Property Finance Case Study: buying below value
Buying property below market value may be a shrewd decision - but it can complicate your mortgage arrangements.
TL:DR - When a client struggled to finance a bargain property purchase because it was valued below market rates, his 30% deposit was at risk. He turned to the Rangewell team who were able to arrange a second valuation, and were successfully able to negotiate a Property Development Loan at 7% fixed for two years, which not only allowed the purchase to proceed, saving the client's hefty deposit, but also meant that he could remortgage the property to a much lower rate once work completes.
When you apply for any kind of property finance or mortgage, the lender will want a valuation based upon the purchase price and not the value of the property. You will only be able to borrow a certain percentage of this price – this is called the 'loan to value ratio' (LTV).
if you secure a property bargain - a property below market value - the lender may actually become wary, because their lending is secured on the value of the property as it stands, if it has to be sold on. Any property that has to be sold below market value, therefore, causes alarms bells to ring. If it can only be sold below market value, it may not be possible for it to be resold for the full price - or not sold at all.
However, although there are some challenges, there are some major advantages to buying below market value.
Buying property below market value gives you an immediate paper profit. If you sell at market value quickly, you’d make a good return on your investment.
So if you paid £200,000 for a property valued at £200,000, you’d make nothing by selling quickly. But if you only paid £180,000 and then sold at the market value of £200,000, you would make a handsome return on investment (ROI). If your original investment was your deposit of £50,000, and you made £20,000, this means you enjoy an ROI of 40% - although you will have costs to pay.
“You might think that lenders would be keen to help you buy a property that is below market value and obviously a bargain. But it seems that things don’t quite work that way. I had found myself a bargain, but I was having a real problem in finding the funding to buy it."
At Rangewell, we recently helped fund a small unfinished block of flats which was sold off by the developer at below market price.
This can be a common scenario when large developers run into cashflow difficulties. They may need additional funds to complete a large development, but rather than incur additional lending fees, they may offer a few properties for sale to provide the cash they need quickly.
The client was offered the block of two-bed flats for just £115,000 - substantially below the market value for the finished flats, which should have been closer to £200,000, and possibly more as the development was completed and landscaped and the area became more attractive.
“I knew that I had a good deal lined up - the area is up and coming and the property was aimed squarely at the young professional market who were starting to come into the town. It would be perfect for renting out for a year or two while values climbed some more - and then easy to sell the flats on. But I had not bargained for the problems. Buying a bargain makes lenders uncomfortable - and so did the Covid crisis."
There would be work to be done. The block was a bare shell, with second fix electrics and fitting out of bathrooms and kitchens required. These might cost another £50,000, but our client was confident that he would still be able to turn a good profit from renting out the flats, and then go on to resell the properties when the time was right.
He had secured the property with a 30% deposit. However, he would require funding to complete the purchase - and found that he had run into a serious problem.
Because the flats were unfinished, lenders were reluctant to help. Without kitchens or bathrooms in their current state, they could not be sold on to buyers who would use them as a home. It is usually essential for a property to be sellable to act as security for a loan.
The valuation provided by most property professionals working with lenders was either substantially even lower than the purchase price, or negative.
It looked as though our client would be unable to raise the additional funds he needed and was, therefore, in danger of losing his deposit.
He turned to us to find a solution.
Why was there a problem?
In the current climate, financial uncertainties have made lenders even more cautious when large sums are involved - even when the security is provided by saleable property. Without property that could be resold to recoup the loan if the borrower became unable to pay, most lenders would not look at this deal at all.
And those that would lend may require a high rate of interest - which would remove any profit from the deal.
Without in-depth knowledge of the lending industry, it can be extremely difficult to find the lenders who can provide the most competitive rates for specialised funding such as below market value finance. At Rangewell, we not only have the necessary knowledge, but we can also put it - and our network of contacts throughout the property lending market - to work for you.
We found another valuer who was able to take a fresh look at the property - and a lender who was prepared to work not on the basis of the valuation of the property as it stood, but on the Gross Development Value or GDV. Gross Development Value may be used as part of a residual valuation, the process of valuing a property with development potential. It is essentially the value of the completed property, less the costs of the work required.
We believed that the GDV of the property would be much higher, and found a local valuer who suggested a value of £180,000.
Armed with this figure, we were able to approach a lender we believed would be prepared to offer the funding required. Some negotiation was required, and we needed to call on our own experts to provide opinions that the lender would be convinced by, but we eventually arrived at a deal that would allow the purchase to proceed - and save our client’s deposit.
We sourced a 70% property development loan at 7% fixed for two years.
About Property Development Loans
Property Development Loans are a type of short-term lending that can allow an experienced developer to finance renovation or refurbishment of a property.
All lending is arranged on an individual, project-by-project basis. Projects fall into three broad categories:
- Small-scale loans to cover light refurbishment
- Lending to cover renovation and major conversion projects
- Funding for ground-up development, starting with an empty plot of land
We knew that many property development funders had shut up shop until a post-Covid future became more clear, but our knowledge of the market allowed us to go straight to the lender best placed to help - and to secure the funding in the shortest possible time.
The cost of the finance was high compared to a straightforward Commercial Mortgage, but the client was able to proceed and will be able to remortgage the property to a much lower rate once work is completed.
Fitting out the flats is already underway, and he hopes to have tenants in place before the end of the year.
“The funding was exactly what I needed to move forward and to save the deal - and the money I had already put down. We were able to start work immediately despite the lockdown. The boost to the value of the property thanks to an unexpectedly buoyant market is making things look brighter than ever.”
Why we were able to help
At Rangewell, we have a team of property funding experts and we work with all the lenders in the UK market. We have built up close contacts with many of them, and not only do we know which are most suitable for a particular type of deal or a particular sector, we know those that can offer the most cost-effective solution for any individual need.
This means that, whatever your property finance challenge, we can help you find the answers you need - in less time, and frequently at a lower cost.
What’s more, when it is a matter of Property Finance, our services are free.
Getting the right deal for your property plans
Finding the most appropriate lender for your development project can be crucial to its success and profitability. That’s why it is important to speak to an expert team without delay. Our team includes experts in property finance and our service is completely personal. It lets you talk to a property funding expert who understands the challenges you face with your project to find a solution that is planned around your business needs.
It often means finding solutions that our clients did not know were possible - and it always means having a property expert working to save you money.
We will discuss your plans and then call on our network of property lenders, which includes virtually every name in the UK market, to get the funds you need.
If you have a property project in need of funding, or simply want to scope out a potential deal, call us and one of our experts will be able to discuss your options and work out the most cost-effective ways to provide the funding you want - whatever the challenge your business plans present. And in most cases, our services are absolutely free.
Property development costs less with help from Rangewell
- Individual arrangements tailored to your circumstances
- Adverse Credit – no problem
- Repayments geared to your revenue stream - including interest roll-up
- Understanding the funding challenges for your sector
- Personal service
Talk to Rangewell – the business finance experts