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.
HMO Valuation Methods
Bricks & Mortar HMO Valuation
Bricks & 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.
Bricks and mortar valuations are reached by a set of standard criteria to which 99% surveyors work.
- Size – bedrooms & square footage
- 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 bricks 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
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
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;
- Operating Costs (10-30% depending on the quality of property)
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(15-30%)) *12 / Yield
HMO Property Value = Annual Net Rent / Yield
|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|
Commercial HMO Valuation Calculation Calculator
Bricks & 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
- Prepare the property as if you were to be selling it. Make it look epic and you will be giving yourself the maximum chance of maximum valuation.
- 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.
The appetite for lenders towards HMOs in 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.
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.