Property investors are always looking for a good deal and there can be no better than BMV – Below Market Value. If you buy a property for £75k which has a market value of £100k then congratulations you just made £25k on the day of completion.
However Lenders are wary of BMV and you should be aware of this. Some lenders will not consider supporting a purchase unless full market value is being paid.
So what’s the lenders issue with BMV? You may have thought lending someone 75% of £200k is £150k and if that property is actually worth £300k then the loan to value is actually 50% which is much better for the bank isn’t it? Well yes that’s true but that is not the issue. There have been cases where BMV property transactions have been reversed following analysis from administrators. If a business owned property and sold it below market value and subsequently went into receivership the administrator can legally challenge and reverse the transaction.
This issue applies to all vendors whether individuals, partnerships or limited companies. Therefore whether it is an Official Receiver in Bankruptcy, an Administrator or Liquidator the transaction is potentially open to challenge if the vendor was insolvent on the date of the transaction.
Insolvency practitioners have the power to challenge the transaction and Insolvency legislation can embroil the lender as well as the borrower in expensive litigation. Also note that the time period for an action in a bankruptcy transaction for property is 5 years, so if you have a property currently in your portfolio over 5 years then BMV concerns fall away.
Moreover, in the case where the property was in the estate of a deceased party, and sold out of probate – by matter of fact – the owner is not insolvent and therefore the BMV risks are mitigated.
Another issue with BMV for lenders is the brand damage of the bank supporting a customer in a distressed purchase scenario which could involve a vulnerable family– not a good look. So criteria to one side lenders will not want to support a distressed purchase at all.
The real issue I see with BMV is the contradiction between skill and penalty. I have clients that own large property portfolios and they commonly strive to buy at the best price, then refurbish for lowest possible cost while adding the most value – makes a lot of sense business wise. However if the lender funding the portfolio applies a standard calculator they can wrongly come to the conclusion that the portfolio owner must have bought BMV because the property is now worth too much. This therefore penalises the property professional for expertly executing their strategy. There are a number of lenders in the market and some will have different criteria and policy but all will have different rates and terms. So you may be able to refinance your portfolio but you may need to compromise on rates and term which is still an unwelcome penalty.
So in summary if you find a BMV deal of more that 20% you might not be able to get funded and need to be aware of the risks you are taking. Always check the lending criteria before any application is made or commitment to purchase where lending will be required as part of your purchase plan.Its always a good idea to check with your broker that the property you intend to buy – below market value – can be supported with lending at the time of purchase or following a refurbishment.
Finally please note that your personal valuation is an estimate and will be subject to the lenders valuers opinion. You may find that your purchase price and the valuers market value are more closely aligned than you expected which will also remove BMV as a challenge. Its usually the borrower that pays for the valuation so your money is at risk and dependant on the valuer. Most lenders use the purchase price and not market value to lend against, so in a purchase scenario you should plan to borrow the loan to value amount to be a percentage of the purchase price which is fixed by you and not and not the valuer.