Buying property under value

Buying property below market value may be a shrewd decision - but it can complicate your mortgage arrangements, particularly if you are buying with a buy-to-let mortgage. You can expect a lender to closely scrutinise your mortgage application - and you may need the help of Rangewell to secure the funding you need. 

Market values determine the cost of property in the UK. The price of homes, and of commercial property will always be roughly in line with what someone wants to pay for it - and unless the property is very unusual, it should be relatively simple for a property valuer to determine the market price for it. 

The Royal Institute of Chartered Surveyors (RICS) defines market value as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in arm’s-length transaction after property marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”

 

Obviously, there are very few occasions when it is possible to sell a property at above market rates, and very few reasons to buy it. However, there may be situations when it is possible to buy at below market rates. There is an urban myth that to buy a property well below its actual worth may be unethical or illegal in some way. In fact, buying a house or other property below market value, with or without a mortgage, is a common practice.

In practice, a valuation will be based on two factors:

• Recently completed sales of similar properties in the immediate area

• Current condition of the property you’re looking to buy

‘Recently completed’ is generally defined as in the last six months for a house in the local area of similar size and condition. Damp and subsidence are fairly common conditions that can affect a mortgage valuation.

 

There are a number of reasons why a property may be sold at below market rates.

• When a property is sold by one family member to another. Parents who own a property portfolio can help their children get on the property ladder by selling them a house at a cheaper price.

• When a property is  deliberately undervalued for a quick sale. Developers may run into cashflow problems and need to call in cash quickly. Selling a property below market value may provide funds to allow a larger project to continue.Some property investors only buy off-plan property. This is generally sold at a discount to its current market value. This builds in a natural buffer and profit when you’re investing in property. You have to wait for the property to be completed, but if values have increased in the meantime then your profit increases, too. And if they don’t, you probably have a quality product with maximum appeal to the rental market.

• When the vendor is in financial difficulties. Distressed house sales and commercial sales are both possible when a vendor - who might be an individual or a business - is in financial distress. A vendor may need to sell to avoid an imminent repossession or bankruptcy, therefore, reducing the price below market value can entice prospective buyers. Individual may need to raise cash quickly, or to relocate in a hurry.

• When a property is bought through an auction. Properties available through an auction include properties where a quick and often cash sale is required. Properties with structural and other problems which make them unmortgageable, and lenders selling repossessed properties may wish to simply achieve a figure covering all outstanding costs and monies may both be featured in auctions. A property may be knocked down to the highest bidder on the day,  which may amount to a valuation below the market value.

Remember, some things are too good to be true - and it may be that a property is priced below the market for a reason. For example, it is very possible to pick up cheap properties in rural areas in isolated parts of the UK. These appear attractive, but the chances of selling them on for a profit or renting them out is unlikely. Even properties in apparently desirable areas can cause unexpected selling problems, such as a lack of tenants or low rentsin the area failing to cover the mortgage. 

Check  if there is rental demand in the area for properties such as the one you are considering buying, monitor websites and apps such as Zoopla and Rightmove to check, the rental market.

Getting the funding you need to buy under market

The challenge of finding a property you can buy under market value is one thing - but you will probably still need a mortgage, and this can mean another challenge.

Most mainstream lenders will not consider granting a mortgage if the property is sold at a discount to the open market value.

There are several reasons why.

The first is that lenders are suspicious of deals that look too cheap.

A low price might be evidence of collusion between buyer and seller, suggesting that some kind of fraud is being planned.

The low price might be because a vendor is desperate to sell to avoid the property being seized in an upcoming bankruptcy proceeding. This is a complicated issue, but in some cases a property which appears to be sold with a clear title will actually be subject to charges, and in the case of some commercial properties could be clawed back.

The price might simply reflect a hidden problem that means the property will be difficult or impossible to sell on, and cannot therefore be used as security for lending.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.

In practice there will be lenders who may be prepared to help, but there could still be issues with mortgages.

