by Rob Dix
Buying a property in this way – without it being marketed by a third party – is known as going “direct to vendor”. It’s undoubtedly the most effort out of all the methods we’ve looked at, but it can also be where the best deals are found.
How do you get in front of the vendor in the first place? Some of the typical approaches include:
Putting “we’ll buy your house for cash” adverts through letterboxes
Advertising in the local paper
Putting up small ads in shops
Advertising on billboards
Driving around in a branded car
Or ideally, all of the above, repeatedly. Going direct to vendor is a numbers game: only a tiny fraction of the people in any given area will be in a position of needing to sell their house quickly at any given time, and those people are unlikely to even notice your advertising the first time they see it. The trick is to stay visible through all kinds of different channels over time. The fifth time someone gets your leaflet through your door (after already seeing your car parked on the next street and your billboard by the bus stop), the timing might be exactly right, and they’ll give you a call.
I won’t go into endless detail about how to advertise to vendors, because it’s so time-consuming it’s just not going to be a viable option for the vast majority of readers. Done properly, advertising and following up on leads is a full-time job – and for most of us, it’s more time-efficient to pay a fee to sourcers who’ve gone direct to vendor to dig up these opportunities in the first place.
Chapter 9
Assessing a deal
Through a combination of one or more of the methods we’ve run through, you should be well on your way to having a healthy pipeline of potential deals crossing your desk. The next step, of course, is to analyse those deals: which ones fit your strategy and are worth offering on, and what price should your offer be?
My view is that any given property has two prices: its objective market value, and the price that it makes sense for you to pay in order to meet your objectives. You don’t want to pay anything higher than the lower of these two prices: you don’t want to buy a property that’s objectively overpriced, but you also don’t want to buy a property that’s priced fairly if it won’t give you the return you need.
In this chapter we’ll look at determining how much a property is worth, and what it’s worth for your purposes in both buy-to-let and buy-to-sell scenarios. We’ll also look at assessing a property’s rental demand and rental value.
Before we can get into any discussion of market value though, we need to straighten out one of the property industry’s most innocuous-sounding yet misunderstood and misused concepts: that of buying below market value.
Does "BMV" exist?
One of the most seductive and misunderstood concepts in property investment is the notion of buying below market value, or BMV. If you look on any property forum, one in three posts will be someone asking where they can find BMV property. Another one in three is someone offering a “BMV opportunity”. And a good proportion of the final third contain warnings about some company or other ripping someone off over a BMV opportunity.
Given that it’s being talked about so much, agreement on exactly what constitutes BMV is surprisingly difficult to pin down. Taking its strictest definition, some people will tell you that it’s a contradiction in terms: the market value is the price agreed between a willing seller and a willing buyer, so whatever price you pay is by definition the market value.
That may be literally true, but I don’t think it’s very helpful. When most people say “BMV” they mean “buying at a better price than might have been possible under other circumstances”. By that definition it’s very much achievable – and desirable.
To understand why it’s possible, we can contrast the selling of properties with the selling of shares. If you want to buy a share in a company, there’s one quoted price – which has been arrived at by weighing up all the people who want to buy and all those who have shares to sell. Everyone knows what the quoted price is, and there’s absolutely no chance of being able to buy the share for less than that. We can argue endlessly about what the price should be and conclude that the price that’s being offered is either cheap or expensive, but there’s no way you can buy a share for less than the price actually is right now. It’s also not necessary to consider who the seller of the share is: you’ll be able to buy it for the same price regardless of whether they desperately need to offload it today to avoid bankruptcy or have come to a cool and rational decision to sell today purely out of choice.
In property, none of this is true. If there are two absolutely identical houses next door to each other, it’s not hard to imagine situations in which they could each sell for a totally different price:
The vendor of one house is in a real rush to move. They’re willing to slash the price for anyone who can buy in cash within 30 days, because taking a hit on the price is worth it for them to have the certainty of being able to move on.
One house is on the market with an agency that has a fleet of branded Minis and besuited salespeople who take ten viewers through the house every day. The other is listed with a discount agent who’s forgotten to put a board up, and listed it on Rightmove with no photos and the wrong number of bedrooms in the description.
Three families have fallen in love with the two houses. One of them moves first and makes a straightforward cash offer for property #1, which is accepted. That leaves the two other families to fight it out over the second house, and over the period of a week they desperately keep attempting to outbid each other until the winner secures the property for far more than the original asking price.
As you can see from these examples (and many more you can probably think of), the reason for being able to buy one house more cheaply than the other can be more to do with the circumstances surrounding the sale than the property itself. But that isn’t necessarily the case: the condition of a property can be a factor too.
