Purchasing a property below its open market value (BMV) is an enticing strategy for property investors seeking bargains and high returns. However, when it comes to remortgaging these properties, particularly to secure a Buy-to-Let (BTL) mortgage based on the open market value (OMV), there are significant challenges and potential pitfalls. Understanding these issues is crucial to making informed decisions and avoiding costly setbacks.
In this article, we’ll explore common problems associated with remortgaging BMV properties, discuss acceptable sources of undervalue purchases, and explain how mortgage lenders protect themselves when lending against BMV transactions. Let’s dive in.
Common Problems When Remortgaging Below-Market-Value Properties
Below are some key challenges investors face when attempting to remortgage BMV properties:
1. Distressed Sales: The Risk of Coercion
Properties sold through distressed sales—where the seller is under financial or emotional pressure—can be red flags for lenders.
- Why is it a problem?
Lenders may question the legitimacy of the sale. Was the seller coerced into undervaluing their property? Distressed sales are prone to scrutiny because they might reflect a non-transparent transaction, posing potential legal risks for both buyer and lender. Damage to the lenders reputation. - Impact on remortgaging:
If lenders suspect coercion or manipulation, they might only lend based on the original purchase price or reject the application outright.
2. Purchases Through Sourcing Agents
While sourcing agents can provide access to off-market deals, these purchases often carry hidden risks.
- Key concerns:
- The agent’s valuation may be inflated, leading to an artificially high OMV.
- The true reason for the undervalue sale might not be clear, causing lenders to question the validity of the transaction.
- Impact on remortgaging:
Lenders require an independent RICS (Royal Institution of Chartered Surveyors) valuation and may disregard inflated valuations provided by sourcing agents. Without clear documentation of the vendor’s motivation, remortgaging at OMV can be difficult.
3. Vendor’s Gifted Deposit
Sometimes, vendors offer a “gifted deposit” as part of the purchase agreement, effectively reducing the buyer’s financial contribution.
- Why does this raise concerns?
Lenders may ask: Why is the vendor offering this discount? Is the transaction at arm’s length? Gifted deposits can suggest that the purchase price doesn’t reflect the property’s true value, triggering additional due diligence. - Impact on remortgaging:
Lenders might limit the loan-to-value (LTV) ratio or decline the application unless the gifted deposit’s rationale is well-documented.
4. Developer Incentives
Developers sometimes offer financial incentives such as cashback or paying part of the buyer’s deposit.
- What’s the issue?
These incentives might mask the property’s real value. For example, a developer’s “gift” could mean the property is overpriced relative to the local market. - Impact on remortgaging:
Lenders often exclude the value of these incentives when assessing OMV, which can significantly reduce the amount available for remortgaging.
Acceptable Sources of Below-Market-Value Properties
Not all BMV purchases are problematic. Some sources of undervalue properties are seen as legitimate and acceptable by lenders:
1. Auction Purchases
Properties sold at auction are generally reflective of what the market is willing to pay. Auctions are transparent and competitive, providing credible evidence of value.
2. Purchases from Insolvency Practitioners
When buying from an insolvency practitioner handling a company’s liquidation, the undervalue sale is often justified by the need to repay creditors quickly.
3. Repossessed Properties
Lenders selling repossessed properties aim to recover their loan balance rather than maximize the property’s sale price. As long as the transaction is transparent, these purchases are usually acceptable.
How Mortgage Lenders Protect Themselves
Mortgage lenders implement strict policies to minimize their risk when lending on BMV properties. Understanding these measures is vital for investors:
1. Lending Based on Purchase Price
Some lenders will only lend based on the original purchase price rather than the OMV, especially within the first six months. This is a key restriction for those seeking to remortgage quickly.
2. LTV Limits on OMV
Lenders may cap their LTV to 80–90% of the OMV to ensure they maintain a sufficient equity cushion in case the property’s value was inflated.
3. Restrictions on Gifted Deposits
Many lenders impose limits on the percentage of the deposit that can be gifted, requiring thorough documentation to verify the legitimacy of the gift.
4. Six-Month Ownership Rule
A common requirement is that the property must have been owned for at least six months before it can be remortgaged. This rule helps prevent fraudulent property flipping or misrepresentation of value.
5. Independent Valuations
Lenders rely on RICS valuations to determine the property’s true OMV. They often reject valuations tied to sourcing agents or developers.
6. Detailed Vendor Documentation
Lenders require a clear explanation of why the property was sold below market value. For example:
- Documentation from the vendor outlining financial distress or urgency.
- Evidence that the transaction was conducted at arm’s length.
Tips for Investors: Navigating BMV Remortgaging
- Plan for the Six-Month Rule:
Factor in the ownership period when planning your refinancing timeline. Bridging loans can help bridge the gap. - Prioritize Transparency:
Provide clear documentation for every aspect of the transaction, including vendor motivations and any discounts. - Invest in Auctions or Repossessions:
These sources are more likely to satisfy lenders’ criteria and offer a smoother path to remortgaging. - Get Independent Valuations:
Always commission a RICS valuation to establish credibility with lenders. - Work with Specialist Brokers:
Partnering with an experienced broker can help identify lenders with favourable policies for BMV remortgaging.
Conclusion
Remortgaging a below-market-value property is a viable strategy for investors, but it requires careful planning and awareness of lender expectations. By understanding the pitfalls—such as distressed sales, gifted deposits, and sourcing agent risks—you can navigate the challenges and secure financing successfully. Stick to legitimate undervalue sources like auctions or repossessions, and always ensure transparency in your transactions.
With the right approach, remortgaging BMV properties can unlock the potential of your investments without unnecessary setbacks.
I hope this article provides valuable insights for your property investment journey! If you have any questions or need further assistance, feel free to contact me.
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