What does ‘market value’ mean to you?
What does ‘market value’ mean to you?
It’s the price someone is prepared to pay for a product, right?
After fair marketing and allowing for standard market conditions?
Or some crap like that.
Is it the price that a property would obtain at an auction?
The value that a property has when vacant or simply the agreed level where a traditionally motivated seller and pro-active buyer agree to strike a deal?
How do you put all of this into HMO terms?
Is it the price that a UK mortgage buyer would be prepared (or allowed) to pay for an HMO?
Well that can’t be right can it because that would discount the huge swathes of buyer profiles that might want to purchase the property that aren’t governed by lending costs or restrictions.
So is the market value of an HMO the amount that a cash HNW buyer would pay?
I was in a 6-unit studio HMO a couple of weeks ago which generates around £4,200 a month income but the lending costs were nearly £2,000 for the current owner.
To her, the net profit is around £1,000 PCM at full occupancy (at the current high rental level).
To a new cash buyer, the net profit each month could be over £3,000.
As a £500k purchase, does this property suit a cash rich arm chair investor looking to tie up capital for a healthy, well managed and well look after return on their money or does it suit a mortgage buyer who was looking to BRRR originally or buy the asset now at 75% LTV?
One cough and half a sneeze and the property is breaking even despite bringing in over £4k a month across 6 sublime, well thought out studios.
So is the market value the price that the lender valued this HMO at commercially?
A smidge over £500,000.
Is the market value what this property would obtain at auction?
£400,000 on a good day.
Maybe the value that a HNW cash buyer would pay for the going concern and the quality, secure income?
£525,000.
Or how about it we marketed the HMO to the widest audience possible and ask 1,000 people to tell us how much they’d be prepared to pay for the property if they had the capacity or lending availability.
That’s just one type of HMO and a recent example.
Some HMOs value up from a lender’s perspective at much lower than the market value that a buyer would pay.
For others, it’s the reverse. A developer might have bagged a ridiculous commercial refinance on a crippling deal only to find that a buyer, any buyer, wouldn’t go to that level in a month on Sundays.
I’ve not heard “month of Sundays” since I was a kid getting told off, by the way.
So what the hell is the true market value of an HMO when so many are being disproportionately over-valued by lenders commercially (which is killing deals everywhere) or unfairly down-valued by caution from rickety RICS gammons?
It’s about applying a different perspective and criteria to each property and realising that we’re not talking about steady eddy, dependable bricks and mortar market values.
We’re not just talking about quick auction values and we’re not just talking about the value obtained from ‘full market exposure’ either as this can ruin the saleability and exclusivity of a well planned HMO exit.
And we’re not just talking about one buyer group – for estate agents this would be owner occupiers, for example – there are dozens of buyer profiles all with their own risk tolerance, targets and investment strategies.
For me, with HMOs, it’s the value that the RIGHT buyer, who gets the optimum value out of the HMO and whom the property matches their needs the best, is prepared to pay for the property.
Is that me manipulating the market value to get the best exit price for a landlord or is it me understanding which type of buyer would be perfect the a particular HMO and why?
Both, I like to think.
I’ve been up since 3am worrying about HMO market values.
Can you tell?
