Below Market Value (BMV)
07/02/10 13:00 Filed in: Real Estate
If one was operating a retail shop selling drinks,
magazines, basic food items and other things expected
at a 7/11 or an unbranded corner shop do you expect
the price charged to be the price the shop owners
paid for the items? Clearly not. You expect to pay
retail while tacitly recognizing that the shop owner
paid the wholesale price. Does that mean that the
public understands how there can be two prices for
the exact same item? Maybe buying in bulk attracts a
discount while selling items individually happens at
the retail price.
Yes, the above seems obvious and a bit dull.
When we talk about the price a house should sell at many times people forget that there could be more than one price or value for the property. It can be said that the value of a property is what someone would pay for it so the value is the sale price. At the same time there is the concept that the sale price is heavily influenced by the terms of the sale. If you have to pay all cash for something you attract buyers who have the cash. If you want a larger number of buyers then offer financing where the buyer does not need to have the full cash price on day one. Most people expect that an item sold with financing will cost more than if they paid cash even if the headline price is the same. The extra cost is the interest or fee paid for the financing.
Seasoned residential real estate investors expect to buy at a discount from the retail price. Call it buying wholesale. Some will call the retail price the After Repair Value (ARV) or the Open Market Value (OMV). When buying wholesale you are paying the Below Market Value (BMV) price. A real and true discount to the price a typical retail buyer would pay.
Some investors who are active but not all that sophisticated will confuse the value of the property with the price and they will further confuse the value with the amount the lender will use when evaluating what the amount can be loaned on the property. In the US and more recently in the UK lenders are prepared to lend based on the sale price or the appraised value, what ever is lower. The lender is taking a view on what is a prudent amount to lend. They are not there to set the true value for the property. The third party appraiser or valuer is also not there to set the value of the property. They are hired by the lender to determine the value based on the conditions of the transaction which more or less means is the property worth enough to justify the loan amount.
Bottom line: Value is in the eyes of the beholder. The conditions of the sale impact the price (a forced sale is not likely to result in the full value being achieved). What a lender will lend vs. what a buyer or seller will accept are different. In many ways the value is also a function of the risk one wants to take.
John Corey
Yes, the above seems obvious and a bit dull.
When we talk about the price a house should sell at many times people forget that there could be more than one price or value for the property. It can be said that the value of a property is what someone would pay for it so the value is the sale price. At the same time there is the concept that the sale price is heavily influenced by the terms of the sale. If you have to pay all cash for something you attract buyers who have the cash. If you want a larger number of buyers then offer financing where the buyer does not need to have the full cash price on day one. Most people expect that an item sold with financing will cost more than if they paid cash even if the headline price is the same. The extra cost is the interest or fee paid for the financing.
Seasoned residential real estate investors expect to buy at a discount from the retail price. Call it buying wholesale. Some will call the retail price the After Repair Value (ARV) or the Open Market Value (OMV). When buying wholesale you are paying the Below Market Value (BMV) price. A real and true discount to the price a typical retail buyer would pay.
Some investors who are active but not all that sophisticated will confuse the value of the property with the price and they will further confuse the value with the amount the lender will use when evaluating what the amount can be loaned on the property. In the US and more recently in the UK lenders are prepared to lend based on the sale price or the appraised value, what ever is lower. The lender is taking a view on what is a prudent amount to lend. They are not there to set the true value for the property. The third party appraiser or valuer is also not there to set the value of the property. They are hired by the lender to determine the value based on the conditions of the transaction which more or less means is the property worth enough to justify the loan amount.
Bottom line: Value is in the eyes of the beholder. The conditions of the sale impact the price (a forced sale is not likely to result in the full value being achieved). What a lender will lend vs. what a buyer or seller will accept are different. In many ways the value is also a function of the risk one wants to take.
John Corey
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