Valuing HMO’s

I needed a blog post to discuss Valuing HMO’s. I think this is something super important that every investor SHOULD know about. I’ve seen it plastered everywhere that changing your property to HMO is a good thing. Why? Because your property is valued on a commercial basis (investment value) so rental income x yield. Which should give you a higher capital value then if purely valued on a bricks and mortar basis.

I’ll give you a very basic example:

I have a 3 bedroom property in Birmingham it’s bricks and mortar value is £180,000 (The value that it would be if compared with neighbouring residential, single unit family homes).

However, I then convert it into a 4 bedroom HMO with a rent of £2,000 pcm / £24,000 a year. The yield is 7.5% (I know this because comparable properties have been valued at this yield). If it is valued using an investment valuation the value is £320,000.

Which value would you prefer?

Yes, the second one for sure! Here is the thing. IT IS NOT THE RULE THAT YOUR HMO SHOULD BE VALUED ON A COMMERCIAL / INVESTMENT VALUE BASIS.

Phew, got that off my chest.

How do I know? I’ve been trained on the RICS guidelines about valuing a HMO premises.

The Guidelines on Valuing HMO’s

As surveyors here’s what we are taught. You can value a HMO on a bricks and mortar basis or you can value it on an investment value basis. It really depends on the circumstance of the HMO.

To start off with the surveyor valuing the property will look at comparable properties being sold in the area as this will provide a good indicator of value. The sale of similar properties may prove that there is no additional premium payable for a HMO and therefore value based on a bricks and mortar value.

The surveyor will also look at the local areas property demographics. If the HMO is located in a mixed investment/owner occupied area the valuation would be expected to fit in with the TONE of the area. Adjustments to value would be made for any additional works.

If the area is predominantly an owner occupied area where there is not much demand for HMO’s then it is more than likely going to be valued on a bricks and mortar basis. Conversely, if the HMO is in an article 4 area, has already got a HMO license and is completely compliant with legislation. This will attract a premium and will more than likely be valued on a commercial basis.

Please also note that surveyors will take into account compliance of a HMO. If it doesn’t fit in with the minimum space requirements, it isn’t compliant with legislation, or the surveyor can’t get into all rooms on inspection these are RED FLAGS and will impact on your valuation.

However…

HMO’s that have their own use class (sui generis) and have more than 6 occupiers will be predominantly valued on an investment basis.

So, you may want to convert a property into a HMO to add that additional value, which you could then use to do a tactical remortgage and pull out the additional capital to fund another property. However, it may not be that simple if you don’t choose your HMO wisely and you don’t play by the rules and legislation.

My advice to you

Consult a surveyor who values this type of property and see what value they would put on it. Don’t assume anything prior to getting your facts straight.

And finally my last piece of advice. Surveyors have a strong moral and ethical code, it’s their job to be impartial. Those websites that say it’s OK to have a little chat with the surveyor, or not to take no for an answer, it’s all how you display your property… blah freaking blah are WRONG. Any surveyor that knows his worth is going to value your property in accordance with RICS guidelines and that’s that. Yes, you can get a second opinion. But don’t try and sway a professional’s recommendation. All that will happen is they will have to disclose what you are trying to do. And probably won’t want to work with you because it could have really bad implications for them!

Has this changed your opinion on HMO’s? Are you shocked you might not get a commercial valuation every time? Leave your comments below, I’d love to hear from you.

NC