No, it’s not rent x 10 to value an HMO and lenders don’t decide the value of a property. These are the two most common questions I get asked. There is so much incorrect information on this subject.
Firstly 75% of lenders will only lend against bricks and mortar and the other 25% can have restrictions on how much they will lend to a newly converted HMO. Yes, some properties are valued at 10 x rent but I’ve seen as low as 5 and as high as 14. Lending against rent is often called a commercial valuation.
If I can buy 24 Sherwood Close for £150,000 which is a 4 bed detached, spend £15k on conversion costs to make a 6 bed HMO what is it worth? Each room will go for £95 per week so annual rent is £29,640. Some will say now worth 10 x rent which is £296,000. Now that then goes for sale, but I can buy no 22 for the same price and get my own HMO for £131,000 less. So who would ever buy no 24 at a figure way above bricks and mortar?
If it’s a new HMO and you qualify for the lenders that allow commercial valuations, there can be restrictions which last up to 2 years after conversion. These are all aimed at keeping the LTV down and you leaving money in the deal. We have seen no more than 70% of costs and maximum 60% of value. As it’s a new HMO not tested in the market they don’t know how successful it will be, so they reduce the loan to lower the risk.
HMO VALUATIONS FROM A COMMERCIAL LENDER
Lenders will instruct their valuer to value on a vacant possession (VP) value which is bricks and mortar and market value which is based on a yield resulting in the value being linked to a multiplier of rent.
The valuer will analyse the gross rent and make deductions for repairs and management. They then capitalise the net rent to obtain a capital value figure and compare with other residential properties and comparables in the locality.
There are four ways that valuers look at HMOs:
The property can be used on a multi-let basis and any works to convert are minimal. When empty the property can be used as a single let.
The property can be used on a multi-let basis but the works to convert are minimal. A buyer is likely to purchase a similar property and convert than pay a premium. It will always be valued on a bricks and mortar basis. Some lenders will lend off the total rent by room and others will base the loan on the single let rent.
There is no article 4 in the area and there is no planning in place. The building has had a significant change to be used as an HMO and it cannot be used as a single let.
No Article 4 in the area and no planning in place. Other units in the area are sold as private dwellings. The building has been significantly altered and can no longer be sold as a private dwelling. If there is a demand for an HMO and there are comparables then the lender may work off market value.
Article 4 is in place.
Up to 6 beds. Article 4 is in place so there is a barrier on new HMOs. The valuer will consider comparables and rents and will be valued on market value.
Planning in place(Sui Generis ) to be used as a large HMO.
7 beds or more. Sui Generis (class of its own) planning in place. The valuer will consider comparables and again base on market value.