Happy Friday everyone – I never thought I’d moan about the weather, but when everything is so busy and taking so long at the completions end, it is pushing a lot of us to our limits.
Today we are covering Care Provider leases on HMO properties.
Having got more investors wanting to get involved in this sector, I thought it good to cover this week.
As some of you know, I have been involved in this area for some time, starting some years ago with refinancing large HMOs for vulnerable women and their children. This was daily emergency housing, so the most difficult to place. In recent years, lenders have shied away from the vulnerable areas, as they didn’t want the prospect of reputational risk. Which really made me mad, as it is so important that they have options, which need funding.
Moving on, last July, I worked with one of our investors to get a supported living contract approved – which I did. It wasn’t for the very vulnerable area, but a start. Since then we have enabled funding for a number of HMOs on this is basis and this lender has now changed their policy regarding care providers. This has enabled us to have much more certainty around what we can offer our clients.
So how do you get involved in this area….
The assumption is that you need lots of experience, but you actually only need to have had one buy to let (single let) for 12 months. You don’t need to have any previous HMO experience. The refurbishment part is slightly different if it involves one, but if it is a light refurbishment then yo don’t need any previous refurbishment experience.
The important part is to check out is your potential care providers; a lot of them are not regulated as they cover areas that fall outside CQC etc. Check their reviews, as the lenders will not tolerate those with poor reputations. Doing your due diligence early on will save a lot of time and cost later on.
- Type of property – each care provider needs a specific type of property, whether it is the number of bedrooms, amount of communal space etc; and so on. It’s a balance between making sure that it is not so bespoke you can’t do anything with it if this doesn’t work out without spending further money, if for any reason it doesn’t go through.
- Area – again, this will be dictated by the type of tenants. Location is so important to your care provider, so make sure you find this out before you start sourcing your property. Distance to local amenities, transport links, particular things that need to be close (or not!) are vital to your provider.
- The lease – ask for a copy of one of the care providers draft leases in advance. Lenders will need to approve them, so it is important that you give us a copy of this to get it approved, in principal, before the transaction starts. A recent case needed some amendments which the care provider agreed to, but this may not always be the case. This is really important as the fund is dependent on it.
FYI – if a lease goes over 7 years, then it is registered at HM Land Registry and the care provider will pay SDLT on it. Something to consider.
As a recent example, a client came to us who had bought a property cash to convert to an HMO. He had bought it for £130,000 in January of this year. As he started the refurbishment, he engaged a care provider early on to understand the requirements they had for the HMO. They are a charity who help young adults leaving care, providing them with supported living as a stepping stone to living alone. Their ethos is around helping their tenants not only with housing, but also with with their finances, employment and ensuring that they are supported at a time when so many are not.
The refurbishment cost £60,000 in total.
After looking carefully into comparables for the end value the clients estimated this would be around £200,000. The surveyor inspected the property and lease and gave it a value of £210,000 – a great result, the lease created an uplift in value well as long term security. The rental income is £2250 per month on a 3 year contract.
We were able to lend 75% of the new open market value, within 6 months of the purchase date. This is on an interest only mortgage too, which historically was an issue for this type of lease.
I genuinely believe that having commercial leases in place, with the current climate of uncertainty, can only be a good thing for both investors and lenders. There are no void, referencing of new tenants and most of the contracts include the bills – so it is a much more profitable, both money and time for these type of contracts.
I hope that is of help, but were here for a call, as always.