You make your money when you buy a property, so buy below market value. This is a common phrase you hear when talking about property investments and is certainly true when discussing the capital gains. It can also be true when you consider mortgage repayments, as the less you pay for the property, the less your mortgage will be.
Buying the property Below Market Value (BMV) is a sure way to guarantee improved profits and can ensure that if you remortgage, later, you could even take your money back out of the deal. In effect you are buying the property for free or no money down.
If this sounds great, then here are some ways you can buy property below market value, especially if you are just starting out.
Goldmine Area
The first task should be to establish your goldmine area. Establishing your goldmine area takes some groundwork but it is well worth it. After all that’s why it’s called a goldmine. Your goldmine area is an area in which you’ve already worked out that the yields are optimal and the other criteria are a fit for you.
Geography should be your first criteria. In what location do you want to own property?Ideally it should be within 30 minutes commute, as you will need to visit the properties before making offers.
You will be doing some analysis on the financials of the properties in your gold mine area and I can recommend setting up a spreadsheet to do the donkey work for you. Get in contact with me for a free copy of mine.
Rightmove research
Next go on to Rightmove and search properties for sale in a smaller area within your 30-minute catchment area. As a rule of thumb search postcode sub-sections e.g. M25, M45, BL8. Filter your search by numbers of bedrooms, separately. 1,2,3 and 4. if you are planning to let out your property don’t bother with more than 4 bedrooms. If you already know you are only looking at 2 or 3 bedrooms, then you only need to filter for these. You might also have already decided you don’t want to look at flats or bungalows, so you can filter these out too.
Sort by price lowest to highest. What you are looking for here is the average price for a property with that number of bedrooms. Use the median price for a quick and dirty average. This is the middle price, so if your search comes back with 11 pages for instance, go to page 6 and choose the middle-of-the-page price. Enter this into your spreadsheet. Repeat this for each number of bedrooms.
Now you want to repeat this exercise for rental prices. Go to the For Rent tab and find the average rental price for each number of bedrooms. Enter these into the next column on your spreadsheet. Use the following formula to work out the average yield for each number of bedrooms:
Av. Monthly rental x 12/ Av price x 100. (enter this into you spread sheet).
Repeat this for every sub-area in your catchment area. Once you have done this you will have a breakdown of yields per no. Bedrooms per sub area. Simply choose the highest yielding sub-area as your Goldmine area.
Rightmove alerts
Once you’ve established your goldmine area, if you haven’t already done so, create an account with Rightmove. Set up a search for the goldmine area, number of bedrooms and filter out unwanted property types if you have them. Click on Save Search and then choose to receive instant emails for new properties fitting your criteria.
For existing properties for sale within your goldmine area, fitting your criteria, you can start viewing them. Rightmove makes this really easy, within the individual property details you can click to email or call the Estate Agent.
Viewing – put figures into spreadsheet
Once you’ve confirmed a viewing with the Agent, put the details into another spreadsheet. The details should include:
- Address, postcode
- Property type
- No. Bedrooms
- Asking price
- Est refurb costs (always overestimate)
- Your offer price
- Paste a link to the Rightmove listing (this will be important later)
- Comments
Check out my spreadsheet if you want, just get in touch via the contact page. The purpose of this spreadsheet is not just to track your activity and market trends, but also to act as a follow up prompt. (See later).
Put offers in BMV
Once you’ve viewed the property, work out what your Below Market Value offer would be minus refurbishment costs. Aim for 25-10% BMV. For example:
If the property was listed at £100,000 and needs £5,000 work doing, then offer e.g. £85,000. (£100,000 x 0.9 minus £5,000). Add this number to your spreadsheet.
Then wait until the Agent follows up with you and use a script like the following. This will only work when you are starting out. Once you are established, you should have relationships with the Estate Agents and so won’t need this script.
“Apologies I didn’t get back to you, I really liked the property, however the numbers don’t stack up for me as it needs quite a bit of work doing to it. I didn’t want to waste your time with a low-ball offer.”
The Agent will almost certainly ask you what your offer would be. That’s when you state confidently your Below Market Value offer.
The Agent may then ask you if you want to put this offer forward, in which case say yes and wait for feedback. If they say outright that the vendor won’t accept that offer, then politely thank them and end the conversation. Say something like “No problem, thanks anyway. Let me know if anything happens and I can help in any way.”
Expect rejection – number of rejections determines your success
One of 3 things will happen after your offer has been put to the vendor:
It will be rejected outright.
Accept rejection as part of the plan. In the end it’s a numbers game; you are looking for bargains, so don’t worry about knock-backs. Simply put the results in your spreadsheet and move on.
It will be accepted.
If the offer is accepted, great. You’ve either found a bargain or the Vendor and Agent know something you don’t. Either way you will be doing more due diligence with your building survey and searches. Read these thoroughly. If there is anything untoward you can still re-negotiate or pull out. Often your mortgage lender will refuse to offer a mortgage on the property if there is something serious.
They will want to negotiate.
If you’ve gone for 10% BMV I wouldn’t negotiate unless you are in a rising price market. If you’ve gone for 15% BMV then you can move up to 10% BMV. However, don’t offer round numbers, your offers should be less and less rounded. For instance, if you went in at £85,000 and you know you can move to £90,000, then offer an odd number like £88,750, then £89,130. This will signal to the Agent that you’ve done your homework and this is really your Best and Final Offer. It will give you credibility.
Record your offers/viewings into a spreadsheet
Record all your rejections, offers and counter offers in your spreadsheet. Over time you will start to see trends and you will really become an expert in your Goldmine Area. You will also see that some properties will stay on the market for a long time. Some will be sold subject to contract (STC) or be taken off the market, only to reappear later. You should certainly follow up on these.
The follow up.
If a property has been on the market for a while and not sold, then follow up with the Estate Agent. Tell them you are just getting back in touch to see if the seller is willing to come down to your price. Again, they may say yes, no or counteroffer.
Sometimes you don’t need to follow up, as the Agent will contact you back, after your BMV offer is rejected. If you finished the conversation by inviting them to come back to you, if there were problems, then the Agent will almost certainly have made a note of it. If a subsequent sale falls through, they will come back to you and ask you if you are still willing to purchase at your previous offer or would be willing to negotiate. You are then back in play and are in a strong position.
Conclusions.
Buying property below market value takes patience and practice. You won’t get it right at the start, but the more practice you get the better at it you will be.
Property investment is a long-term strategy, so have a long-term outlook.