What you need to know about semi-commercial mortgages – and valuations!

We’re back! After a few weeks of dealing with the crazy amount of completions we seem to have had, and a week of an un summer holiday in Devon it’s back to blogging!

This week we are talking about semi-commercial mortgages. Specifically the valuations for these mortgages as they are so important.

When someone calls me up to ask about semi-commercial mortgage quotes and costs, the assumption from them would be that we are looking for the ‘lowest cost’ option and that’s not what I am thinking! There are a number of semi commercial lenders back in the market now, most at 75% LTV and some at 70% and their rates are similar. There are pros and cons of them all and we will discuss that. The most important part of that comparison is not necessarily rate though, the valuation methodology is often overlooked and that’s something I will always want to cover at the beginning.

How do you value a semi – commercial building? 

The commercial element can be valued as a vacant building, or with the benefit of a tenant in the property. The difference is usually about 10-15-% depending on the location, tenant and lease length. Some lenders will use the vacant value and some use the market value and that can make a big difference to the amount you are able to pull out of the property.

What about the residential element? 

It’s more common now to see HMOs above a commercial unit. It’s an easy way to up your rent, and given the location (usually above a parade of shops) there is less issue with demand when letting to students or professionals than to a family.  Again the value of an HMO can depend on if you’re using the vacant or bricks and mortar value, or the market value. There is an assumption that as you are paying for a commercial valuation that you will get a commercial figure but this isn’t necessarily the case!

Some lenders will use the market value, which is fantastic for pulling as much money out as you can, and some will (as with the commercial element) use the bricks and mortar, or vacant value. 

As an example, we have recently refinanced a semi commercial property for a client. It is a shop with a 4 bedroom HMO above. The vacant value is £285,000 and the market value is £310,000. This means that the client has been able to pull out an extra £18,750 by using the market value of the building. This can be far more important than a small difference in interest rate. This client has used those funds as a deposit for another BTL property, so the onward return is increased even further.

So how do you know what to do and who to use? 

This is where you need a good specialist broker! We have great relationships with our lenders, we only use lenders that we know and trust and this means we know their criteria and appetite inside out so we know what to expect! With rules changing so often at the moment,  it’s important that your broker specialises in these types of cases and understands valuation methodology.

As always give us a call if you have any questions.

 

All you need to know about mortgages on blocks of flats – and a good example!

I’ve had quite a few enquiries about flats recently, and we’ve just had an offer through for a great example of how to structure your mortgage so I thought this week I would run through all you need to know!

Firstly, what’s a multi unit freehold block (MUFB)

It’s a block of flats where it is all on one freehold, so it is kept all together as one with no flats on their own leasehold titles. We sometimes see blocks that have been broken up, so some flats have been sold off within the block and that can cause issues with your mortgage so it’s worth checking the Office Copies at Land Registry to see what the situation is before you proceed. Some lenders do not like split freeholds – ie. where some flats are on their own leasehold – whether you own them or not.

What do you need to think about before you put an offer in? 

  • As I’ve mentioned, the Office Copies are really important so always check this before you do anything else – it’s a quick and cheap starting point!
  • What planning is in place if the property has been converted? There are so many historical conversions that don’t have the correct planning so this is something to check. You can look at the planning portal, or check with the planning department. Don’t assume that just because the council tax is separate that it’s been granted!
  • Could the properties be split off and sold separately? Utilities need to be split, check the water tank and boiler too.
  • Are each flat over 30m2 and do they have independent access?

What mortgages are available and what should you think about? 

As always, there are a couple of considerations as well as the interest rate! There are some lenders who will offer a competitive rate for blocks of up to 12 flats and for purchases this may work well. We can look at it on a 2 or a 5 year fixed, so if you are looking to refinance at some point there there are shorter options.

These lower rate lenders will value the property at what’s called a block value though, and that may or may not work for you. What this means is that they valuer will look at the individual values of the flats, and then deduct about 10-15% depending on the demand for the sale of the full block. Recently we have seen a fairly consistent 10% being deducted from the value.

