How do you value an HMO?

As the saying goes, ‘a property is only worth what someone is willing to pay for it’ and this is certainly true when it comes to calculating the value of an HMO (House in Multiple Occupation), but with a few key nuances.

Like with any type of property, the method of valuation will largely depend on the core objective – whether you want to sell on the open market, sell directly to a cash buyer or raise finance, usually via a remortgage. And while the process for understanding how much your HMO is worth from a bricks and mortar perspective is fairly straightforward, the ‘intrinsic’ value placed on it by a potential buyer will differ hugely.

This is why it’s important to understand the various ways to value an HMO, based on what you want to achieve and who you are trying to target – lenders, buyers or investors.

Reasons to value an HMO

• Remortgage after development: a common tactic among the HMO landlord community is to seek a revaluation after a standard residential property has been converted into an HMO. This is to try and achieve a valuation over and above the purchase price plus refurbishment costs (development profit) to get a better interest repayment rate.
• Remortgage after term ends: there will come a time when a fixed rate mortgage deal ends or an investor is trying to release equity from an HMO to potentially reinvest in growing their portfolio, and the need to remortgage arises.
• Sell to or buy from an investor as an HMO: whether you’re looking to buy an existing HMO or sell your HMO property to an investor, you’ll not only need to prove a bricks and mortar valuation, but also prove the profitability as a commercial entity.
• Sell to a buyer as a residential property: in some instances, perhaps due to low investor demand or local changes to licencing, an HMO landlord may want to exit the sector and sell the property back to a residential buyer for use as a single dwelling.

Bricks and mortar valuation

A bricks and mortar valuation takes into account the size, condition and location of the property plus the market value according to recent sold prices, supply and demand. It is the most common way of valuing smaller HMOs with six bedrooms or less, which have been converted under Permitted Development to C4 usage for two reasons:

1. In the event of repossession, lenders will likely sell it on as a family home or single-let investment.
2. Other HMO investors will not pay a premium for existing HMOs when it’s more profitable to buy and convert a single dwelling property themselves.

If a lender deems the property to have undergone wholesale changes that make it difficult or costly to convert back into a single dwelling, they could refuse to provide a valuation. This is where specialist lenders, commercial valuations and cash buyers come in.

Commercial valuation

For landlords who want to value an HMO to sell to another investor or to remortgage and achieve a better loan to value ratio, commercial valuations are far more beneficial. Although the specific method differs from one lender to the next (and one surveyor to the next depending what mood they are in), specialist firms will largely base a commercial valuation of an HMO on the following formula:

(Gross rent – reasonable operating costs 20-30%) x 12 / yield

Here is an example of a seven-bedroom HMO with a yield of 8.5%:

(£3,600 - £720) x 12 / 8.5% = £406,588

In order to be eligible for a commercial valuation, most lenders will require that your HMO is large (more than six tenants - Sui Generis); and/or in an Article 4 location where HMO licences are limited; and/or that there have been extensive works specific to an HMO set-up (e.g. two kitchens, laundry room, all en-suite bedrooms etc).

Intrinsic value

Although investors will value an HMO using aesthetics and its location - perhaps how close the property is to public transport - the decision to buy will be ruled by the head and not the heart - and this is where the purchase of an HMO differs from an owner-occupier buyer. As figures and yields matter, HMO landlords should always insist on a commercial valuation if they are hoping to sell to another investor.

The law of supply and demand will also apply. For instance, if the property is in a location where an Article 4 Direction is in place, then new investment in HMOs will be difficult and, therefore, existing HMOs will be more attractive to potential landlord buyers.

Struggling to sell your HMO?

The difficulty with selling an HMO is there are a limited number of willing investors available, regardless of what’s happening in the wider property market. Many HMO landlords would prefer to carry out the initial refurbishment themselves and if your only option is to sell to a residential buyer, then you might not achieve any net price appreciation unless you’ve owned the property for some time and the market has been kind.

Sell immediately for cash

HMO Buyer is the valid alternative to trying to sell an HMO on the open market, with an instant valuation and a cash offer waiting. We will take into account: gross and net rent; the number of lettable rooms; fixed services and costs, and unforeseen costs (such as maintenance, repairs, arrears and voids) when creating our offer.

As professional HMO buyers, also acting as landlords and property managers, we actively seek to purchase HMOs from landlords. Let us value an HMO you own – get in touch today.