How do you value a HMO?
Looking to buy or purchase a HMO (House in Multiple Occupancy)? If you need to use finance to assist you in your purchase, your HMO property will require a valuation. Valuations are used by lenders to ascertain whether a property is suitable security for securing a mortgage. A surveyor will typically check the condition of the property, its particulars (number of bedrooms, bathrooms etc.), the location and provide various values for what they think the property might be worth and what rental income it might yield. The lender then uses this information to decide if they will provide finance and if so, how much.
Types of HMO valuations
There are two types of property survey in use for valuing HMOs – a brick-and-mortar valuation and a commercial HMO valuation.
Brick and mortar valuation
Brick-and-mortar valuations are the ones most commonly seen and used by lenders for most application types. Also known as a buildings valuation, this valuation is commonly used for standard residential dwellings that are in use or have been converted for use as a HMO. A brick-and-mortar valuation will assess the property in its current condition and effectively give a valuation based on how much you could get for the property if it was sold as a residential dwelling.
Commercial HMO valuation
A commercial HMO valuation works differently from a bricks-and-mortar valuation in that it looks at the property as an investment. The surveyor calculates the property value using a multiple of the projected rental income. The valuation provided is based on what they think the property would be worth to another HMO Investor, although they’ll often be mindful of the property’s resale value to non-HMO buyers as well. Commercial HMO valuations will often come back higher compared to brick-and-mortar style valuations because they assess the HMO’s earning potential. However, lenders can sometimes impose tighter restrictions which can also reduce what you can borrow if this type of valuation is used.
Which type of HMO valuation do I need?
The type of valuation that will be carried out will be determined by the lender’s criteria which usually include the size (square footage) of the property, the number of bedrooms, where the property is located, the condition of the property and how the property compares to others in the area. It’s also worth noting that not all lenders offer commercial HMO valuations and those that do will have rules about under what circumstances they will be used.
What factors influence a Commercial HMO Valuation?
When assessing a property during a commercial HMO valuation, the surveyor will look at several factors including:
- Location of the property and amenities in the surrounding area
- Expected rental yield of the property
- The value of comparable properties in the vicinity
- Tenant demand and demographics
- The condition of the property and the type of build (i.e. construction type)
- The size of the property including the number of bedrooms
- Whether the property is most suited to the investor market or the residential market
What are the Advantages and Disadvantages of a Commercial HMO Valuation?
There are advantages and disadvantages to using Commercial HMO valuations, which are worth considering when applying for HMO finance.
Advantages of a commercial HMO valuation
- The main advantage of a commercial HMO valuation is that they are usually valued higher. This is because the property is valued based on the earning potential from the rental income and what it would be worth to another HMO investor.
- The higher valuation means landlords can raise more equity when refinancing a HMO than they would be able to with a brick-and-mortar valuation.
Disadvantages of a commercial HMO Valuation
- Unfortunately, there are fewer lenders in the market who offer HMO valuations. With fewer lenders available there are limited options for product selection which means the criteria are also less flexible.
- It can be more expensive to arrange a commercial HMO valuation. They often come at a higher cost and legal fees can be more expensive in comparison to other valuation types.
- Interest rates offered by lenders who offer commercial HMO valuations can be higher and the arrangement fees more expensive.
Speak to Simple Fast Mortgage today about your options for HMO finance.
If you would like to take advantage of a mortgage with a lender who carries out commercial HMO valuations, it’s worth speaking to our team of mortgage advisors. Our team will be happy to talk through the pros and cons of obtaining finance through a lender using these types of valuations. Our team will use its extensive knowledge acquired from working with other investors to find the mortgage that’s right for your needs. We have some great connections in the industry and have access to a number of HMO mortgage lenders including some who provide commercial HMO valuations. If a HMO mortgage isn’t right for you, there may be other options available including commercial finance and bridging finance. For more information or to find out how much you can borrow, contact our friendly team.
Commercial HMO Valuation FAQS
Can I request a Commercial HMO Valuation?
Your lender will normally determine whether a Commercial HMO valuation or brick-and-mortar valuation is carried out and you usually have very little choice over this. However, there are a number of things you can do to increase your chances of securing a commercial valuation for your property. Some items which will be considered are the type of conversion that has taken place, the number of bedrooms, and the location. It’s also important that you use a lender that is able to allow a commercial valuation and that you have control and understanding about which surveyor is selected.
Which lenders conduct commercial HMO valuations?
There are a limited number of lenders who offer commercial HMO valuations and many of them are more specialist in nature. As lenders can vary their criteria and products, to find out which lenders are currently offering commercial HMO valuations, speak to our mortgage team.
How much can I borrow based on a commercial HMO Valuation?
This will depend on the property value, your operating costs and estimated rental yield for the year. A common commercial valuation method is to annualise the rental income and divide it by the HMO yield for the area. The lower the yield factor, the higher the valuation will be. Finding the appropriate yield for your area can be difficult. Other considerations include the size of the deposit and the loan-to-value restriction in place for your chosen product (commonly 85% where a commercial HMO valuation has been used). Contact our friendly team to find out how much you can borrow.