When you apply for a buy-to-let mortgage, the lender will want a deposit based upon the actual purchase price, not the supposed 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’ (LVR). Typically this is 75%. If you borrow a lower LVR, the lender sees you investing in property as lower risk. This makes it easier to borrow.

If the property purchase price is £200,000,  at 75% LVR the mortgage of £150,000 is . But if you negotiate a discount on your property investment of 10%, or £180,000 the lender will still only offer 75% LVR - a maximum loan of  £130,000.

You may still need to provide a large sum to secure the laon - although if you can, a larger deposit could help you secue a better rate. 

The vast majority of high-street lenders are only prepared to provide finance to developers and landlords for properties based on the purchase price. This can be a major hurdle for property professionals to overcome and acquire properties at auction or below the market value.

There are,lenders who you can go to who lend based on purchase price, rather than the open market valuation - but some that would lend may require a high rate of interest - which would remove the profit from the deal.

Without in-depth knowledge of the lending industry it can be extremely difficult to find the lenders who can provide competitive rates for specialised funding such as below market value Finance. At Rangewell we not only have the necessary knowledge, we can put it - and our network of contacts throughout the property lending market - to work for you. 

Depending on the reasons for the low cost of the property, this could mean a straightforward mortgage - or one of a number of specialist funding products. 

A buy to let mortgage

If you buy a property with a conventional mortgage, the lender will include clauses that will prevent you letting it out. A Buy to Let mortgage contains no such restrictions, and is specifically defined as a loan for buying or refinancing property which is let to tenants rather than lived in by the borrower.

They are similar in principle to a homebuyers mortgage, but are classed as a business transaction and are not subject to the same regulations as residential mortgages. This means that they are more flexible, but rates and fees are typically higher than those you would find with a standard residential mortgage.

Buy-to-let mortgages are a lot like ordinary mortgages, but with some key differences:

• The fees and Interest rates are higher

• The minimum deposit for a buy-to-let mortgage is 25% of the property’s value

• Many Buy to Let mortgages are interest-only. This means you don’t pay anything each month, but at the end of the mortgage term you repay the capital in full.

• Most Buy to Let mortgage lending is not regulated by the Financial Conduct Authority (FCA).

 Buy to Let mortgages are based on the revenue your property will generate. The mortgage lender will make a rent to interest (RTI) cover calculation. This means that you will need to show that you can obtain enough rental income from a tenant to cover the interest on the mortgage.

RTI cover calculations vary between lenders. The rental income usually has to be between 125% and 130% of the monthly mortgage repayment. Many lenders also require a minimum income of £25k per annum in addition to the income made from rent.

Most buy to let mortgage lenders impose a maximum age of 75 on maturity of the loan, however there is a small number that extend this to 85.

If your property is suitable for letting with minimal preparation - decoration and installing items required by law such as smoke alarms and electrical safety systems, it should be possible to arrange a Buy to let mortgage for a property below market price with some lenders - although you may be required to show the reasons why the property was available at low cost.

Commercial mortgage

Another solution may be a commercial mortgage, which as the name suggests is a mortgage used to buy a commercial property. Generally, commercial mortgages are for 15 years or more, and, as with a residential mortgage, the premises will be at risk if you are unable to keep up your repayments

Unlike a residential mortgage, the rates for a commercial mortgage are arranged on an individual basis.  Lenders will look at your business, your accounts and projections to ensure that it has a future and set interest rates based on the level of risk they believe it presents.

 There will be valuation, arrangement and legal fees to consider. Typical loan-to-value ratios for a new business with no trading history will be a maximum of 50% of the purchase price. Owner-occupied businesses such as offices or shops can normally get a maximum loan-to-value of around 80%.

Commercial mortgages can be used to buy commercial premise or residential property for buy to let. When the property is below market rate, they can provide a solution - although again you may be required to show the reasons why the property was available at low cost.

