How will they value my HMO?
One of the most common questions I get, is from HMO owners keen to understand how surveyors will value their HMO investment either as part of a refinance application or on behalf of a buyer if they are disposing of their investment.
The answer is a resounding, “It depends.”
The issue of valuing HMOs was recently raised at The Specialist Lending Event with mortgage brokers asking why HMO properties are frequently given unexpectedly low valuations.
One reason for discrepancies in valuations is that there are two ways of valuing an HMO – on an investment basis and a bricks and mortar basis. These two methods can deliver very different results.
The “Bricks and Mortar” valuation is the more common used and is based on current fair market value determined by local comparable evidence. On this basis the Valuer is looking at the property as a traditional residential property and making any necessary allowances for the fact that it is let.
The alternative is a commercial valuation, often referred to as an Investment Valuation. An investment valuation calculates value based on a net yield calculated using rental income and operating cost data. This method is, I understand, offered by a number of lenders but is subject to various criteria.
The main reason for a landlord preferring this investment valuation is that it will be typically higher than a Bricks and Mortar calculation, provided your HMO is full of tenants paying a proper market rent.
Clearly understanding the method your Lender will use is important given that the higher the valuation, the more funds could be available to the Landlord to draw down or a more attractive mortgage rate could be available as a consequence of a lower loan to value percentage.
Unfortunately, there seem to be no hard and fast rules in terms of which valuation method is used and it is often dependent on the Surveyor appointed to determine which method is more appropriate once they have inspected the property. Generally speaking however I would suggest that if you present a lender with a commercial premises with a full HMO planning consent for more than say 7 rooms then I would think your argument for an investment valuation is strong.
If on the other hand you have a five bedroom house on a street comprising similar five bedroom houses then the argument to stray away from a standard Bricks and Mortar valuation will be weak at best.
Bear in mind, in addition to considering regulation, local authority requirements and the RICS Red Book guidelines, a surveyor also needs to be cognisant of the specific criteria of the lender that is involved in the case, as different lenders will have their own guidance notes. Some may only undertake valuations on a Bricks and Mortar basis. Best to know this before you apply!
Whilst, by adding value to your property, you can improve the value of a property when considered on a bricks and mortar basis, there will be an upper limit that a surveyor will believe your particular street will support. Accordingly, if you have a property in such an area, be mindful of comparable data as further development of your property may mean that you are obliged to leave that additional investment in the property rather than being able to access it for reinvestment purposes. For those of you hoping to build or expand a portfolio, this could cause significant headaches.
If you feel the investment valuation is more likely for your property, you should then focus on the factors that can influence that calculation and these are limited principally to rent, operating costs and yields. If you can increase your rent and successfully manage your costs then you will be in the best position come the Valuers visit. In order to demonstrate this to the Valuer it is useful to prepare a pack for their visit. Typically this may include a floorplan, copy of HMO Licence, Copy of Planning Consents and Building Control Documents, Electrical/Fire/Gas checks and compliance documents, details of rental income over as long a period as is available and a copy of the management contract if the management of your HMO is outsourced.
Demonstrating you are operating your property as a full commercial entity should provide some persuasion that a investment valuation should follow.
If you wish to do some due diligence to improve your chances, then enquire of your lenders which surveyors are on their approved panel. You can then approach them and see what their instincts are in terms of which method of valuation may be suitable for your HMO and indeed whether the lenders guidance notes allow their surveyors to provide an investment valuation.Back