There are usually two markets, trade and retail.
A real discount [trade] is one that is below the market value of a property that can be proven with higher [retail] comparables which are usually evidenced; that is the similar type of property in the same area sold for the same price in the last 6 months.
This isn’t just knowing what the Property is worth, not just going to 3 estate agents and getting their opinion on the market or asking what Property Asking Prices are, not just going to 3 letting agents and getting their opinions on the lettings market, not just going on RightMove and finding all the relevant comparables
…not just doing your searches on the Land Registry to find out any restrictive covenants, easements or anything else that might be on the Property that would be relevant to you, not just speaking to the neighbours to find out about the area, the amenities, to find out if there’s much crime, not just speaking to the vendors and getting to know them.
Its about ascertaining what the Property is really worth in that area.
You get the picture; there’s a lot of information you need to get.
The key to achieving this level of discount, yield and cashflow is understanding what the real values of the properties you are buying are, and then negotiating from that point with agents or vendors, or simply spotting under-priced properties as they hit the market.
Currently many repossessions hit the market already BMV, and you will be able to spot them before anyone else and ‘Hoover them up’ quickly, because you understand their real value.
Property Value Perception [Explanation of Deals & Value]
As mentioned it is VITALLY important that you understand the definition[s] of value if you want to achieve real discounts, release deposits, or put none of your own money into a deal.
What an Estate Agent value a property at will often be higher than it will sell for. They want to get you to sell the property with them and will often try to make you feel good by valuing it high. The value of that property is often higher than the OPINION of the surveyor [Valuer]. By the way, all this plays into your favour, when understood properly.
Armed with this knowledge, you know that there is a fair ‘range’ of possibles values for a property, where opinion may vary, and this can be up to 20% of the value in many cases. An Independent Estate agent who wants to buy the deal himself [naughty, but rife] will value a property very low.
The vendor is likely to have an unrealistically high perception of the value, you, as the investor may have a lower expectation of the true value, the average sale prices shown historically on Land Reg. may vary again and even surveyors opinion of value may vary, depending on their knowledge, stage in their career, pressure from the market conditions and so on.
The ONLY real value is what someone will pay for the property with real money on an arms length basis…but of course, you know that this can vary depending on the liquidity of the market, the buyers own perceptions and desires, their position and the quality of the Agent.
This might seem confusing, but in reality it is pretty simple: talk to Agents and find out what properties are selling for. Check and Land Reg. data to see if you can get recent sold prices, and set this as your benchmark for value.
You can also add value to property through a refurb to achieve a high property value.
If there is a big differential between the asking price of a property and local sold prices, negotiate the price down, or walk away until the vendors expectations of value have been corrected by the market, and they drop the price.
1 in 5 properties we buy at full asking price, knowing that we have at least a 30% margin [or discount after refurb]. Very often we only need to offer 10% below asking price to achieve a 30% + discount. Yet sometimes it needs to be 40% or more off asking price.
Agents are useful to ascertain the latest selling prices of comparable properties, there’s no delay in the price being available [it can take months on LR and smart investors can delay the price being shown] – you can literally find out what sold last week with Agents, not months ago.
Also, and this is THE most important thing, you’ll find the ‘motivation’ or reason behind the property sale.
A lot of people think there is a ‘set’ market value. And they are right, if you take all the sold prices and ‘average’ them out. Trouble with that is that every single sale motivation is different.
If you take 10 houses sold, for example, it could be that:
- 2 went to a first time buyers [funded by the bank of Mum and Dad] 10% above average sold price [‘reverse’ motivation]
- 2 went at full or around full asking price [which has little to do with ‘value’] [zero desire or need to drop the price from the seller] because the buyer loved (emotional) the property
- 3 went 5-10% below asking price [perceived BIG discount by emotional buyer]
- 2 went 10-15% below asking price because an out of area surveyor down valued these properties incorrectly and the seller was forced to renegotiate
- 1 went 35% below asking price [pre repo, fast sale, divorce, put back on market 3 times in last 15 months, etc]
Plus a Property Market Value is multi-faceted and is strategy dependent.
It means different things to different buyers, different thing to three surveyors, a different thing whether its a ‘market value’ owner occupier sale vs a trader flip vs. a long term buy to let investor which will all drive a different perception of ‘MV.’
This is of course then different to a 20% BMV flip ,or a 30%+ BMV buy, recycle and hold strategy.
The job of a professional investor is to filter out the 8-9/10 properties where there are little to no motivations, and SOLELY FOCUS on the small percentage of property that sells faster and cheaper.