HMO or Houses in Multiple Occupation

What are HMOs or Houses in Multiple Occupation?

A HMO or House in Multiple Occupation, refers to many types of accommodation, such as houses or flats that are shared by several different tenants, who rent their rooms on an individual basis.

Essentially these are properties that houses three or more tenants, that are not related and form more than one household – hence why they are classed as HMO’s. They can be hostels, bedsits in large buildings, blocks of converted flats, employee accommodation, refugee accommodation, private halls of residence etc, the list is quite vast.

What do surveyors consider in the valuations of HMOs?

Typically, the lower rate lenders will lend off the bricks and mortar value, or a blend between this and the investment value. Whereas the specialist lenders mainly lend against the investment value which can often release more capital.

Lenders don’t always declare which, and that is why at NapeX Finance we make sure we understand what will be used on each application.

Take a look at the list below of other factors that surveyors consider when valuating a HMO.

If you already own a HMO, you are looking to invest into one, or you want to purchase a property with the intention to convert into a HMO, then contact our team today for expert advice.

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What do surveyors consider in the valuations of HMOs?

  1. Is the property worth more as a house or an HMO?
    If the property is in a high value postcode it could be worth more as a house. If the property is in a low value postcode it could be worth more as an HMO on an investment-based valuation.
  2. What works have been undertaken and how much has been spent to convert to an HMO?
    If it is a small HMO (not in an article 4), with no works undertaken and simply let to multiple tenants, then a surveyor is likely to use the bricks and mortar value i.e., value it as a house. On the other hand, if significant works have been undertaken to convert the property to an HMO, then the specialist lenders often lend off the investment valuation.
  3. What are the property running costs?
    Surveyors generally will deduct 15 to 20% for costs annually off the gross rent. This takes into account the utilities costs, council tax, wear and tear together with letting fees, which on these types of properties are usually paid by the landlord.
  4. What planning is in place?
    If it is in an article 4, or if planning for a Sui Genesis HMO (meaning an HMO with more than 6 occupants), then some lenders can lend off the investment value.
  5. Is the HMO in an established HMO location?
    This is important because it creates evidence for the surveyor to find comparable sales and lettings. This enables them to build their report supporting your figures. Lenders like an established HMO market, otherwise the lender will lend off the bricks and mortar value.

Worked example recent case:

3 Bedroom Terraced House Converted to a 6 Bedroom HMO
Mid Value Location with an established HMO market
Purchase Price £160,000.00
Conversion Cost £150,000.00
End Rent Gross £40,560.00
Value as a 3 Bedroom House £160,000.00
Hybrid Value £282,800.00
Investment Value as an HMO £405,600.00
Finance @ 80% mainstream HMO lenders against hybrid value £226,240.00
Finance @ 75% mainstream HMO lenders against investment value £304,200.00

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