Below Market Value Loans.

Buying a below market value property stands out as a popular, and efficient strategy for many developers, property investors and landlords, helping to snag a below market value bargain or align investment goals. In this article, we will look at, and explain how these loans work. We will also discuss why it could be a good choice for your next property investment.

 

Below are answers to the top five most frequently asked questions:

 

What is Below Market Value Finance?

 

This short-term bridging loan solution allows borrowing up to 100% of the purchase price if the purchase price is lower than the open market value also known as OMV. It provides fast access to capital, making it ideal for time-sensitive below market value deals.

 

Who can use Below Market Value Finance?

 

It's ideal for developers, house flippers, and landlords needing to quickly secure below market value land or property.

 

What are the Typical Costs?

 

These short–mortgages are typically bridging loans, so costs are generally a bit higher than traditional longer term mortgages, pricing typically ranges from 0.5% to 1.5% per month. The exact rate depends on factors like the lender, LTV ratio and credit profile.

 

How Quickly are Funds Available?

 

Many lenders can provide access to bridging loans within days, making this solution perfect for buying under valued property. With streamlined processes and flexible criteria, they enable buyers to act fast on property transactions like under valued properties, rental portfolios or off market sales.

 

What is the meaning of Open Market Value?

 

Open market value is the price an asset would likely sell for in a competitive and transparent market, where both the buyer and seller are acting independently, are well-informed about the asset, and are not under any pressure to complete the transaction. This value reflects fair market conditions and is often used in property transactions to determine the true worth of an asset. It represents the price both parties would agree upon in normal circumstances.

 

Bridging finance is a short-term option, making it extremely useful for developers and landlords. It helps them quickly buy, renovate, and resell or remortgage at the new higher value. A key advantage of bridging loans is the ability to unlock immediate capital, enabling swift action in competitive property markets.

 

To better understand how bridging loans work, let’s explore three real-world scenarios:

 

1.The Quick Renovator: The renovator finds a home priced 20% below market value. The owner needs to sell quickly. Using below market value finance the renovator buys the property, completes a four-month renovation, and sells it at the new higher value. The uplift in the open market value not only covers the cost of the bridging loan facility and interest but also yields a solid return.

 

2. Commercial Value Booster: A small business owner buys a low-priced commercial property using a bridging loan. They renovate it and attract better-paying tenants. The higher rental income helps with getting a better long term mortgage finance rate and ensures long-term financial stability.

 

3. Auction Opportunity: A developer spots a property listed 25% below market value. Property auction finance allows them to quickly secure the property, setting the stage for resale or switching to a buy to let mortgage later.

 

These examples demonstrate how short-term bridging loans empowers property professionals to act swiftly and capitalise on undervalued opportunities.

 

1. Short-Term Financing: Unlike traditional mortgage finance, short-term bridging finance typically lasts a few months to a year, making it perfect for projects like quick renovations or flips.

 

2. Flexible Repayment Options: Bridging loan repayments can be made monthly or deferred to the end of the agreed term. This flexibility allows alignment with cash flow and project milestones.

 

3. Rapid Access to Capital: The speed in which a bridging loan can be completed is a significant advantage, enabling buyers to secure deals quickly in competitive markets.

 

4. Versatility: Bridging loans can do more than just help with buying property. They can also be used to carry out renovations, restructure debts, or provide for other investments.

 

Increased Leverage: By basing the bridging loan amount on the OMV, investors can often secure up to 100% of the purchase price, reducing the amount of personal capital required.

 

Speed: The loan can be arranged quickly, providing the opportunity for buyers to capitalise on time-sensitive deals.

 

Flexibility: These bridging loans are typically interest-only, with the principal repaid at the end of the term, providing flexibility in managing cash flow.

 

Profit Potential: Purchasing a property below its actual value inherently carries a higher margin for profit, especially after value-adding renovations.

 

Yes, bridging loans requires an acceptable exit strategy, this provides confirmation and satisfies the bridging loan lender on how you intend to repay the facility at the end of the term, an experienced broker will be able to guide you on this.

 

Below are a couple of acceptable exit strategies.

 

Sale of Property Exit. This could be the re-sale of the property that is being purchased with the bridging loan or the sale of another property.

 

Buy to let Mortgage Exit. This type of exit is popular with property developers and landlords whose intention is to retain the asset as a buy to let investment, the bridging loan is used for the acquisition and refurbishment of the property which is then rented out, and then refinanced with a buy to let mortgage or commercial mortgage against the surveyor's new higher valuation which repays the bridging loan.

 

Step 1: Search for properties that cost less than their market value. You can often find these online, from motivated sellers, or in distressed listings.

 

Step 2: Evaluate Investment Potential. Calculate renovation costs, expected post-renovation market value, and local demand to assess viability.

 

Step 3: Approach an experienced broker that works with a broad range of specialist lenders and will prepare a detailed investment plan with exit strategies to secure favourable loan terms.

 

Step 4: Execute the Plan. Use the loan to buy and refurbish the property. Make sure to follow the project timelines and budgets.

 

Step 5: Repaying the bridging loan. Repayment may come from the property sale proceeds, longer term commercial mortgage finance or buy to let mortgage, or other sources. A strong exit plan is crucial to avoid penalties.

 

Speak to a BMV Finance Expert

 

Bridging finance is a powerful tool for property professionals, enabling them to make bold moves in the market.

 

With the right property and strategy, these loans can unlock significant potential and yield substantial returns. As with any financial decision, it's essential to consult with financial experts that are knowledgeable of the current lending criteria to navigate the complexities of the financing whilst ensuring a positive loan application and professional service.

 

Considerations and Risks : While bridging loans offer attractive benefits, you must also be aware of the risks. The short-term nature of the bridging loan means higher rates, and the reliance on a clear exit strategy is required. Additionally, an accurate valuation of the property's true worth is crucial to avoid over-leveraging.