If done right, BMV property investments represent one of the strategies that can generate double-digit returns. BMV is an abbreviation often used in the real estate industry and stands for below market value. BMV properties are offered by motivated sellers that are in strong pressure to sell quickly because of financial distress (such as the the inability to keep up with mortgage payments) or other circumstances that require swift liquidation of the property in order to raise cash.
Opportunities for BMV property investments exist in both rising and falling markets, fewer in the former and more in the latter. Investors that buy BMV properties in a rising market and resell them at market value, while the market is still rising, can achieve significant capital gains. These capital gains have two components: the significant discount below market value that was secured when the property was bought and the additional increase in property value during the holding period when market prices were rising.
BMV property investments in a falling market are considerably riskier and high returns are more difficult to achieve for several reasons. The greater risk is that further price declines may follow after the purchase, which will reduce or completely eliminate any capital gains that would otherwise be achieved by selling at market value.
An additional risk of BMV property acquisitions in a falling market is that it is considerably more difficult to sell a property, as demand from both consumers and investors shrinks significantly. Finally, it is more difficult to determine the true market value of the property and, therefore, the magnitude of the discount achieved, because only few transactions are taking place, thus providing limited market data to be used as basis for the valuation.
Given that it is difficult to predict when the market will bottom out, four factors can make BMV property investments in a falling market less risky, but certainly not riskless: a long-term holding period, a large discount below market value at the time of acquisition, thorough analysis and accurate estimates of all costs involved in acquiring and reselling the property (including any rehabilitation/repair costs that may be needed), and a reliable valuation.
A long-term holding period may reduce the risk of BMV property investments, because real estate markets tend to behave in a cyclical fashion. In other words, a downturn is usually followed by the recovery of the market and rising prices. Thus, a long-term holding period will reduce the risk of capital losses, as it will allow more time for the market to bottom out and property values to rise. However, it may take years before property prices rise back to the level that will allow significant gains for the investor.
A large discount below the prevailing market price at the time of acquisition will provide a strong cushion against further property value declines. In addition, it will reduce the waiting time for reselling the property with profit, as a lower level of property prices will be needed to be reached when the market recovers.
A thorough analysis of all costs necessary for the acquisition and resale of the property is very important because in many instances, BMV properties need repair before they are brought to the market either for renting or resale. Significant underestimation of these costs will reduce considerably capital gains and investment returns upon the resale of the property.
Finally, a reliable valuation is absolutely necessary for assessing the level of discount achieved by acquiring the property at a certain price. Of course, this is necessary for any property acquisition, independently of whether the market is rising or falling.
Dr. Petros Sivitanides, the author of Real Estate Investing for Double-Digit Returns, has a Ph.D. from M.I.T. and over 17 years of experience in real estate investment consulting, research and forecasting. More on property investing for double-digit returns can be found here.
[tags]property investments,BMV property investments,real estate investments,property investing,real estate[/tags]
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