Care Provider leases on HMO properties

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.

Adding value to your property: How can a bridge to term product help you? 

What an amazing week we’ve had – we are still flying high from Wednesday night!! Roll on Sunday now…

This week I want to talk about bridge to term products specifically. Last week we covered bridging and why it is so important to add value to your property, but there is more to it – and there are ways to reduce your overall cost and this is a big one!

What is bridge to term? 

It is a product which allows you to use the same lender for the bridge to purchase the property and then use it as an exit onto a term mortgage as well.

How does it work? 

There are two types:

  • You can have it as ONE product, which means that you have two offers at the beginning (one for the bridge and one for the term) and the valuation with cover both products too, so you have certainly over the end value and what you can work towards.
  • You can have it as 2 products, so you apply for them separately and have two valuations and offers (the term gets started once works have been finished). This allows a valuation to take place once works are completed so you often get a more favourable figure, it can also take into consideration the finished property, which really can help. As with the same lender it has the advantage of lower arrangement and legal fees.

What are differences between this and a standard bridge?

From a cost point of view, you can save on valuation costs (in some instances), legal fees and arrangement fees. This will help to reduce your finance costs and increase your ROI. As bridging can be very expensive, this is a good way to bring it down.

It also offers you some certainty around the exit for your bridge. The lender will underwrite the case for the exit as well as your initial loan, so any issues with the property should be picked up on before you buy the property. There’s never a guarantee with these things, but it does mitigate some of the risk.

How much can I borrow and what works can be carried out? 

This depends on the type of product.

We have a lender who will look at both parts as one product, as mentioned earlier. This is ideal for light refurbishments before letting out as a single let. For example where the EPC isn’t good enough, or it needs a new kitchen or bathroom. We will know the end value from the schedule of works and the valuer will confirm this. You can borrow up to 65% for the purchase, and then 75% for the refinance. This is a low cost option and offers some security but does mean you are putting more in up front.  The 2nd valuation is only a revisit, to confirm the works have finished – it cannot change the GDV. You have to complete and refinance by 6 months maximum.

For more complex refurbishments, ie conversions from commercial to residential or to HMOs we have another product. This is set up as two products, a bridge to start and moving to a term facility when it’s finished.  The initial valuation will include GDV expectations from the valuer. For light refurbishment projects we can lend up to 85% of the purchase price (subject to some restrictions) and for heavy refurbishments we can go up to 75%. Heavy refurbishment would also include anything requiring planning or building regulations. You also have up to 18 months to do the works.

For the term exit we can generally lend up to 75% of the new value.

For both options we do not need to wait 6 months from the purchase.

As always, give me a call to discuss individual cases and how we can make it work. Have a fantastic weekend and come on England!

Straight forward bridge or borrow the refurbishment costs too?

This is a question which has come up a lot recently so I thought I would try and untangle some of the pros and cons of both options. It is very case specific but hopefully this will help you think about some of the other considerations rather than the interest rate alone!

When does a simple bridge work? 

The most common scenarios for when you most likely to use a standard bridge are:

  • When the cost of your works is less than about £50,000 as you will always need some working capital so it really doesn’t add much benefit to you
  • When you have the funds available for the refurbishment for little or no cost and don’t mind having this money tied up (ie. no other projects on the horizon!)
  • When you need the maximum loan (usually 75%) on day one

There are benefits to doing it this way round too:

  • The overall costs are lower, not only because you are borrowing less. There are QS or asset manager costs associated with refurbishment bridges and there can be an exit fee.
  • You will usually get a higher loan on day one as we can usually get to 75% and all the lender fee on top of this.
  • You are more likely to have the option to service the loan (pay the interest monthly) if you want to and are able to. This does increase the amount you receive initially.

So how does a refurbishment bridge work in comparison? 

A refurbishment loan allows you to borrow the costs of works in arrears as well as a percentage towards to the purchase.  You may end up with slightly less on your day one loan, but his does depend on the project and how the figures work. You will always need capital to start the works, and as you spend that it will be reimbursed. The drawdown interest is estimated at the beginning based on the lender’s experience of how draw downs generally work (amounts and timings) and then paid on redemption of the loan.  Your broker will know how each lender works in terms of payment for QS for example.

Benefits of a refurbishment bridge?

  • You can borrow far more money, so less for you to put in
  • You only pay interest on the amount you have borrowed and this is calculated daily. This is a big one! You don’t pay interest on the whole amount, only as you draw it down, which can save about 40% of the interest costs if you borrowed the full amount for the full term.
  • This can mitigate the other costs, such as an increased arrangement fee and QS or asset manager fees

Clients are often put off by an exit fee and QS, but looking at the overall cost is so important here.

So what types of projects work for refurbishment bridges? 

  • Heavy refurbishment projects such as conversions to flats or HMOs
  • Commercial to residential conversions
  • Large scale refurbishments of single dwellings

But what about planning I hear you say! There are instances that we can complete without full planning. It’s a case by case basis, but if we have a favourable pre app or an alternative use with the current planning then that can work. We can also buy the property on a bridge and then switch to a refurbishment bridge once planning is granted to save you money and add some additional time in.

As always, give us a call if you want to talk through your options. And don’t forget we’ve got plenty of time to get these sorts of cases completed before the stamp duty deadline.

How does an 85% LTV bridge sound?

Here we are at Friday again, although the days all seem to be merging into one! I hope you are all doing ok, for those home schooling like me we’ve got one week left before a slight break of half term which I am so excited about! The irony of children’s mental health week being in the middle of a winter lockdown is not lost on me…

This week we genuinely do have some good news though. After a bleak January and with the stamp duty relief deadline inching closer we really do need it.

Shawbrook Bank have this week re-launched their 85% loan to value bridge. There are a few caveats to this, which I will go into but this is a great sign of confidence in the market moving forward. It allows you to borrow an additional 10% on top of the 75% (net of lender fee) for refurbishment costs.

What you need to know:

  • The 10% is for refurbishment costs, so you need to be spending at least that amount on the refurb. You can spend more (and fund it yourself), but if you spend less than the additional loan will be capped at that.
  • This is for a light refurbishment, so nothing which involves planning or building regulations or any structural changes.
  • You do need some experience, one similar project is enough
  • The maximum loan is capped at 75% of the post works value, so we need to give the valuer a copy of the schedule of works and they will give us a figure to work with.

This is brilliant for so many scenarios:

  • It allows you to borrow additional funds for the refurbishment and this is be upfront rather than in arrears which we often see with typical refurbishment bridges.
  • It suits conversions to small HMOs (up to 6 bedrooms)
  • Any residential internal refurbishment which can include kitchens, bathrooms, heating systems and re arranging layouts where no structural works are required.
  • You don’t have a cap on the amount you can spend on the refurbishment, and the additional funds will go towards this.

As always, we are happy to chat through any enquiries you have. We can let you know whether we think your project is something suited to this sort or product or whether something else would work.