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In the world of property investing the phrase “BMV” is, to my mind, quite comfortably both the most misunderstood and overused concept around.

So what does “BMV” mean? Generally speaking, “BMV” stands for Below Market Value. A bargain. Cheap. A great opportunity. I am sure you get the impression. So what are the problems? Well firstly, what exactly constitutes market value? Having the (alleged) benefit of an academic background in economics I will take a stab at this one. Broadly speaking, in this context, the free market value of a property is the price agreed between a buyer and a seller assuming both complete information and for both to act rationally. In these days of RightMove, Zoopla and legal searches most information is freely available to anyone who seeks it. Acting rationally, it could be argued, is a little bit more difficult to pin down, but it is probably a reasonable assumption than an investor with a predetermined strategy could be considered rational in this context.

Many people will argue a (RICS) surveyors valuation will represent market value. Others may suggest referring to Zoopla or RightMove similar sold prices. These are overly simplified as in truth there are almost as many opinions as investors. Two surveyors may have wildly differing views based on experience. Two identical houses in the same street may have sold at vastly differing prices due to one vendor being substantially more motivated than the other. So are you beginning to see the problems? Lets talk through a couple of common scenarios…

A developer selling the last few homes on a site cheaper than the others. Lets say 20%. Does this, strictly speaking, constitute 20% below market value? Well, it depends. These deals are usually in the public domain and prices set by large companies well versed in what they feel the market will support to allow them the best overall return. The new price may represent the lack of relative desirability of the property or plot in question. Or, alternatively maybe a huge discount is offered because it allows the company in question to tie up an existing site and move to another one and a quick sale gives them a better overall return. In these circumstances, it may be truly BMV. Simply put a good barometer is to ask yourself, “if I were to buy said property at an apparent discount would I be able to sell it for more than what I paid for it?” More often than not the answer is no. Remember, you can ask whatever you like for a property in the first instance but it’s what somebody is ultimately prepared to pay for it which dictates it’s value in the open market. Even if prices do then increase and you do manage to sell it for more you can make the argument it was not purchased “BMV” because that would not have represented the prevailing market value at the time of purchase.

Example number two. You buy a house in a particular street for £40,000. You estimate after £20,000 of work it will be worth £80,000 which is what other good examples on the same street sell for. Is this 25% “BMV”? (i.e you have £60k into it and it’s probably worth £80k). Well again, I would argue no. Such properties are priced accordingly because that’s what the market dictates. Most people view such a property as a challenge and shy away: there are risks involved with such a project and it is generally accepted that a level of uncertainty is rewarded with a healthy potential profit. Is it a good opportunity? Probably. Is it truly below market value? Probably not. And if you do buy at £40,000 for example, how is a surveyor going to view this if you come to remortgage? Are they going to look at all the £80,000 sold prices? Or are they going to take a view that as you bought it at £40,000 prices must be falling and adjust their valuation downwards accordingly? In my experience, you just don’t know.

So what do we take from this? Well, quite frankly there is no easy answer and you will routinely get a number of different views of what truly constitutes Below Market Value. And, for me therein lies the flaw of making BMV purchasing the overriding factor in your property investment strategy. There are obvious situations when a property is truly available Below Market Value but these opportunities are increasingly rare as we live in an ever more connected world where information becomes more freely accessible. This is why it is important for any investor to have a robust strategy taking into consideration numerous factors, such as risk, yield and scope for capital growth and and not just simply buying at a large apparent discount.

I do hope you have been able to take some information from this article. Please feel free to drop us a line at any time to find out more about what we do and how we can assist you in achieving your property investment goals.