You might expect that a property in need of a £10,000 refurb would sell for £10,000 less than an otherwise identical property that’s already in prime condition. That, however, is assuming that buyers are completely rational and make all decisions based on the financials – which isn’t the case among owner-occupiers and amateur investors.
If only owner-occupiers were looking around the two properties, I’d expect the one in prime condition to sell for more than £10,000 above the one that needed the work. Many prospective buyers would discount the “fixer-upper” out of hand, because they want somewhere that’s ready to move into. Others would wrongly estimate the works as costing more than £10,000. And as more people are in the market for the immaculate property next door, a bidding war can be sparked – with people getting emotionally attached to the property and willing to pay more than it’s worth.
Does that mean you can snap up any property that needs work at a bargain price? No, because in reality there will always be people looking for “a project”, as well as investors actively seeking out properties that need some TLC. But sometimes, the different factors will align in your favour: if you get a mess of a property that’s being poorly marketed, or where the owner is desperate to sell and knows they have a limited target market, then a BMV opportunity can be created.
What BMV isn't
So buying BMV is possible. But to know whether you’re actually buying below market value, you need to know the market value. This is where a lot of investors come unstuck: they equate “cheap” with “BMV” – and they aren’t the same thing at all.
Take a pair of two-bedroom flats on adjacent streets, in the same condition, and with the same internal area. Leaving aside any people-factors why the owner of one might be willing to sell for less than its market value, why might the actual market value of one be lower than the other?
There’s a railway line at the bottom of the garden and it shakes every time the 11:27 from Edinburgh goes past.
There are nightm
are neighbours on one side who are always throwing rubbish into the garden and shouting abuse, making it an unpleasant place to live.
The lease has just 50 years remaining on it, which can be extended but only at a cost.
There’s a major works bill looming for cyclical repairs to the roof, which will be taking place in a year.
It’s fractionally outside the catchment area of a very popular school, and the other flat is just inside.
If one of these situations were true and you hadn’t considered it, you might come to the conclusion that one of the flats was being sold below market value. In fact, its true market value is lower.
That’s why, although I firmly believe that BMV does exist as a concept, it’s in your interests to have a healthy scepticism towards whether any given deal is genuinely below market value. The thing to remember is that nobody sells a property at a bargain price because they’re feeling generous: there will always be a reason, and it’s your job to find out what that reason is.
If you discover a problem with a property, that doesn’t necessarily mean you should steer clear of buying it – just that you shouldn’t be under any illusions about its true value. For example, say that the value of a property is £20,000 lower than otherwise identical properties because of a short lease. If you know that and you’re up for the task of extending it, no problem – you might be able to offer £40,000 lower and secure the deal, because most other people are put off when they find out what the situation is.
How to assess market value
When surveyors conduct a valuation on behalf of a mortgage lender, they compare the property to others that have sold recently. The idea is that if an identical property across the road sold for £175,000 a few months ago, that must (in the absence of any other evidence) be the market value.
They’ll take into account the condition of the property and reduce or increase its value accordingly, and they might apply a percentage increase if they’re confident that the local market has picked up in the intervening months, but it all starts with these “comparables”.
So when you’re assessing a deal, it makes sense for you to calculate market value in exactly the same way: using similar properties, that are very nearby, and have sold recently. It’s no good if they’re a mile away or twice the size, and you can’t tell anything from a property that sold two years ago or is still on the market and just has an “asking price” (which might be totally disconnected from reality).
Imagine a scenario where you’ve had a call from your friendly neighbourhood estate agent, who says they’ve got a gem of a property for you. It’s worth £175,000, but the vendor is in a hurry so they’ve listed it at £160,000 and an offer above £150,000 would probably seal the deal. How do you put to the test their claim that it’s worth £175,000? Given a postcode and a set of photos (and ideally, but not necessarily at this stage, an in-person viewing), here’s what I’d do:
Step 1: Completely forget everything the agent has said. Pretend that you’ve been set the task of determining how much the property is worth without even knowing what the asking price is.
Step 2: Fire up Rightmove, and head over to the “Sold house prices” section. The information is pulled from the official Land Registry data, but Rightmove is able to supplement it with extra historical information from its own database. (Zoopla does the same, but I just happen to prefer Rightmove.)
Enter the postcode of the property in question, select a search radius of 1/4 mile (increase it to 1/2 mile if you don’t get many results), and select “freehold” or “leasehold” as appropriate to filter out properties that wouldn’t be a good match.
