Distressed Property News

Below Market Value (BMV) Property Deals

Buying Distressed Property In Spain. Below Market Value (BMV) Property Deals

BMV Property Deals

BMV deals may be in vogue, but some believe the distressed property market in Spain may have almost run its course – so agents will need to move quickly to get their share of deals.

Below market value property deals are nothing new, but the parlous financial positions of many developers, banks and owners means more deals are being done below actual values rather than merely at a discount to the asking price.

During the boom years many investors confused discounted property – where the developer refunded the deposit, for example – with below market value or BMV property. However, the combination of a soft property market and severely restricted access to finance has focused minds on finding properties that are on the market at a level below their open market value.

The Below Market Value (BMV) Concept

BMV is quite an interesting concept because traditionally it implies what it says, below the average price for this property in this market.

In a distressed property market like Spain it is quite deceiving because if the market value of a property is x, and the banks value the property at y, the banks will only give a percentage of y, and this may or may not be the market value.

It cannot be defined by a size of discount, because the property market sets the value, not the developer. The banks and lenders also value themselves and give a percentage of what they value it at or the sales price – whichever is lower. The banks don’t want risk.

The level of discount offered varies from property to property.

Banks are applying discounts of up to 30 % below current market value and many developers have been offering discounts of up to 35 % since February of this year.

Acknowledging that the shelf life of valuations has fallen, Alfredo Milla , international commercial director of Spanish bank Caja del Mediterraneo (CAM) says that in the case of CAM repossessed properties, a discount of between 10 % and 30 % has already been applied to the valuation the bank has on record.

“Developers tend not to invest in new certified valuations for BMV transactions.

However, many developments have been bought by investment clubs who will have a valuation undertaken to prove to potential buyers that the property is being offered at a true discounted price.”

Declining Property Valuations

Banks are directing valuers on the basis that the net price (inclusive of any discount) is the true value. Developers tend not to invest in new certified valuations for BMV transactions.

However, many developments have been bought by investment clubs who will have a valuation undertaken to prove potential buyers that the property is being offered at a true discounted price.

Normally, non resident buyers can borrow 80 %, so they will need 30 % (20 % plus 10 % closing costs). Banks now lend on their own valuation or the sales price – whichever is lower. Cash buyers can get better prices and avoid mortgage costs and taxes.

Spanish property lenders are effectively ignoring discounts when it comes to establishing market value. Banks are using the sales value as the value of reference for the mortgage and applying a much higher differential to interest rates. Therefore, most current below market value buyers are people with a good amount of cash.

Active Buyers Of Distressed Property

Spanish, British, Russian, Dutch and Scandinavian investors are among the most active.

Dutch, Danish and Norwegians are incredibly active. They have the euro and their economies are in better shape than Germany or France.

Many UK investors see this as a good time to buy new builds because of the combination of low prices and good rents, while Dutch, Danish and Norwegians are incredibly active. They have the euro and their economies are in better shape than Germany or France.

LuisTeixeira da Silva, an International Property Adviser, is sourcing deals in the UK, Portugal, Spain and Cape Verde from private vendors, developers and funds. They are mostly deep discounted deals, either from sellers who cannot complete or developers who still have stock that has not sold due to the downturn.

In some cases they get bulk stock (5-20 units) bought by investment groups that can now not afford to hold on to the stock. Commenting on activity in Cape Verde, he adds: The current buyer market comes from a small pool. English are still quite active but everyone is bargain-hunting.

The Irish have reduced significantly as a buyer force and the Italians have also dropped, not due to the crisis, but mainly in a previous wave, pushed out by the English and Irish.

Tactic Used By Distressed Property Investors And Sellers

The funds have all but dried up for the moment. Mostly individuals bargain hunting.

Developers and some banks are using a variety of tactics to market such properties, such as investment clubs, syndicates and BMV specialists, while others prefer auctions and estate agents.

The lack of finance also means that developers are becoming more creative and offering finance packages to buyers, especially to first time buyers. Developers are offering gifted deposits. And banks are offering 100 % finance in some cases to residents in Spain. This pushes the market price down naturally.

Remember that banks are banks, they do loan products and banking, they are not real estate agents. Auctions only work if the discounts are greater than 40 % so most developers continue to sell through their own marketing activities and estate agencies.

There has been a lot of talk about independent financial advisers selling homes, but up to now they have not represented a major sales channel. As well as selling direct, banks are using agents and IFAs recruited through previous relationships or associations.

The banks are being careful to steer clear of the well known ‘hardselling’ agents who have historically commanded high commissions. This is the case at CAM, which uses a combination of its website and “a selective network of agents and investment groups” to market its properties.