This article concerns Transfers of Undervalue property. Put simply, a Transfer at Undervalue occurs where a vendor enters into a transaction on terms that provide for him to receive an amount significantly less than the value of the asset. The issues which this article goes on to explain will therefore affect all investors within the BMV sector and in the current uncertain economic climate may become more prevalent.
A liability may fall on an investor for up to five years after purchasing a property at an Undervalue. Although it may be surprising, it is also possible that if someone else purchased the property at a price under market value and you subsequently purchased it from them within five years of their purchase then a potential liability may still fall on you.
If a vendor sells a property at undervalue and becomes insolvent within five years of the date of the sale then a Trustee in Bankruptcy may be able to take proceedings to restore the position to what it would have been if the Transaction at Undervalue had not been entered into i.e. reversing the transaction. Alternatively, proceedings may be commenced to recover the amount of the undervalue. This scenario is set out below:
Vendor to sell to investor (you) at price of £100 000 True market value of the property is £130 000 Therefore property purchased at an undervalue of £30 000 Trustee in bankruptcy of the vendor may pursue you for £30 000 or for the sale to be reversed.
The general rule is that the value of a property is ascertained by reference to what a reasonably informed purchaser is prepared, in arms’ length negotiations (where the parties are not connected and are negotiating for the best deal for themselves) to pay for it. The argument against this may be a valuation obtained perhaps for your mortgage company that may contradict the value you are paying for the property as well as comparable evidence of other higher prices. If the difference between the monies received and what ought to be received is “significant” then there may be a liability. Although there is no guide for what is “significant,” in my opinion, the undervalue element in the scenario above would comfortably fit in the “significant” category.
If the Transaction at Undervalue was entered into in the period of 2 to 5 years prior to the presentation of a petition of bankruptcy against the vendor and the vendor was insolvent at the time or became insolvent as a result of the transaction at undervalue then the risk outlined above could effect you.
To identify any risk you may wish to obtain a schedule of liabilities and assets from the vendor to ascertain there solvency position pre any transaction and what it would be if the contemplated transaction were completed, comparable evidence that the market place indicates that the price you are willing to pay is reasonable which may be supported by the property being on the market for a long period without selling or because it is in poor condition etc. Your Solicitors may also wish to ensure they carry out Bankruptcy Searches against the vendor at Land Registry, obtain a Statutory Declaration of Solvency from the vendor and check the Insolvency Register. None of these methods are certain of defeating a claim by a Trustee in Bankruptcy but may assist in contesting any action brought against you.
Any transactions entered into in the 2 years prior to the presentation of the bankruptcy petition you should be protected against provided the transaction was for valuable consideration and entered into in good faith.
David Kyte is a regular author for the Property Magazine – Your Property Network.
Article Source: http://EzineArticles.com/?expert=David_Kyte
Risks
Investing in a below market value (BMV) property is certainly a risk, but a calculated risk will reduce your exposure to a financial loss and could make you a huge profit when done correctly. Those that succeed in investing do so because they always invest within their capacity and they always carry out thorough research before investing. A professional property investor will always turn a below market value property into a lucrative investment.
In order to find below market value properties, many investors go online and subscribe to a service that provides detailed property listings for distressed properties. Many of these database-type websites will include property listings, products and services providers’ listings and networking capabilities all in an effort to arm BMV investors with enough information to make intelligent decisions on which properties to invest in.
People invest in properties for many reasons. You may want to invest in below market value properties because you simply like the profit potential from buying and selling investments. Others like the idea of buying a piece of property and being able to rent it out for a continuous rental income. Overall there is a common belief that all property investors hold, investing in a property or several properties will bring income in a way that working for someone else can never do.
The first and most important thing you can do when considering investment in a property that is below market value is to gather as much information about the property as possible, especially if you are planning to sell it on. Always take a good look around the exterior of the building for signs of any problems that could lead to costly repairs. If possible, bring a professional builder along with you as they are more likely to know what the beginnings of any problem will look like.
There are a few other basic tips you must realise to make your first time below market value investment purchase easier. One of them is to take into account is what type of investment property you want to purchase. Is it going to be a commercial investment, an apartment or are you going to purchase a house from a distressed seller and then sell the property for a profit?
Once you have decided this, the next step is to consider exactly how much money you can afford to put into the deal. This will help you work out how much of your own money you will feel comfortable investing in your new property investment.
In negotiating a price, it’s best to start with a low offer and meet the Seller somewhere in the middle. If a property owner is asking far above its market value then move to another property. The owner will only be willing to go down so much and if you can’t meet them in the middle, do not make the mistake of overextending yourself; that could lead to financial disaster.
For more help with buying investment or below market value property join hundreds of investors who have benefited from excellent property investments by receiving our FREE Investor Property Alerts at http://www.publicangel.com/investor_enquiry.php.
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