Stick with the experts
❌ Why I won’t be selling any social housing or supported living properties this year ❌
It’s still the same, really.
I could give it a go and try and sell HMOs with active social housing leases on them and take them on face value.
So many of them seem (and are) brilliant investments – it’s just, I don’t know which ones and I’m not sure everyone else does either.
The easiest ones for me to stay away from are the SERCO and Mears properties – I just can’t support that, by having these leases in place, an HMO suddenly jumps up in value.
Most of the ones I see are small properties, with minimal alterations made, offered at around 9% net yield – this ‘increases’ the value twofold in lots of cases.
An £80k terraced house valued at £160k just because it has a SERCO lease. A lease which is heavily weighted in favour of the tenant and with a guarantee that extends to the length of the break clause.
As someone said to me yesterday, who works with only one, quality CIC that they’ve built a relationship with for years, “if SERCO suddenly decide to leave the property (which can happen due to external factors) then you’ve got a property that you’ve overpaid that you’re stuck with”…
There’s nothing wrong with working with SERCO or the like, I just believe that they should be valued at bricks and mortar prices, that’s all. When you start adding value just because a lease (that is widely available, not exclusive or that secure) is in place then I think we’re in trouble in the long term.
I don’t just apply this logic to SERCO/Mears properties, if I valued a standard, AST tenanted HMO which had the following criteria;
• 3/4 beds
• no article 4
• no license
• lower cash flow
• minimal conversion
• low bricks and mortar value area
Then, guess what? I’d value this HMO at the bricks and mortar price too.
There’s nothing wrong with that.
For an HMO to rise in value above the ‘sum of the parts’ it needs some robust USPs and the more there are, the higher the value can go;
• Extensive conversion
• Article 4
• Planning changes
• License
• Demonstrable income and cash flow
• Sustainability
The type of tenant/lease in situ can also have an impact on value.
Student HMOs tend to sell for more money, for example, but this is usually because they are also in higher value parts of towns/cities and come with a couple of extra USPs beyond the tenant type.
Social housing/supported living HMOs seem to be always go up in value just because the lease is in place.
How do I know which one of these CICs or providers is worth the paper they’re written on?
It’s not my specialist subject to do hours worth of DD on the liquidity or track record of a care operator and I wouldn’t even know if after that process I’d be able to put the words ‘guaranteed’ onto anything I sell.
I know there are some exceptional relationships between developers, landlords and providers across the UK that work brilliantly for all parties (including the tenants) but I’m just not in my comfort zone when asked to value or sell these properties.
I know what I’m good at – I’ve spent years selling tenanted HMOs with ASTs in place and I have learned my craft around this.
It’s so tempting to start to ‘specialise’ in supported living HMOs (I get offered at least a property a day and I’ve only turned my taps back on 6 weeks ago) but it was only 14 months ago that I did a series of interviews (that will never see the light of day, thank god) with someone representing a CIC that offered “guaranteed 25-year CPI+1, FRI, whizz pop bang leases” and we were going to launch this product via my business at the time.
Fast forward to today and most of those leases have hit problems and the CIC has proved to be a pack of cards, ready to tumble at any time.
What’s impressed me recently is the people who specialise in working with RPs and housing associations etc, have pretty much boiled their business down to 1 partner who they have long term trust with. Many of them are investing with this lease parter themselves too.
It’s just not my specialism to wade through this minefield and put my name to something that I’m essentially taking a punt on.
I’ll stick to tenanted HMOs on ASTs and leave the social housing sector to the experts.
If you’re buying one, make sure you buy off one of these experts.
