Pitfalls of BMV Properties

publication date: Sep 2, 2010
author/source: Guest article by Sarah Walker, Freelance Property Writer & former presenter of BBC1’s ‘To Buy Or Not To Buy’

Pitfalls of BMV Properties

Below Market Value (BMV) is a great strategy: buy at a discount to give yourself immediate significant inbuilt equity, refinance or sell six months or so down the line to pull all your invested capital back out, and either leave yourself with a buy to let that will now give you an infinite return on investment and an appreciating asset for the future, or walk away with a nice profit.  It’s a great strategy, but it’s not easy, it doesn’t work everywhere and, in our opinion, it’s certainly not something you should be attempting if you don’t have capital. 

What’s been promoted over the past decade to a whole series of investors is the idea that they can buy property without using any of their own money.  And not just one property – the headlines have included, ‘Become a property millionaire (we’ve even seen ‘billionaire’) using little or none of your own money!’  To people searching for the perfect ‘get rich quick’ solution, that sounds very attractive, and for a while it was possible.  You could indeed – through a combination of buying a property below its true market value and employing an entirely legal same-day refinancing structure – buy property putting no money in and even walking away with a ‘cashback’.  Happy days.

But while there was a rising market, and the lending institutions made ‘no money down’ deals possible, people got greedy and complacent.  They started buying houses like fun and where cashbacks and NMD deals weren’t possible, they were advised by too many of the property investor training companies that sprung up in the early ‘noughties’ to put deposits on credit cards and overextend on debt.  What did it matter?  House prices were going through the roof – you could remortgage and get the money invested back several times over!

But what we’re seeing now is a lot of investors who have worryingly overextended themselves and are going to be facing big financial trouble in the coming months and years.  What’s helping a lot of them at the moment is the low base rate, but as most bought at the peak of the boom and a lot of the stock was new build, which is unlikely to appreciate any time soon, the chances of being able to refinance at the level they all thought they could, are slim to none and the timeframe for their financial rewards is utterly shot to pieces.

So, is no money down in the past?

Honestly?  Legally, yes; practically, no.  Ever since the CML and lenders changed their regulations on same day refinancing, since buy to let lending dropped to 75% LTV and since getting a mortgage based on a valuation rather than a purchase price was pretty much outlawed, the “crooks” have been looking for ways to fiddle the system.  Over the last 2 years I’ve heard countless ‘gurus’ telling rooms full of hungry investors – novice and experienced – that they have found a way to get around the rules.  They tell you that only a mug puts any money into a BMV deal and provided you use their mortgage broker, their solicitors and sometimes their SPV (a company that the deal will pass through), it’s a piece of cake.  You notice I said solicitors, plural, and that’s because you need to have two separate consenting solicitors in order to make this system work. You see, at some point in the system, information is not being disclosed to the people it should legally be disclosed to. 

We’ve had three highly respected barristers look at pretty much all these schemes, and it’s their opinion that if you buy property without your own money and without full disclosure of that fact to the lender, you will commit mortgage fraud.  The last firm we consulted on the strategy that we felt had the best chance of scraping through under the law said, “It is clear that our opinion of buying property using no money down schemes is considered to be illegal and should not be done."  Some excerpts from the firm’s document:

     “...the aim of the scheme is ... to attempt to get around the present restriction existing in the market under which most reputable mortgage lenders are unwilling to lend 100% of the purchase price for the purchase of a property.”

     “It is my view that such a scheme would not be legal but would be likely to constitute a mortgage fraud and to expose those involved in the scheme to offences under the Fraud Act 2006, the Proceeds of Crime Act 2002 and under the common law of deceit.”

The worrying thing for you is that you are the one signing the mortgage application, therefore it is you who are potentially committing mortgage fraud and you are the one who may get a criminal record.  The person standing at the front of the room getting you all excited about the way you can beat the system – the person who’s making their money from your seminar fee or BMV lead commission – hasn’t put their signature on anything related to the sale.  No vested interest = no interest, so don’t expect any support if you get investigated.  The FSA and CML are looking very closely at all these schemes in 2010 and going forward, and you, yourself, have to be very wary if you’re signing a mortgage form.  Ignorance is not a defence.

And be very wary of any valuation you’re quoted for a property you’re considering buying.  Unrealistic BMV valuations are one of the biggest complaints against property companies.  We hear stories all the time about people whose properties have been significantly lower in value when they come to refinance.  The only way to get a ‘true’ valuation is to have an independent Royal Institute of Chartered Surveyors qualified (RICS) surveyor give you an open market valuation at the particular time you’re looking to purchase - it’s well worth paying a couple of hundred pounds for peace of mind.  We actually don’t call it BMV, we refer to BSV – Below Survey Value – because that’s the only valuation that matters.  ‘Market Value’ is open to interpretation.  When someone’s telling you they’ve got an amazing deal that’s 30% BMV, you need to be able to judge for yourself whether that’s true and whether it’s genuinely BSV.  You need to ask where the property’s valuation came from - when it was carried out and by whom – and if the person with the deal tries to put you off getting your own independent valuation, walk away.
With Platinum Portfolio Builder we offer clients a way to build BSV property portfolios with a guaranteed minimum equity, as assessed by an independent RICS surveyor.  That way our clients get real certainty that what they are buying has a genuine equity level.  You do however, need to have some working capital as we only use 100% legal buying structures which means that your capital is tied up for six monthly intervals.

Taken from the forthcoming book, ‘Beware the Property Rogues’ by Nick Carlile and Steve Bolton, founders of Platinum Property Partners, available this Autumn.


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