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 more commonly used and is based on the 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, which calculates value based on a net yield 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 an investment valuation is because it will be typically higher than a bricks-and-mortar calculation, provided your HMO is full of tenants paying a proper market rent.
It’s important to clearly understand the method your lender will use. The higher the valuation, the more funds that 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 is more appropriate once the property has been inspected. Generally speaking, I would suggest that if you present a lender with a commercial premises with full HMO planning consent for more than, say, seven rooms, then you would have a strong argument for an investment valuation.
On the other hand, if you have a five-bedroom house on a street comprising similar fivebedroom houses, then the argument to stray away from a standard bricks and mortar valuation will be weak at best.
In addition to considering regulations, local authority requirements and the RICS Red Book guidelines, bear in mind that a surveyor also needs to be cognisant of the lender’s specific criteria, as each one has their own guidance notes. Some may only undertake valuations on a bricks and mortar basis. Best to know this before you apply!
Whilst you can improve the value of a property when a bricks and mortar valuation is considered, there will be an upper limit that a surveyor will believe your particular street will support. Accordingly, 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 an investment valuation is more likely for your property, you should then focus on the factors that can influence that calculation, which are limited principally to rent, operating costs, and yields. Increasing your rent and successfully managing your costs will put you in the best position for the valuer’s visit. In order to demonstrate this, it’s useful to prepare a pack.
Typically, this may include:
•a floorplan
•a copy of the HMO licence
• copies 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
•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 an investment valuation should follow.
If you wish to do some due diligence to improve your chances, then ask your lenders which surveyors are on their approved panel. You can then approach them to see what their instincts are with regards to which valuation method would be best suitable for your HMO, and whether the lender’s guidance notes allow the provision of investment valuations.u
As always I am happy to assist readers on 0790963771 or email us on [email protected]
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