As an investor, you are generally trying to pull as much out of each deal to allow you to move on to the next one. Getting the right valuation for your HMO is key to this!
There are a few ways lenders value HMO’s, so here is a simple explanation for them all:
Bricks and Mortar Valuation
Most lenders will value an HMO up to 6 bedrooms as an empty house regardless of how much you have changed the layout. The comparables they will use are for similar-sized properties in the local area.
In order to achieve more than this, you need to work with a couple of specific lenders who have other options but all lenders will value on a bricks and mortar basis where the existing layout has been kept; for example where the only change has been converting a lounge into a bedroom and perhaps adding an en-suite.
Commercial or Investment Valuation
This is valuing based on yield. The lender will use a net market (not actual) rent, using local comparables.
Most specialist lenders will use this method where the property has Sui Genaris planning, and some will also use it where Article 4 applies.
There are a couple of lenders in the market that will also consider this where you have a larger HMO and C4 planning where the internal layout has been significantly changed so that it would be more likely to be resold as an HMO rather than a house. There would also need to be a good demand for both room rentals and the resale of an HMO.
What’s the commercial valuation calcuation?
Annual market rent – 20%
Average yield
This is an approximate calculation and figures can vary but it’s a good guide.
HMO Hybrid Valuation
Where your property does not fit into the previous definitions, there are a few lenders that have an alternative. There are other lenders who say they do and don’t so you do need to be careful!
It is up to the surveyor to decide if the internal layout is significantly different from a house and whether it would be more likely to sell as an HMO. This would typically be where the property has all double bedrooms with en-suite, the kitchen has multiple cookers, sinks, etc. and the living space is comparatively small. There needs to be a demand for resale as an HMO too.
How do surveyors come up with a hybrid figure?
They take the purchase price of the property (or market value where it was purchased under value) and add the cost of the conversion. This is based on an average cost so may not be exactly what you have spent.
Having a good valuer pack and a clear schedule of work is so important.
This is a guide and doesn’t always work perfectly, so if you would like to talk through your case and whether it’s worth trying to get that hybrid or commercial valuation then please give us a call!
