HMO Valuations: the Ultimate Guide (2022)

HMO Valuations: the Ultimate Guide (2022)

OVERVIEW

HMO valuations can be complicated.

To help investors and developers, we’ve put together this guide/article to help understand the process from start to finish, allowing the best decisions to be made.

Most of the information in this article relates to re-mortgage valuations but also touches on sales valuations, which can differ.

For further information we recommend you speak to a specialist HMO agent or a qualified RICS surveyor.

PURPOSE OF HMO VALUATION

Depending on the purpose of the HMO valuation (mortgage or sale), will dictate the methodology you will need to understand.

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 attention and then use pricing strategy to ensure buyers feel like they are getting a good deal.

Priced too high, and the listing will attract no attention. Priced too low and you may fail to extract maximum value from the transaction, based on your target transaction timeframe.

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).

Beware: Most high street agents are incentivised to tell you whatever you need to hear to win your business (like a price that is likely too high, to make you feel good and thus sign up with them).

Ultimately with HMO sales, with mortgaged buyers, the surveyor is the most important factor, in supporting a potential sale.

For more complete information if you are looking to sell, then check out How to Sell an HMO Property: the Ultimate Guide.

FOR MORTGAGE

If you are looking to mortgage or remortgage an HMO property, then the objective is to try to understand how a surveyor will appraise an HMO property. Surveyors all have different opinions so finding precise answers is difficult.

Providing a surveyor with supporting documentation (a local comparable sold HMO, for example) to justify a particular valuation. The main problem the surveyors face is the lack of direct comparables available to enable them to draw accurate comparisons, and thus give be confident about valuations.

For help with HMO mortgages make sure to check out the thehmomortgagebroker.co.uk

They are experts in managing the process and helping find relevant lenders who are happy with commercial valuations, assuming the property qualifies. They cannot predict the valuation figure but are the market leader in HMO lending if you want a fast, efficient, and HMO-specific experience.

Tip 1: If looking to sell then speak to an agent who has experience selling multiple HMOs.

Tip 2: If looking to mortgage then speak to a HMO specific mortgage broker.

HMO VALUATION METHODS

There are 2 valuations methods when it comes to HMOs; brick & mortar, and commercial.

Factors Affecting HMO Valuation Method

There are no hard and fast rules surrounding the HMO valuation method, and it can be subjective based on the lender’s criteria.

The best thing to keep in mind is that the further away from a single dwelling a property appears, the easier it is to justify it being valued at anything other than a single dwelling.

Valuation variables include, but are not limited to:

– 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 is difficult to make.

– If you’ve converted a 5 bedroom house, with 3 receptions into a 9 Bedroom all ensuite HMO, including loft conversion and rear extension (added sqft), and obtained full planning permission, then the argument for a commercial valuation is strong.

– 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 25 bedroom house of multiple occupancy, then you’re argument for a commercial or yield-based valuation is very strong.

Tip: There are 2 different HMO valuation methods, brick and mortar, and commercial.

BRICK & MORTAR VALUATIONS

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 most of surveyors work. These include but are not limited to:

To get an idea of bricks and mortar value we recommend clients use Hometrack.co.uk, and pay for a report. Alternatively, if you want to get the free option you can use the data from Zoopla markets and just type in your postcode to get the price paid £/sqft and then adjust for condition and property type.

Tip: Understand that brick and mortar valuations make up 90%+ of HMO valuations.

COMMERCIAL HMO VALUATIONS

This HMO valuation method is offered by certain lenders who offer commercial or yield-based HMO valuations subject to certain criteria.

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.

Factors affecting commercial HMO valuation

  • Available comparable properties
  • Planning Use Class; C3, C4 or Sui Generis
  • Property size
  • Number of bedrooms or units
  • Presence of an Article 4 Directive
  • Local HMO density
  • Condition
  • Management
  • Location

Commercial HMO Valuation Calculation Model

The core variables surrounding this methodology are;

  1. Rent
  2. Operating costs – 15-35% (subject to the surveyors’ discretion)
  3. Local yield – (subject to the surveyors’ discretion)

Assuming the property is in good condition the operating costs can be normalised at 25%, including bills, maintenance, and management.

Local yield is normally the variable at the surveyors’ discretion and is subject to factors affecting the valuation as mentioned 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 Value Calculation

HMO Property Value = (gross monthly rent – monthly opertaing costs(15-35%)) *12 / local yield

Or more simply,

HMO Property Value = annual net rent / local yield

To show how local yields differ between areas, we can provide you the following examples.

LOCATION LONDON MANCHESTER BLACKPOOL
Rooms 10 10 10
Rent Per Room £1,100 £500 £400
Gross Annual Rent £121,000 £60,000 £48,000
Operating Costs (20%) £24,200 £12,000 £9,600
Annual Net Rent £96,800 £48,000 £38,400
Yield 6% 9% 12%
Valuation £1,613,333 £533,333 £320,000
LOCATION LONDON MANCHESTER BLACKPOOL
Rooms 10 10 10
Rent Per Room £1,100 £500 £400
Gross Annual Rent £121,000 £60,000 £48,000
Operating Costs (20%) £24,200 £12,000 £9,600
Annual Net Rent £96,800 £48,000 £38,400
Yield 6% 9% 12%
Valuation £1,613,333 £533,333 £320,000

Tip: A variety of factors make up a commerical value calculation, including local yield.

COMMERCIAL HMO VALUATION CALCULATOR

Calculation: Potential HMO property value = (gross monthly rent – monthly opertaing costs) *12 / local yield.

Tip: Understand the HMO commercial valuation model calculation.

MAXIMISE VALUE

Regardless if you are looking to sell or remortgage, we recommend that you prepare the property as if you were looking to sell. See the article on How to sell an HMO for more guidance surrounding preparation and presenation.

Make it look epic and you will be giving yourself the maximum chance of maximum valuation

Preparation

  1. Refurbish everything & get the HMO rooms staged photographed just after refurbishment.
  2. Collect all details and present them in such a way that allows for total transparency.
  3. Get your documents together in a pack for each property;
    • HMO Licence Certificate
    • HMO Planning Certificate
    • HMO Floor Plan
    • Building Regulations Certificate
    • Tenancy Agreements
    • Fire Risk Assessments
    • Fire Alarm Certificate
    • Electrical Safety Certificate
    • RICS Valuation Document (if available).

Presentation

See below for a good example of how to stage and present an HMO for sale or for a mortgage to achieve maximum value.

Tip: Get max value by refurbishment, and collecting the full document suite prior to valuation.

SUMMARY

Lots of things to consider when valuaing an HMO property but here are some highlights.

  1. If looking to sell then speak to an agent who has experience selling multiple HMOs.
  2. If looking to mortgage then speak to a HMO specific mortgage broker.
  3. There are 2 different HMO valuation methods, brick and mortar, and commercial.
  4. Brick and mortar valuations make up 90%+ of HMO valuations.
  5. A variety of factors make up a commerical value calculation, including local yield.
  6. Understand the HMO commercial valuation model calculation.
  7. Get max value by refurbishment, and collecting the full document suite prior to valuation.