If you want the opportunity for an aggregate value, then we do have other options. This could be for your own development or a refinance of a property you already own. Rates will be higher, but as always it is about the bigger picture! For blocks of up to 10 flats, where the valuer confirms that the flats can be sold within a 12 month period, then we can use the aggregate value; this means the total value of the individual units. In real terms this usually means an minimum of 10% on top of the block value, so that’s the consideration on absorbing the rate difference.

There are other reasons that you would use a more specialist lender, so don’t get put off when things look a bit more complicated:

  • Some flats are under 30m2
  • Where some flats are on a leasehold title so it’s not a freehold block
  • Where some flats have been sold off so you don’t own the whole block
  • If it’s a block of more than 12 flats

As always, consider your yield when looking at these properties, the rate is only a deciding factor if the yield isn’t enough! 

A recent example…

A client has built a block of 6 flats and is putting them on long leasehold titles. We have had a valuation carried out and are able to use the market value as the flats could be sold within 12 months. This is giving the client an additional 10% on top of the block value – in this instance it was increased the loan size by £123,000 so can make a big difference to the viability of the project. We were able to fund 75% LTV of the aggregate value.

Give us a call if you want to run through any examples.

Focus on HMOs: Do you need a hybrid valuation and why you want a specialist lender

So here we are at Friday again – for many of us the Friday we have been waiting for! We’ve also had a solid budget this week, with an extension to the stamp duty relief which is great news.  With all this, as well as a clear roadmap out of lockdown, it does seem like there is some vibrancy to the market this week.

I’d like to talk about HMOs this week.  It’s a hot topic at the moment and we have had many enquiries asking about how to value properties and what rates we can do.  These conversations don’t always go the way clients expect though, so I thought I’d explain it in a bit more detail.  As you know we are big believers in looking at the bigger picture and not chasing low rates so this should help explain why.

Do you need a Hybrid valuation or will a bricks and mortar work?

Before we go on to hybrid and bricks and mortar methods, I just want to mention commercial valuations.  The words ‘commercial valuation’ are used a lot in the property world, and not always correctly.  The lender decides on the type of valuation we use, so we can’t request what to have; and no, it doesn’t always mean a yield based valuation!  We would only be able to use a commercial valuation for HMOs where it is 7 bedrooms or more.  There will always be a ceiling price for a property in an area based on the location, size, condition and demand and that needs to be taken into account when looking at the yield calculation.  It’s really important that as investors you do the same to be as accurate as you can.

Hybrid valuations are also something which I don’t believe are explained very well a lot of the time!  It is something that some lenders allow, but it is up to the valuer to decide what that means and what the figure would be.  I have written a blog on it here, but what I wanted to talk about today is whether it is important to you and your property.

I am a big advocate of using a hybrid valuation, but there are only a few lenders who truly use it, and it is more expensive.  So do you need it? 

If you have spent a significant amount on your refurbishment, and the total cost (refurbishment and purchase price) is significantly higher than the bricks and mortar comparables then it is worth exploring, but if not then it may not be.  I have had examples recently in Suffolk and Kent where the bricks and mortar value is significantly higher than the hybrid calculation, but areas in and around Manchester, for example, have lent themselves to a hybrid model.  It allows you to pull out what you have spent on the property when that figure is more than the bricks an mortar.  We do sometimes see the elusive ‘no money left’ situation sometimes, but that is rare, especially at the moment.  When we have seen it is where the client has done really well negotiating on the purchase price and they have made the extra money before they have even started works – you can only get this back out on a refinance through.

So why would you want to use a specialist lender?

