Below Market Value is one of these terms that many ‘property gurus’ will try to get you hooked to join their real estate education. So let’s take look at this confusing term.
What means Below Market Value (BMV)
In simple terms Below Market Value means buying cheaper than the market would pay for it. Simple right? Well, not really. But I will get back to it. First of all — why would you care? It’s pure maths. If you buy a property with 10% discount (10% below market value), on a standard 75% loan to value mortgage (a bank lends you 75% of a property value) your return on investment might go up by 1–2% (calculated using formulas in one my last articles). That might not seem a lot but if you invest long term and you understand the compound effect over years — this becomes a big deal.
Why BMV is not that simple
The main issue with BMV is how the market value is defined. In the UK valuations are performed by members of RICS (Royal Institute of Chartered Surveyors. That is great advantage of UK property market as this is a formal body with legal responsibilities for numbers they provide. The problem though is that market value is hard to quantify. Let’s look how RICS defines the term of Market Value:
‘The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.’RICS – Royal Institute of Chartered Surveyors
If you made it to the end of this mouthful definition there are a few parts that might raise questions.
What Market Value is based on
Valuers need to base their value on something. Typically they base their valuation on properties that have been sold recently in a given area. That however depends heavily on data which might — or might not be available. If the area didn’t have a strong historical data, surveyors might be judging. (btw, as investors I wouldn’t recommend buying in such areas unless we know the area well).
The next part of the definition that probably got you thinking is ‘the parties had each acted knowledgeably, prudently and without compulsion’. There are few caveats to this part. Probably the most interesting part is that each party (in our case the seller) acted without compulsion. Most of the cases when we buy properties on a discount we buy them from motivated sellers — people who’s circumstances force them to sell quickly (divorce, financial situation etc.). Those sellers are probably acting under compulsion, aren’t they? If valuers base their valuation on historical transactions without context (under compulsion) then the market value is rather questionable.
I am not saying that buying below market value is not an attractive strategy. It is an amazing strategy. What I wanted to point out though is that we never know whether we buy below market value because it is hard to quantify a market value in general. But don’t worry. Chances are that in vast majority of cases are that our numbers will be good enough to move on on the deal. And we do move on!
Wishing you a lot of fantastic deals
Co-Founder of Momentum Property Education