Discounts, Market Value, Surveyors' Valuations

I hear so many differing views on this, and so many people getting too hung up with certain aspects of this so thought would write my thoughts on.

I was checking over some properties last week, and the first thing the agent I met said was, “How much discount would you be looking for?”

Now what does this mean?!

Discount from what?

An already inflated price?

A surveyors value?

Or current market value?

All 3 will generally be different.

When you see off plans being marketed at 15-20% discounts, remember this is marketing. All this generally means is the prices were too high in the first place, and have had to reduce to sell, or are trying to attract business with a promotion. No different to a shop that cannot shift its stock, and has to have 20% off sales, or even half price sales. Because the Brits love a bargain they often buy at these “discounted” prices – but just because you have got a discount, this does not mean you have bought below market value! Even the large supermarkets have been accused of putting the prices up one week, and then discounting them the following – is simply a marketing method.

You have bought at market value, as that is what investors were willing to pay.

Yes – occasionally a discount can be negotiated, but often this will be at the start of development, if the developer wants to sell the first phase quickly. I prefer to see developments where the prices go up during the development as get a truer feel for the values.

I then hear people say – well it must be below market value because a surveyor has valued it at £20,000 more than I paid. In fact about a week ago, I received an email offering some completed new builds in Nottingham, which I have driven past several times. It had copies of the surveyors valuation done, and were offering these properties at around 15% below this valuation.

But clearly although you could buy at 15% below the surveyor’s valuation, this is totally different from market valuation. The market valuation is what someone is willing to pay. Perhaps if there is just 1-2 units left, but not when are 10-20. I’d be very concerned at buying a property 15% above the market valuation, which in effect is what you are doing as the 15% discount is being used as a deposit. Why would anyone pay a finders fee for that?! Especially at around 5% yield. This tells me these properties are too expensive for first time buyers, and not attractive for investors, so prices will only go one way as supply will outweigh demand.

I’ll give another example of the differences in different markets. As most of you will know I target areas in UK where yields are still strong and capital growth is still strong – although is getting very competitive. Currently properties that say are being valued by a surveyor at £40,000 are selling on the open market for nearer £50,000. Why is this? Well because yields are so strong, and demand is higher than supply. So again, you have not paid above market value, you have paid market valuation. I personally would still be reluctant to pay much more than a surveyed valuation but this gives an idea of the overall market.

I know I’d rather be buying in a market where market valuation is 10-15% above the surveyed valuation, rather than 10-15% below it, as this is a very good indicator of future prices and values.

These discounts should not be confused with genuine distress sales, where one offs will come up where the seller is desperate for a quick sale and will sell for below the market value.

So I would say take any discount with a pinch of salt – always look at the actual figures paid, the yields, and the comparable prices in the area when making a decision.