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Buying Investment Property: purchasing a property below market value

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Finding and Purchasing a Buy to Let Property - How to Buy a Property Below Market Value

There are many ways to find and purchase investment property, and whichever route you choose, as an investor, there are ways of improving your chances of getting a property below market value, which will enhance your investment, and reduce your risk of getting caught in a negative equity trap.

I describe the usual method of buying a rental property through an estate agent, including tips on how to build up a relationship the vendor, then describe a technique for making a series of offers on a number of properties, which should result in you getting a property below market price.  I then go on to describe other routes to purchasing a property.

Buying a property through an Estate Agent

The bulk of both private and investment buyers do so through estate agents. These generally charge the seller a fee of 1 to 2.5% of the sale price. You might be able to get a slightly better deal by checking private listings. The estate agent should be viewed by yourself, the investor, as a handy person to ask advice on investment property and to help you get to know the area. In a sellers market, such as what we have in early 2004 in the UK, they may be pressed for time – so best try and be as efficient as possible with the use of their time.

I personally believe estate agents add a lot of value in holding deals together, chasing up on issues and negotiating tricky issues for you with the vendor. Remember though, they represent first and foremost the interests of the vendor or seller, so be careful with advice you are given on specific property. The best plan is to get to know one or two estate agents in an area very well – make sure they know exactly what you want – be very open with them. Tell them up front how much your budget is, what type of property you might be interested in and ask them if there are any particularly good deals around for such an investor. You will be surprised what comes out of the woodwork.

It will be helpful if you can honestly tell them you like to buy under normal market value since you have finance lined-up, are not in a chain, can move quickly, are an experienced investor and have a strong track record. Offer to give references.

If you are interested in a property, ask about the vendor – what do they want apart from a good price? Are they in a rush? Are they looking for an investors to purchase there property? Are they a motivated seller – e.g. have to sell because of moving jobs, divorce, financial problems? This information will give you an idea about how low you can offer. As a general rule, most vendors like investors because they are not in a chain, the chance of them not being able to raise the finances is smaller, they are normally experienced, with high levels of commitment to purchase.

Estate agents normally have their own websites that you can check property details on. Some estate agents also collaborate with internet portals so you can see many different agents details on the same site – examples of such sites are: rightmove.co.uk and findaproperty.co.uk.

If you do not think there is any competition immediately on the door-step, this is the best situation to be in. I recommend putting offers on a fax describing the conditions of your offer, advertising your good points and saying the offer is subject to contract. Having something in writing for the estate agent to give to the vendor always has a positive impact and demonstrates your commitment. If you are desperate to get your offer accepted and do not mind taking a risk, you can offer say a 400 pound non refundable deposit in cash within say two days of the offer being accepted. This is to show how serious you are – of course the vendor can accept, take your 400 pounds, then go somewhere else, but the chances of this underhand behaviour happening is very low.

I advise trying to get to know the vendor and strike up a business-like relationship with them. Be nice to them – friendly and courteous – if they like you they are far more likely to accept your low offer.

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Winning the property investment numbers game

Buying is a numbers game – it's best to scan at least 100 properties on the internet and local papers, choose your top 30 to view, then make get serious about making offers on say 5. Then offer on the top property at say 15-20% below market value. If the offer is declined, go to 2 and offer 15-20% below market value. Continue doing this until you get to 5. If 5 refuses, go back to 1 with say 12% below market price. Using this process, someone is likely to accept eventually and you will have got yourself a substantial capital cost saving. I describe this as a “safety margin” in case prices come down. You will therefore avoid the negative equity trap.

Remember, most investors make the most money when they buy the property in the first place – after you purchase at a certain price, this is a significant long term financial commitment. A small investor may only make 5-10 such decisions like this in their life – so be prepared to look hard, spend a lot of time and effort buying the right property at the right price. It’s a number game. If you go for value, and manage to get a good deal, you’ll be well on your way to making some serious money.

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Buying a property at auction

A considerable number of investors purchase properties at auction. Most of these properties are generally sold at about 10-20% below normal market value if sold via an estate agent. The properties can be difficult to shift, purchasers may require a quick hassle free sale, or the properties may be for cash buyers only because of structural or other problems that make raising money from building societies problematical.

Because of the strong sellers market in the UK at present, some very desirable properties are sold at auction with the hope that bidding competition will drive the price up close to or even above the normal market price range – an example would be an old farm with outbuildings close to London with say 4 acres – something richer city dwellers might fight to get hold of if marketed correctly.

Some things to watch out for are whether the property has any structural defects, is in an area of rising crime or next to an expected new road or development. Ask the estate agent why it's being auctioned rather than sold in the normal process. Is there anything that looks suspicious about the property – if so, ask the estate agent questions about the issue?

If you bid for a property at an auction, you need to have finances lined up with a Building Society. There is a considerable amount of time and effort required to line this up, say, on five properties you might be interested in. If your bid “wins”, you will have to exchange contracts more or less straight away. You cannot legally pull out. Hence it is normal to get a survey of the property done before bidding, or at least to have some expert look at it to see if there are any fundamental problems that could make raising finance on it problematical.

As you can imagine, because it is impossible to do thorough due diligence on a number of properties and it is costly both in money and time, auctions are often attended by experienced investors who have large cash reserves. These investors may buy in cash, renovate, then mortgage with a company after say 6 months. Their cash reserves means they can handle the risk a lot better than an inexperienced private buyer with limited cash in the bank.

So my advice is, if you are new to property investment, best to buy from an estate agent. In time, you can learn about auctions, the pit-falls of the buying process and attend an auction as an observer to see how things are done.

As a rule, you should set yourself a “limit” to which you will bid to – be prepared to get out-bid. Best not to make the first bid, and keep the bidding at a slow pace when you bid against other people – this tactic might result in the price not quickly reaching giddy heights.

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Buying a property via the internet

Some people purchase their property via the internet – many companies that specialise in internet sales have started up in the last five years. These companies offer a variety of services, the most basic of which is advertising the vendor’s property. Others provide appointments and other services.

The commission Internet based agents charge the vendor is as low as 0.5% of the sales price or a fixed fee. As a buyer, you would expect to see some of this benefit coming your way in the form of a slightly lower price, albeit this might be difficult to see when doing benchmark property price comparisons because it is a relatively small amount of money.

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Private purchase of property – contacts or friends

If you know someone who might want to sell a house you like you can approach them - you might be able to get a good deal, particularly if you can persuade them they will be saving 2% on estate agents fees.

If you know them as a friend this is even better, since the value of the trust you have built up will also be worth a price reduction. You might also offer something else in return for a low priced sale – for instance, if you are an architect and know the vendor has a building plot and will be building a new house, you could offer say 20 hours free architectural services and drawings.

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Private property purchase – via magazines, internet, newspapers

Its worth scanning the private advertisements for property – you might stumble across a real bargain. If a vendor has not properly valued their property because they have not commissioned an estate agent to do this, and competition is not high because the advert is not very good, you could get a property at say 20% below market value after making a low but attractive offer. Not being part of a chain will definitely help you in this case, since long chains amongst privately advertised purchasers are very difficult to keep together.

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Repossessions

Most repossessed properties these days are sold via estate agents or auction. When a building society or bank repossesses the property, they normally commission a reputable estate agent to sell at a reasonable value – the days of repossessed properties being sold at fire-sale prices, as happened in the early 1990s, is over. There are few repossessed properties at the moment, and as soon as one is advertised, you normally get a flood of locals eager to take a look in the hope of picking up a bargain. For this reason, the price of a repossessed properties in the sellers market of 2004 is very similar to the normal market value.

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