There are flaws in BMV which we need to be aware of and that is that the BMV sales themselves can set the tone of value, rendering the price paid the true value, and not a discounted value.
Let me explain. Let’s assume you buy a property, say a flat, in a reasonable sized development. You are told by the agent this is great buy to let opportunity and the flats are available at a discount of 25%. They’ve got the RICS valuation to prove it.
20 out of 25 flats are then sold at this discount to investors like yourself.
Now here’s the thing. As many investors have experienced, the valuer has come along, has seen that most of the apartments are selling for 75% of £X instead of £X, and so now concludes that there’s an overwhelming weight of evidence suggesting the true value is now 75% of £X. It makes sense, doesn’t it, because that’s what most of these flats are selling for.
The investor may argue that a few months previously another RICS qualified valuer had been out and had valued the apartments at £X, but it won’t make any difference. When the valuer undertook that valuation none of the flats had sold and so there was no evidence within that development. He or she might have had to rely more on his or her own experience and judgement (or lack of it), or on evidence provided by sales at other developments. Now, though, there have been 20 sales, all at 75% of £X, so the evidence is conclusive, a ‘slam-dunk’ case.
The result? The BMV is now the actual MV, the B has disappeared. One of the major advantages for the investor in buying this property, that of obtaining built in equity, “making the profit on the purchase” has now evaporated almost overnight.
This was a problem back in the day when the financial crisis first hit and a large residue of ‘off-plan’ deals were still progressing through the system. Today it is still potentially a problem, not so much for investors buying off-plan, as they are now few and far between.
Instead there are an increasing number of new and completed developments being offered to investors with bulk sales of individual flats or houses.
If you think that’s harsh, how about this for an argument? Many leading thinkers in the property world would argue that the same argument applies even where there is no mass sale of property. For them, a single sale will set the tone of value.
So, for example, they would argue that if you buy a property at a BMV price, in reality the property isn’t worth the pre-discounted price and, instead, you have just set a new level of value, which is lower than the previous level. Same argument but requires less properties to prove the point!
If you think about it there’s some sense to this. Putting the official RICS definition of MV to one side for a moment, I’d guess that most of us would agree with the sentiment that the value of a property is what someone is prepared to pay for it. That being the case, if you are only prepared to pay 30% below what was previously the accepted MV, then the MV must now be 30% less.
This is how the banks operate, in the sense that a mortgage offer will invariably be made against the value or the purchase price, whichever is the lower. The bank won’t, on day one, accept that the property is really worth 43% more than you’re paying for it (mathematical proof – a 30% discount from £100,000 is the same as a 43% increase on £70,000, when you reverse the sum) although they might accept it after 6 months, which is the minimum time frame in which most banks will now allow you to refinance.
Why does any of this matter? Mainly because some investors are buying property, lured by the prospect of having a significant discount to value when, in reality, the figure they are using for MV is far from certain.
This can be the case where investors source their own properties, in areas where evidence is far from conclusive, and especially where sales are few and far between.
And the problem is more likely to occur where the investor is slack in doing their due diligence.
If you‘re buying for the long term there may be no practical consequences other than ‘the profit you’ve made on the purchase’ might, arguably, be just a figment of your imagination but, if you hold the property for the medium to long-term hopefully you’ll come out ahead anyway when values increase, even if there weren’t really a discount to MV.
On the other hand it’s possible that you’ll find that it impairs your refinancing options later. This could make life tricky if you were hoping to pull your money out and go again to build a portfolio.
Otherwise, hopefully, when the market recovers and values rise, market evidence will once again suggest a value at or above the pre-discounted price, and you can tell yourself what a great bargain you bought.
Peter Jones B.Sc FRICS
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