Then, unless you can write some kind of fancy algorithm to process the results for you, it’s time to scan down the list and see what’s what. Annoyingly, there’s no way to filter by the number of bedrooms (one of the biggest variables affecting the price), so you just have to go down the list and look for properties with the same number of bedrooms as the property you’re interested in. Even more annoyingly, it sometimes doesn’t give the number of bedrooms at all – which means you need to exclude that property completely.
The genius of Rightmove is that if the property has been listed on the portal at any point in the past, it will pull through the photos (and sometimes floor plans) that went with the original listing. This allows you to see what the internal condition was like, and try to piece together information to determine how similar its size and layout is to the property you’ve been offered.
There’s no great art to this, but after looking at as many results as you can, you can get a feel for the range of what similar properties were sold for. It might be that those in ordinary condition went for £160,000, those that had been extended or had a big garden went up to £180,000, and perhaps there were some wrecks down towards £140,000. There will usually be some strange outliers too, which sold at a particularly high or low price for no obvious reason.
Although this approach is imprecise and not at all scientific, it can get you closer than you might think – certainly close enough to run some very rough numbers and decide whether it’s worth viewing. It doesn’t come close to the accuracy you’ll be capable of when you know the streets of the area like the back of your hand, but it’s good enough for now.
The only real challenge with this method is situations where there just haven’t been many comparable sales recently. If this is the case, you can slightly relax your criteria – by looking further back in time, or broadening the area, or looking at different numbers of bedrooms and raising/lowering the price accordingly – as long as you’re aware that your rough guess is going to be even rougher as a result. And even though asking prices count for little, I can never resist the temptation to look at the prices of properties on the market right now – just as another data point.
Another tool you can use in your analysis, if you’re willing to spend a bit of cash, is a valuation report from Hometrack (hometrack.com). It costs £19.95, and is basically an automated version of the process I’ve just described. Many of the big lenders use it as part of their own research process, so using it can increase your level of confidence.
You can also call local agents and ask them if they’ve recently sold any properties similar to the one you’re looking at: any sales within the last couple of months might not have filtered through to the Land Registry database yet. I’m told that agents are even more willing to talk if you tell them you’re a surveyor calling to research a valuation you’ve been asked to do for a client, but that’s a deception too far for me – even though I’m the sort of person who pretends not to speak English when approached on the street by someone with a clipboard.
If the property you’re looking at needs work, then of course the cost of the works should be deducted from a comparable property in perfect condition. If I knew the cost of the works I’d deduct them from the “mint condition” price, then deduct another 10% as a contingency, then deduct a further 20% to serve as my reward for putting in the time and effort of refurbishing. In fact, I rarely know the actual cost of the works because I don’t have any expertise myself, and I’m not active enough in one geographic area that I can drag a builder out to everything I want to view. At the early stages then, I tend to just make a very pessimistic guess about how much it’s going to cost.
In fact, that’s a pretty good general rule for establishing market value: the less sure you are, the more conservative you should be. If there’s a row of identical houses, all in good condition and two of them have sold for a certain price within the last six months, you can be pretty confident of what one of the others should be worth today. The further you depart from that ideal situation, the larger the margin you can be wrong by.
If a property really does seem to be offered at a bargain price, remember the rule: nobody gives a property away cheaply because they’re feeling generous that day – only because there’s a reason (often being in a rush) that’s forcing them to drop the price. Have a re-read of the “What
BMV isn’t” section, and look out for anything else that could be holding its “real” value down. I’m not saying that you’ll never get a bargain handed to you on a silver platter, but it’s far more common that, contrary to initial appearances, it isn’t such a good deal when you get down to it – so a little skepticism is always healthy.
This whole process is much easier to explain visually than in writing, so as part of the “extras” for this book you can watch my screen while I talk you through it. It’s totally free – just sign up at propertygeek.net/extra.
Does the price work for you?
I said at the start of this chapter that I consider a property to have two prices: its market value, and the price at which it makes sense for you to buy it. We’ve talked about how to determine the market value, but what about determining your own price? Well, that’s determined by your goals – another reason why you can’t make well-informed buying decisions if you don’t have a goal in the first place.
In the context of buy-to-let, you could express your goals for the acquisition in a few different ways: a certain yield, a certain ROI, a certain amount of monthly net profit to add to your bottom line. There could also be secondary goals, such as wanting a certain ROI and the ability to add value so you can remortgage and pull out cash later.
In the context of buy-to-sell projects, your goal is almost always to make a certain amount (or percentage) of profit – so you’d need to acquire the property, do any refurbishment work and build in your profit margin for less than the property could comfortably be re-sold for. Again, there might be secondary goals like concluding the project within a certain amount of time.