Bridging Loans

A bridging loan is short-term loan  secured on property. It’s called a Bridging Loan because it is designed to bridge a short-term funding gap. Bridging Loans are usually repaid quickly, either by the sale of the property or by another finance product designed for the long-term, such as a mortgage.

.This type of loan was basically designed to bridge the gap between the sale and purchase of properties but can be used for other purposes - including the purchase of properties that are not mortgageable  such as property requiring renovation,. Traditional lenders - high-street banks and buy-to-let lenders - will not lend when the property is not in an immediately habitable and lettable condition. 

Property can be residential, such as buy-to-let flats, or commercial, such as offices, factories or warehouses. The loan can be used to buy the property itself, or as funding for any other business purpose.Loans are usually for between £100k-£2m although they start at around £25,000, and there is no maximum. Interest rates will vary, and can range from 0.7-1.5% per month, with even higher rates for more difficult propositions. It will also be essential to have an exit strategy in place, which can include refinancing or the sale of the property.

In addition, there may be fees, including an arrangement fee which can be 2% of the loan amount, an exit fee which can equal one month’s interest and surveyors’ and legal fees. If the loan runs over the agreed term there will also be substantial penalty fees.

Repayment arrangements can vary. You may need to make monthly repayments on a bridge, but in many cases, all fees and interest can be rolled up into the loan, which can be settled with a single repayment.

Remember that large amounts are involved, and lenders offering Bridging Finance will carry out detailed checks and apply strict lending criteria, but are able to make rapid decisions. If you need to act fast to secure a property below market value, a bridging loan may be the solution you need. If you are using a Bridging Loan as a short-term solution for a property purchase it can often be paid off by a solution designed for the long-term, such as a Commercial Mortgage.

Auction finance

Finding a property below market rate is difficult in the current market, but property auction may be one way that you can still find a low cost flat, house or commercial property.

 Property auctions can provide properties that might otherwise be difficult to sell such as those  in poor condition or have been repossessed by a lender as a result of mortgage arrears. They are popular among investors, looking for property to let out, and for developers, who may be looking for property in need of substantial work before resale at the full market price. Property may not be in a lettable condition or be otherwise unmortgageable. It may need renovation or even structural repair, or it may even be bought for planning gain and redevelopment.

Buying below market price is routine at auctions.

However, buying at auction requires cash. The precise arrangements vary with different auction houses but with most auction sales, when the gavel falls on your winning bid you will be expected to pay a 10% deposit of the hammer price immediately.

Failure to provide the full funds may lead to you losing both the property and your deposit.Conventional solutions that can provide the high level of funding for property buying, simply cannot be arranged in the time available.

Auction Finance is designed to be arranged quickly and provide the level of funding you need in the necessary timescales. It is basically a type of term finance, similar to a Bridging Loan. It is designed to help you purchase properties at auction because it can be arranged extremely quickly. It can be used for virtually any type of property, whether for residential, commercial or mixed-use, and regardless of whether it is habitable or not.

Finance can be arranged within a matter of hours, and funds released in as little as 72 hours, under certain conditions – although it may be prudent to approach a lender and to get an agreement in principle before you commit yourself.

You will need to have an exit strategy when you take out high-cost lending such as Auction Finance. The most appropriate long-term funding solution will depend on the property and how you will use it, but can include a Commercial Loan secured on the property itself, or a conventional or buy-to-let mortgage.

Getting the solution that is right for you

 

At Rangewell, we work with  lenders across the market and have access to the full range of property funding products.  It lets us use our property finance expertise to support you – and ensure that you have the financial solutions you need.

You need our expertise - even a fraction of a percentage point can make a substantial difference to what you actually pay, while fees and penalties can complicate the position 

At Rangewell, we know the lenders who can offer all types of property finance, and we can use our expertise to identify the deal that really is the most appropriate for you. Our knowledge can not only help you secure the funding you need - it can save you a great deal of cash.

ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.