Media reports have started to portray that BMV investors are evil people because they buy houses at considerably below market value, make promises with the seller to let him stay in property on a long term basis but change their mind onths later – forcing eviction of the seller so as to realise profit. This is not how most investors behave – only a small minority do. Even they do this out of circumstances rather than some sort evil plan.
I wrote following article for a property forum. Many visitors asked me to post this on this site because it is relevant and many others may have missed out. The article stresses the need to do proper due diligence of a BMV deal before making a decision.
There have been many TV programs lately on people loosing homes because BMV investors did not keep mortgage payments to their lenders.
My sympathy for vendors is 100%. Most BMV investors are good people with decent intentions and pro-actively keen to keep it that way. However a recent surge of such media stories suggest that this problem isn’t as rare it it first seemed.
When vendors hand over their keys on a rent back basis, they do so believing that the investor is running a viable business. They do not look into investor’s financial details or the level of his portfolio leverage, his outgoings or the company structure. Nor do they check out investor’s life style or his past business history – the sort of thing one would do when making a rational decision if his future depended on it.
Not that vendors do not worry about these things but most of them lack the sophistication required to make such investigations. Besides they are in the most vulnerable state of mind they are ever going to be in.
Does this make BMV investor a victim of witch hunt some media reports are portraying them to be? No. But that is not the point.
Investors without fault?
One thing these programs have demonstrated is that some investors are not running viable businesses and are failing their customers at the first hurdle. If going gets tougher then it may not be just vendors but more BMVers heading for trouble too.
In most industries, this will never be allowed. Care home owners, for example, must demonstrate that their business is sound and they have necessary skills and commitment to look after their customers, or they face losing their license. Why should it be any different in BMV business?
If legislation does not exist then we should do our best to stay self-disciplined.
I, for one, do not like excessive regulations because they suffocate business environment. But if businesses start to loose self-restraint then regulators will not sit back for long. After all it is their duty to protect society’s most vulnerable ones.
Going forward…
It is easier to jump on the BMV band wagon but it is better to do the sums first before committing to any deal. All numbers must be stress tested in case interest rates go higher (all my numbers are based on an assumption that BoE base rate may hit 6.5%).
Is 90% LTV a good idea? Is there a real business need to take as much money out of the deal as possible? Only investor will know – depending on the deal. It may sound great in theory but cold hard numbers never lie.
All responsible companies run what-if scenarios. Why should we be any different?
If anyone is unsure about how to stress test their deals then let me know and I will do my best to explain how to do that.
[tags]property buying, below market value, repossession, foreclosure, property investor, due diligence[/tags]
