HMO Valuations can be a bit complicated. We’ve put together this guide/article to help HMO property developers and investors through the process from start to finish, allowing them to make the best decisions. Most of the information in this article relates to re-mortgage valuations but also touches on sales valuations, which bizarrely can differ.
Purpose of HMO Valuation
Depending on your objective (mortgage or sale) as an investor or landlord will dictate the purpose of your inquiry about the potential value of your HMO property.
For mortgage/remortgage
This is about trying to get to the bottom of what a surveyor will come up with, which is no easy task, as the surveyors all tend to have different opinions.
Summary; speak to a local surveyor, who is likely to be doing the valuation for your mortgage/remortgage.
Note: Surveyors are generally negative by nature and generally need help. This is due to this representing only a small fraction of their valuation workload. HMO mortgage brokers are not in the game of predicting the valuation. Good ones like www.thehmomortgagebroker.co.uk, are experts in managing the process and helping find relevant lenders who are happy with commercial valuations. They cannot predict the final value.
the HMO Mortgage Broker
The UK’s #1 Specialist for HMO Mortgages, HMO ReMortgages & HMO Bridging Finance. HMO Lending Made Easy.
For sale
If you are looking to sell an HMO property, then the most important thing to think about making the property attractive to potential investors. Use the marketing price to draw in eyeballs and make them feel they are getting a good deal. One of our recommended partners has also written a great Ultimate Guide to HMO Valuations, so make sure to check it out.
Summary: speak to an HMO-specific sales agent (www.AgentHMO.co.uk) to understand investor sentiment currently in any given area of the UK. Most investors buy based on yield. The better the area the lower the gross yield, for example, Mayfair is circa 2% (not that anyone does HMOs as an investment strategy in Mayfair).
Note: do not expect an exact figure from a potential agent, a good one will give you a range. Their job is not to guess the sale value, but rather extract the maximum potential £ from an HMO property sale available from the market at any given time
Agent HMO
The UK’s #1 dedicated HMO property marketplace, helping developers, landlords and investors, buy and sell HMO property.
HMO Valuation Methods
There are 2 types of valuations when it comes to HMOs. Brick & mortar, and commercial.
Brick & Mortar HMO Valuation
Brick & Mortar or Buildings Valuations are the most common type of HMO Valuations. They are commonplace is the property is a normal single (C3) dwelling and is based on the current fair market value and local comparables.
This type of HMO, when viewed through the eyes of a surveyor, is a residential property that happens to be rented out on a multi-occupancy basis.
Brick and mortar valuations are reached by a set of standard criteria to which 99% of surveyors work.
These include:
- Size – bedrooms & square footage
- Condition
- Comparable properties recently marketed and sold
Commercial (Investment or Yield) HMO Valuation
This HMO Valuation method is offered by certain lenders who offer commercial or yield-based HMO valuations subject to certain criteria. It’s not an exact science to figure it out but it’s not black magic either.
The main reason for seeking this type of valuation is that typically a commercial valuation will be higher than a brick and mortar valuation. As such an investor will have the ability to release more capital during a refinance, and/or have a lower loan to value ratio which could result in better HMO mortgage interest rates.
Factors Affecting HMO Valuation Method
There are no hard and fast rules, and again it can be subjective based on the lender’s criteria, what side of the bed the surveyor got out of, and other variables including but not limited to:
- Planning Permission Use Class C3, C4 or Sui Generis
- Lender Selected
- Surveyor Chosen
- Location
– If you’ve bought a commercial property (e.g. an office or retail space), gained full HMO planning consent, and converted it to a purpose-built 12 bedroom house of multiple occupancy, then you’re argument for a commercial or yield-based valuation is strong.
– If you own a 5 bedroom house on a street full of 5 bedroomed houses, but you’ve rented the rooms out individually, the argument for a commercial valuation whilst not impossible, will be more difficult to make.
Factors Affecting HMO Valuation Yield
- Available Comparable Properties
- Planning Permission Use Class C3, C4 or Sui Generis
- Property Size or No of Bedrooms or Units
- Presence of an Article 4 Directive
- Local HMO Density
- Proximity to Local Amenities
- Condition
- Management
Commercial HMO Valuation Calculation Model
There are a lot of myths surrounding this methodology, but having seen 100s of HMO valuations there is no magic surrounding it; it’s mathematical.
The only variables are;
- Rent
- Operating Costs (15-35% depending on the quality of property)
- Yield
Yield is normally the variable at the surveyors’ discretion and subject to factors affecting the valuation as mentioned in the paragraph above.
Some investors talk about using a “rent multiplier” between 8 and 12 times annual gross rent, but if you look into any valuation more closely it’s normally a function of the following formula or calculation.
Commercial HMO Valuation Calculation
HMO Property Value = (Gross Monthly Rent – Reasonable Operating Costs(15-35%)) *12 / Yield
Or
HMO Property Value = Annual Net Rent / Yield
| Location | London | Manchester | Blackpool |
|---|---|---|---|
| # Rooms | 10 | 10 | 10 |
| Rent Per Room | £ 1100 | £500 | £400 |
| Gross Annual Rent | £ 121,000 | £60,000 | £48,000 |
| Operating Costs (20%) | £ 24,200 | £12,000 | £9,600 |
| Annual Net Rent | £ 96800 | £48,000 | £38,400 |
| Yield | 6% | 9% | 12% |
| Valuation | £ 1,613,333 | £533,333 | £320,000 |
Commercial HMO Valuation Calculation Calculator
HMO Valuations Calculator
Brick & Mortar vs Commercial HMO Mortgage Products
| . | Standard HMO Mortgage Products | Commercial HMO Mortgage Products |
|---|---|---|
| # Available Lenders | Fewer | Many |
| HMO Mortgage Rates | Low (1.9% - 4%) | Low - Med (2% - 5%) |
| Max Loan to Value | 85% | 80% |
| Valuation Method | Bricks & Mortar Method | Commercial/Investment |
July 2019: Credit: theHMOMortgageBroker.co.uk
How to Maximise HMO Property Valuations
Regardless if you are looking to sell or remortgage, we recommend that you prepare the property as if you were looking to sell. See this article on How to sell an HMO for more guidance. Make it look epic and you will be giving yourself the maximum chance of maximum valuation.
For an HMO remortgage, you need to ensure you choose the right broker who knows and understands the HMO mortgage market in order to help you select the correct lender and correct product. Different Lenders use Different Surveyors use Different Valuation methods, and therefore give different valuations
We use www.thehmomortgagerbroker.co.uk as they are brilliant and an obvious specialist with direct links to all the UK HMO Mortgage Lenders.
On the other hand, commercial valuations aren’t as elusive as some people would have you believe. The best thing to do is check out the directory for HMO mortgage lenders or speak to our recommended HMO Mortgage Broker.
The appetite for lenders towards HMOs is increasing overall but is changing on a monthly basis. Available products vary depending on when you’re applying, and how the case is put together by your broker especially if the property is showing significantly higher rental income than a standard buy to let in the same area.
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