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 we get asked. There is so much incorrect information on this subject and this post will tell you how it is.
Firstly 75% of lenders will only lend against bricks and mortar on a small HMO (up to 6 beds) and the other 25% can have restrictions on how much they will lend on a newly converted HMO. Yes, some properties are valued at 10 x rent but we’ve seen as low as 5 and as high as 14. Lending against rent is often called a commercial valuation.
If you 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 rent at £95 per week so annual rent is £29,640.
Some will say it’s now worth 10 x rent which is £296,000. If a potential buyer can buy no 22 for the same price and get a new HMO for £131,000 less why would you buy no 24 at a figure way above bricks and mortar?
Lenders will instruct their valuer to value on a vacant possession (VP) value which is bricks and mortar and/or Market Value which is based on yield 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 if the lender accepts this type of valuation.
A standard house
The property can be used on a multi-let basis (another word which lenders use for a small HMO) 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.
Reconfigured and no longer a standard house
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 to 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.
Over 6 beds. Sui Generis (class of its own) planning in place. The valuer will consider comparables and again base on market value.
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