back Out).
Alternatively you can end up buying cheaper and having smaller mortgage payments.
The level of discount should not however be the most important criteria.
For properties you are keeping long term you must buy based on yield, return of capital deployed, lettability (average void periods), potential for capital growth, alignment with your overall strategy etc.
The level of discount should not however be the most important criteria.
For properties you are keeping long term you must buy based on yield, return of capital deployed, lettability (average void periods), potential for capital growth, alignment with your overall strategy etc.
The equity/discount is only a few years of growth so these other factors must be taken into account as more important purchasing reasons.
Assuming however that your chosen areas meet your purchasing criteria then finding that bargain, makes total sense.
Assuming however that your chosen areas meet your purchasing criteria then finding that bargain, makes total sense.
But why would any seller's sell their property cheap?
There are loads of circumstances and situations such as divorce, relocation, upsizing, downsizing, need for cash to invest in business etc but ultimately it is because:
Your solution has more value to the seller than the equity they are sacrificing.
Usually the value in your solution hinges on transaction speed.
4 months on the market conventionally or 4 weeks to completion with you.
Speed and Certainty of Sale are the primary drivers for BMV sellers.
Motivated BMV sellers always have 2 things:
1) A pressing reason to sell
and
2) A deadline that they are working towards
The other solutions we offer that encourage a BMV purchase include:
- A relocation package with long term/ renewable tenancy/ discounted/ rent free period/ lha rate (all negotiable)
- Limited Entitlement Rent Back - Renting a room or a portion of the home (less than 40% is unregulated)
- an equity stake in an alternative property
- The opportunity to buy another property that you have through shared ownership or RTB
- Negotiating a discount on their onward property (Chainbreaking)
- Managing a refurb on their next property
- A share of rental income
- A share of profits from future resale
There are two types of BMV seller, distressed or motivated and these are very, very different.
We are certainly not in the business of ripping people's houses out from under them and stealing their equity.
A distressed seller is someone who's in a really bad place in their life at that time. A distressed seller may be facing repossession, and they think they have to sell the house fast.
A distressed seller is someone who's in a really bad place in their life at that time. A distressed seller may be facing repossession, and they think they have to sell the house fast.
In most cases those people have been given bad advice from a lot of different agencies.
If it's a distressed seller you can actually say to them, "Well look I've found out that there's a simple form you can fill in at the court, you could stop your eviction and get a new arrangement with the lender''.
We do not transact with people in distress, peace of mind does not come from profiting directly from someone's misfortune.
If it's a distressed seller you can actually say to them, "Well look I've found out that there's a simple form you can fill in at the court, you could stop your eviction and get a new arrangement with the lender''.
We do not transact with people in distress, peace of mind does not come from profiting directly from someone's misfortune.
We add value to the entire situation.
In summary:
A motivated seller is in control of the situation and a distressed seller is being pushed by circumstances outside of their control.
A motivated seller is somebody who is literally happy to sell their house quick and cheap.
A motivated seller may discount their property to enable them to buy their bigger dream house that they have got a great deal on as cash buyers or buyers who have already sold.
Example, we bought from a couple who got a 100k discount off their next 850k house, whilst giving us 80k discount off of their 330k house.
A motivated seller may be selling one house because they are moving in the other house as a couple together and want the money to get married.
A motivated seller may be embarrassed at the internal condition of their property and not want to market it publicly.
A motivated seller may be selling quickly because they are emigrating for their dream job.
A motivated seller may come to us as a distressed seller facing repossession and we help to stop their repossession and put them back in control of their situation. If they still want to sell afterwards that is up to them.
There are lots of situations where someone benefits from selling to, or dealing with a trade buyer rather than a retail buyer.
The point is that retail may take 4 months, trade can take 4 weeks.
That 3 months difference is 3 mortgage payments, 3 months of life on hold, 3 months of missed opportunities.
This strategy hinges on there being a difference between the purchase price and the market value, so be extra careful that you are not just paying market value even when buying below local comparable price.
20p may seem really cheap for a tin of beans if you compare it to Marks and Spencer but it is not cheap if they are actually Lidl beans.
Most supposed BMV deals appear to be BMV, but they are Lidl beans, being compared to M & S ones.
Most supposed BMV deals appear to be BMV, but they are Lidl beans, being compared to M & S ones.
In reality many bmv deals are bmv for a reason eg:
Rough or depressed area,
Breach of planning issues,
Negative history of property (eg murder),
Unmortgageable constuction
With this in mind, although we talk about BMV, more important is Below RICS
Value.
Evidencing the RICS value at point of acquisition is very important for later resale, refinancing or tax offsetting purposes (HMRC refer to market value when first let, rather than purchase price).
We call this the "benchmark value"
Making low offers can be credibility damaging and very insulting so I never make a substantially Below Market Value offer:
a) Without special permission to make that offer
and
b) Alongside at least one other offer proposal, giving our vendor the choice of 2 outcomes.
But what about AMV ?
Adding up to 10% to the value is very easy indeed with small cosmetic improvements.
Adding bedrooms without increasing the square footage can enhance the value further outside of London but in London floor space needs to be created to see the same uplift.
BMV is more for the North and AMV is more for the south.
AMV is really about the following 3 things:
1) Cosmetic Improvements.
Decor, Lighting, Kerb Appeal, Damp Resolution, Staging, windows, tidy outdoor space.
This is our preference and almost always meets our criteria of spending of £1 spent to create £2.50 increase in value
2) Adding a Bedroom/ Downstairs Toilet/ Open plan downstairs.
Changing layout, removing internal walls adding windows does not require planning permission just building regulations compliance.
Increases rent and outside of main cities will usually increase the value (we haven't changed the square footage yet).
3) Adding Sq Ft.
When done to a good standard, this always increases value but is most viable down South where you can be assured of the 2.5 x uplift from money invested.
Consider Loft, Basement, Extension, Roof Terrace, Parking
Adding substantial value to properties is only recommended for selling rather than letting long term because:
a) Rental yield may not increase with value.
b) Tenants will generally care less for expensive fixtures, fittings and finishing. Wear and tear increases and focus should be on durability as much as appeal.
a) Rental yield may not increase with value.
b) Tenants will generally care less for expensive fixtures, fittings and finishing. Wear and tear increases and focus should be on durability as much as appeal.
c) You may face refinancing challenges.
Arms length sale valuations are intentionally more accommodating and generous than remortgage valuations.
http://www.mortgagestrategy.
Arms length sale valuations are intentionally more accommodating and generous than remortgage valuations.
http://www.mortgagestrategy.
Key Ideas:
- Gaining equity WHEN YOU BUY can give you a head start on the market and help your liquid capital to go further.
and
- Your equity position represents the safety net that you have, allowing you to exit your investment, even if the market falls.
Call me, Adrian Hibbert on 07966 871854 anytime if you wish to discuss the above...
I look forward to hearing from you....
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