Below market value: the questions that actually decide it

Buying below market value is one of the most effective things a property investor can do, and bridging is usually how it gets funded. A term lender will size the loan off the lower of price and valuation, so a discount buys your client nothing. A bridging lender will generally work from the open market value instead — which is what makes the deal viable at all.

So the question is rarely whether a lender will look at open market value. We will. The question is whether the value stands up, and whether the discount is real.

That is where below market value cases fall over, and it is worth understanding why before you place one.

What the numbers look like

On a £300,000 purchase at a £400,000 valuation, a term lender working from the price would offer around £225,000 and leave your client to find £75,000.

Sized against the valuation, that becomes up to £285,000 — and £15,000 from your client.

Same property, same day, £60,000 less of their cash tied up in it.

Two things bound it with us. We won’t lend more than your client is paying for the property, and we need a minimum 5% contribution from them — so the practical ceiling is 95% of the purchase price, subject to the usual loan to value against the valuation. That contribution matters: a client with their own money in a deal has every reason to see it through.

Here’s the part that matters more than the arithmetic. Why is the property cheap?

A seller giving up value is doing something unusual, and there is almost always a reason. Where the reason is real, a below market value purchase is one of the safer deals a lender can write — your client has equity from day one and a cushion that protects everybody. Where there is no reason, the discount usually isn’t a discount at all. It’s an optimistic valuation.

Reasons we see regularly, and are comfortable with:

• Probate and executor sales. Executors owe a duty to the estate, but often value certainty and speed over the last few thousand pounds — particularly where a property has sat empty and is costing money to hold.
• Condition. A property with no kitchen, no bathroom or an active structural problem can’t be bought with a mainstream mortgage. That shrinks the buyer pool to cash and bridging, and the price reflects it.
• Speed. A seller with a deadline of their own will trade price for certainty.
• Off-market sales. A landlord breaking up a portfolio, or a seller who would rather deal with someone they know than go to open market.

The pattern to watch is a large discount with a thin explanation. If a property is genuinely worth 40% more than the agreed price, ask what the seller is getting in return for giving that up.

Sellers who owe a duty to someone else — executors, receivers, lenders in possession — have to be able to justify accepting less. If they’ve accepted it anyway, either there’s a reason worth knowing about, or the higher figure isn’t real.

Two more things worth checking before anyone spends money on a valuation: whether the property has changed hands recently at a much lower figure, and whether the higher value exists anywhere other than the borrower’s or the agent’s estimate.

One thing that surprises people: we care who is selling, not just why.

Where a company sells an asset at an undervalue and later runs into trouble, the transaction can be challenged and unwound — and that would take our security with it. So on below market value purchases we prefer the seller to be an individual rather than a company, and we want them solvent and not in financial difficulty. Where the sale is between family members, we’ll want the buying entity to be a special purpose vehicle and the borrowing to be for business purposes.

None of that is designed to make life awkward. It’s the difference between a deal that completes and one that unravels afterwards.

Every below market value case needs a full RICS valuation. We can’t use an automated or desktop valuation here — the whole deal turns on the value being right, and those tools aren’t built for it.

Beyond that, a straight explanation of why the property is selling below value, and a solicitor who can confirm the sale is at arm’s length.

Get those in front of us at the enquiry stage and we can usually tell you the same day whether it works — and if it doesn’t, before anyone has spent money finding out.

01244 565095 · underwriting@breezecapital.co.uk