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.
