What is buying below market value?

Buying at below market value is when the seller is offering a deal or special price to a buyer, which is below the usual valuation or asking price of a property.

This can be because of a number of reasons but can include sellers needing quick access to funds, properties that are incomplete, repossessions, or properties for sale at auction.

To read more about using bridging finance to purchase auction properties, read our auction finance page.

How can a bridging loan help buy at below market value?

Below market deals may not be around for long. If you need quick access to funds to purchase a property at below market value, a bridging loan might be the right solution for you.

Traditional lenders are usually only prepared to provide finance to landlords for properties based on the purchase price. Where the property is being sold at below market value, you will not be able to borrow up to the actual value of the property with traditional lenders, which puts you at a disadvantage. This is where a bridging loan may be a good alternative.

There are bridging loan lenders who will assess their lending based on the open market value of the property, rather than what you pay for it, which is why this can be a suitable finance option for below market value purchases.

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What can I use a bridging loan for when buying below market value?

Bridging loans enable you to get fast access to finance. They can also be used when a property is incomplete, such as lacking a bathroom or kitchen, which would not meet traditional mortgage criteria. They can enable you to borrow at a higher open market value, rather than the purchase price.

How is market value calculated?

Market value can be very subjective. It is the amount at which a buyer and seller are happy to negotiate at.

There are some factors which you will need to analyse to calculate the market value:

  • The current property market climate, both national and local
  • Similar properties that have recently sold in the area
  • Property price predictions, but remember they are not guaranteed
  • Plans for the local area, will this increase or decrease the value

There are online calculators that can help you calculate the market value of a property. Lenders will employ a professional valuer when they’re calculating the market value to use within a loan.

Some lenders are cautious about lending on a property that has a lower loan to value, below the market value, as their lending is secured against the property. If the property is being sold below the market value now, it may never reach its market value in the future. This means that lenders will see these deals as high risk. This could result in higher fees or more criteria to meet.

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Can I borrow more than the LTV?

Yes, it may also be possible to borrow more than the maximum LTV, without the need for additional security, if the bridging lender bases their underwriting on a valuation other than the purchase cost.

This would be either a restricted or unrestricted ‘market value’. The market value also called the ‘open market value’ or ‘fair value’, refers to the best price one can realistically expect from an ‘arms-length transaction’ (wherein the buyer and seller are independent and unrelated).

There are no restrictions or barriers to entry; it is assumed that sufficient time will have been given to market the property and achieve maximum interest and that both parties will be willing and acting without compulsion. Open market valuations are an inexact science, but will typically be higher than the purchase value. Surveyors can also provide market valuations restricted to a 90 or 180 day marketing period.

These valuations assume similar transaction conditions but apply shorter hypothetical time frames in which to market the property and complete the resale. As you might gather, the difference between 90 and 180day values can be substantial (though less so in a ‘seller’s market’).

It is important to know which value – purchase, market, 180 day or 90 day – your lender prefers to work to. Also, bear in mind that even a bridging lender who traditionally uses the 180 day value may refuse to fund a deal if the 90-day value is too low. It is advisable to ask your adviser what 90 day value is needed, if any, and attempt to stick to it.

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