How might my HMO be valued by a Lender?
This is a question that we are asked on a regular basis and there is no simple answer.
The majority of HMO lenders will lend on the vacant possession value of the property (or bricks and mortar), despite the rental income received from letting to multiple tenants.
This is generally the case for smaller HMOs (up to 6 beds), although in reality, it is not determined by the number of rooms and I have also seen larger HMO’s valued in this way.
It’s often the case that, were the property to be put on the market, it may still be purchased as a private dwelling. It’s also likely that a property investor looking to purchase a property to let as an HMO, could find a neighbouring property for sale at a lower price, refurbish at a low cost and convert to an HMO without paying a premium to purchase a ready made HMO. In this case, it makes sense for the lender to lend on the bricks and mortar value that is achievable in the market.
There are lenders in the market that will lend on a commercial valuation. The valuer will consider the market value, taking into account rent and yield. Whilst the valuer will apply the gross rent, they will then make deductions for repairs, voids and maintenance and make comparisons with other properties in the area. This results in a ‘premium’ being applied to the value of the property, rather than a traditional ‘yield’ valuation, but does allow for increased borrowing against a higher value.
In my experience, a commercial valuation is appropriate where the fabric of the building has been materially altered and the property cannot easily be returned to a private dwelling. We see this regularly on larger scale commercial to residential conversions, where each room may have an ensuite and there may even be multiple kitchens etc.
Another more obvious example of where a commercial valuation might be appropriate, is where the property has C4 planning, as there is an Article 4 directive in place. The Article 4 dictates that an investor looking to purchase cannot readily purchase a property with C3 use and convert it to an HMO, resulting in a ‘premium’ price for the property that already has the C4 use.
The same applies for properties where planning is in place for Sui generis use as an HMO. Sui genesis is a term used when a building does not fall within any particular use class. This is likely to be a yield based valuation, based on sustainable rent comparisons.
In summary, it can be difficult to determine how a lender might value your HMO as much depends on the lenders own policy and on the method that the valuer deems appropriate; unfortunately the valuation process is not a science. It’s also worth remembering that the valuation method used for valuing HMOs (especially for purchases) can protect you as much as the lender, ensuring that you get your numbers right from the get go!
We work with a panel of lenders who offer products specifically for HMOs and we are here to save you time and guide you through the options available to you and your property.