The HMO Valuation Conundrum

How HMOs should be valued is one of the most common questions we get asked.

In this article I will set out how Octane – and the wider market – approach HMO valuations.

The valuation approach which is most desirable is a commercial/yield based valuation. This involves multiplying the market rent by an appropriate yield and usually delivers a much higher figure when compared to the bricks and mortar value of the property (if it were to be valued as a house). Simply put: a higher valuation means the client can borrow more.

So, how do we decide whether this valuation approach is appropriate?

The first question we ask is: does the HMO require planning to be one? If the answer is yes, these HMOs will always be valued on a commercial basis.

This includes:

(a) Sui Generis HMOs (i.e. those with 7 or more bedrooms), and

(b) those in Article 4 areas (irrespective of number of bedrooms).

The market is generally in alignment here.

The grey area arises for HMOs which do not fall into the above categories: i.e HMOs with 6 bedrooms or less, in areas with no Article 4 Direction.

These are HMOs which do not require planning permission – investors can convert them under permitted development.

Most lenders, Octane included, do not feel it is appropriate to value these HMOs on a commercial/yield basis, as it would result in a disproportionately higher valuation, when compared to a house on the same street of a similar size and specification. Why would a buyer pay a premium for the HMO, when they could by a house on the same street for a lower price, and convert it under permitted development themselves?

For these HMOs we typically use a balanced/hybrid approach – the basis for which is a bricks and mortar value (i.e. the value as a house), but with some consideration given to yields in the area. The result is usually a valuation which sits somewhere in between the value of the property as a house, and a full commercial valuation.

About Octane Capital

Octane Capital is a specialist lender that provides short-term financing to property investors and are a leading provider of developer exit finance. We lend up to 75% LTV with rates from 0.73% per month (BBR linked).

Specialising in refurbishment finance, Octane Capital helps investors enhance property value by offering bridging loans, refurbishment loans, and developer exit loans.

Visit Octane Capital

About Fiducia Commercial Network

Fiducia Commercial Network is a commercial finance \’Appointed Representative\’ network created to allow independent firms to provide commercial property finance and trading business finance options to their existing client base and network.

Joining the network provides opportunities for professional brokers to offer a full range of commercial finance solutions by acting as an Appointed Representative (AR) with the full support of the Fiducia Commercial Network team.

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