There are so many benefits to using a true specialist lender.  Their rates will be higher than the ‘specialist side of vanilla’ lenders, but as you know we are big believers of looking at the bigger picture:

  • They work with property investors regularly, so they understand that your income may be low due to carrying forward losses.  There is generally no minimum income requirements as long as the situation makes sense
  • The required documents that you need to provide are simple and straightforward.  There is no new list once the initial requirements have been satisfied!
  • We are able to speak to the underwriter directly, so if there are any issues then they are usually quickly resolved with a phone call.  We have a good relationship with our lenders so are able to pre-empt any potential issues a lot of the time and have a good idea of what will work and what won’t.
  • They are far more open to investor funds, which is a big deal at the moment.  I have mentioned previously that there is plenty of money within the property world, with private investors looking for better returns than they can in bank savings.  There are also plenty of bounce back loans within the property investor community, and both of these options aren’t acceptable to many less specialist lenders.  Even having a BBL in your account could present a problem, so if you want to take advantage of these funds then you need to know where to go.
  • You have far more choice of how to structure your limited company in terms of SIC codes, number of directors/shareholders and group structures.  Often less specialist lenders have restrictions around this that can cause issues with the way your company is set up.

As always, if there is anything you want to chat through then give us a call.  Enjoy your weekend – the evenings are lighter and things are definitely on the up!

 

Could you use investor funds or a bounce back loan for your next deal?

It’s blog time again! We are feeling more optimistic that we may be nearing the end of this lockdown, and some warmer weather definitely helps!

This week I thought I would cover investor funds and bounce back loans; there does seem to be an air of money floating around within the property world at the moment and I can see why. Bank savings rates are at an all time low, even lower than the previous all time low! We have seen a 400% increase in bank savings in the past year; a combination of being unable to spend money and an uncertainty of what’s to come means that lots of people have got more money than they usually have. We’ve also seen so many people take out bounce back loans for their property companies, as they have been affected by Covid.

So how can you take advantage of this as an investor?

There are many ways. Bounce back loans are a simple way of increasing the funds you have for your next property purchase. There has been many changes over the last year of how lenders view these loans, but on the whole they are now acceptable to be used for your deposit or refurbishment costs. What the lender doesn’t want to see is that you are stretched and have only got the bounce back loan funds available, but as part of your funds available that is fine. It’s also very important that you don’t have any outstanding payment holidays on your portfolio.

I have to caveat this by saying that each lender has their own risk appetite and therefore there are some lenders who won’t be comfortable with clients that have taken a bounce back loan, or they can have taken it but can’t use it for this property. This is mainly more high street or as we like to call the ‘vanilla side of specialist’ lenders. What this means is that you may need to use alternatives lenders, or bridging finance (which you may need anyway) to be able to use this money. Please speak to us about your scenario and we can talk you through the options.

What about investor funds? 

It’s unsurprising that there are so many people wanting to invest in to property at the moment, with so few alternatives. It also offers investors a short term option when they are indirectly investing, or an opportunity to use smaller amounts of money to dip their toe in. The returns are far higher than many other options, and the risk may be more comfortable to them than investing themselves.

As an property investor, using other people’s money is a quick way to grow your portfolio. It’s something that lenders are becoming more comfortable with as it becomes more popular.

It is so important to look at a few things before using investor money:

  • Do your due diligence, this is so important. You are entering into a financial commitment with someone so you need to be comfortable with them and where the money has come from.
  • Have a clear plan with a number of exit strategies. You need to know that you can repay the loan within the timescales. Make sure your investor knows what your plan is, and gauge how they would be if it runs over the time. You need to build trust with investors by delivering on your commitments
  • Have you demonstrated that you can deliver on your promises with a previous project? You need some experience to show your investors, as well as your lender than you are capable.

As with bounce back loans, some lenders are not happy with using investor funds. What we usually see, however, is where you would use these funds for the purchase or refurbishment and then the investor will be repaid on refinance or sale. Bridging lenders are on the whole happy with investor money, as long as you are putting in some cash and have some experience.

Please let us know if you have any questions, we’re happy to run through any deals or scenarios you have. Have a great weekend, and happy property hunting!