HMO Mortgages

How does a HMO get valued?

Bricks & Mortar Value VS Commercial Valuation

A Commercial Valuation is typically based on the rental yield. A Bricks & Mortar Valuation is based on the value of the building compared to other buildings in the immediate area. For example, A 5 bed HMO generating £2000 a month could be valued at £200,000 on a Bricks and Mortar valuation but valued at £255,000 using a Commercial Valuation. This is because other buildings in the area sold for £200,000 (justifying the Bricks & Mortar Valuation), however as the other HMO properties in the area had a strong rental yield and had also been sold for around this value, it was also justified to have a Commercial Valuation of £255,000. Bricks & Mortar Valuations are also known as the Vacant Possession Value (VP). This essentially means what is the building worth if it were to be sold as a normal property. In relation to HMO financing, the Bricks & Mortar Valuation (VP) would be the same valuation as if it were to be sold to a family looking to move into the property or a Landlord looking to rent out the property on a non-HMO basis to a single tenant or family.

So what is a Commercial Valuation?

A Commercial Valuation means the property is also being valued based on it's potential rental income. This is often a yield-based calculation and may often result in a higher overall valuation compared to a Bricks & Mortar Valuation.

So what factors into an Commercial Valuation?

There are 8 factors which need to be considered when considering whether an Commercial Valuation will yield a higher market valuation than a Bricks & Mortar Valuation. The more factors you have, the higher potential opportunity there is that your Commercial Valuation will yield a larger valuation.

• Choosing the right lender - It is important you get expert advice as many lenders will only lend off the Bricks & Mortar Valuation as opposed to the Commercial Valuation.
• Strong Rental Demand is key to a good Commercial Valuation as valuers comments will need to confirm there is strong demand in the area.
• Ensuites & well-designed HMO's - An HMO which has ensuites in each room that has been well thought out will often allow a higher Commercial Valuation than those which have not been modified.
• HMO License - Having a larger HMO can also increase the value of your HMO as it is compliant with HMO regulations.
• More Bedrooms - It goes without saying more bedrooms will be achieve a Higher Rental Yield (ROI) and thus help increase the yield calculation and Commercial Valuation.
• Good Location - It goes without saying a HMO in the right location will often attract a better Commercial Valuation, even if your HMO is small. For example, A small 4 bedroom HMO close to an Underground Station in London would easily attract a Commercial Valuation.
• Experience - Experienced Landlords who have rented out properties before are preferred by lenders but are not always essential if the applicant is a strong candidate.
• Article 4 restrictions - This is an area where the council has removed the Permitted Development (PD) rights, which would normally allow any landlord to freely convert a normal buy-to-let property into a C4 use HMO up to 6 bedrooms without the need for getting planning permission. Because there is a restriction in place (normally caused by the fact that there is already a high number of HMO's in the immediate local vicinity), this restriction increases the Commercial Valuation if your HMO is located within the Article 4 area. Common areas with Article 4 restrictions are roads surrounding universities and many other highly populated city areas near town centres.