Do HMOs still sell for a premium?
Can HMOs still sell for a premium above bricks and mortar?
The answer is yes in ‘most’ cases but there are several situations where this isn’t possible (and rightly so).
Where should I go first?
Let’s talk about the HMOs (we’re talking about C4 properties here, by the way, and not commercial Sui Gen HMOs..) where you CAN expect a premium- that’s what you all want to know;
✅ HMOs with distinguishable and clear USPs such as article 4 or a premium location
✅ Properties with extensive (and expensive) conversions – although this is often just increasing the ‘bricks and mortar’ price higher than next door because of the renovation and additions and they’re often not valued commercially
✅ All en-suite HMOs that can get hybrid/commercial lending
✅ Particularly well-run, established HMOs that are licensed, compliant and quality
As the above can include most well-run HMOs in the country, the important but is to understand how much of a premium can be added and justified.
I valued a property yesterday…
🏡 A decent HMO in Lincolnshire that was not in article 4 and didn’t have a huge conversion as it was a 5-bed, 2-bath. It’s fully occupied, optimised and has proved it’s success over 5 years.
The bricks and mortar value was £140,000 and I think as an HMO it will sell for £160,000.
A £20,000 for the ASTs, furniture, going concern and the HMO alterations that allow it to be licensed…
The local yield benchmark is irrelevant, as is trying to apply any commercially-derived valuation – this is a decent HMO where a small and justifiable value is added to the going concern.
The rent was around £25,000 PA and therefore the yield came out at 15.6% – but we’ve come at the valuation from a different angle to arrive at the final yield.
📍Now let’s move that HMO into an article 4 area
What happens now to the value?
Would you add in £10,000, £25,000, £50,000 as a premium?
There’s not many article 4 areas in the UK where a 15.6% gross yield is the norm – that would represent a bargain!
👉 “City or region-wide article 4 restrictions cause values to go up less than small, select pockets within towns and cities. The bigger the article 4 is, the less impact it has on value”
I know that regionally, the introduction to article 4 in a similar blue-collar area has seen sales exchange hands between 14-15%.
So in this property’s case, the introduction of A4 could see a value increase (determined by what people would pay for it) to £178,500.
🏗️ Now let’s imagine that the owner of this HMO, that’s now inside article 4, was allowed to convert and develop it into a 5-bed all en-suite.
The rents have gone up, hurray.
The HMO now produces £31,200 PA and even has a tenant called Hugo.
At the 14% gross yield that we applied to the last equation, the HMO would now be worth circa £225,000.
Isn’t it still a £140,000 house?
Not really.
It’s impossible to apply this value as a starting point no matter who are (local estate agent, lender, HMO sales expert or buyer) as there has been a clear value add and there are some very credible USPs that lock in value.
You can’t buy next door and convert it to an HMO and you probably can’t get the materials and builder to convert it in a cost effective way even if you could.
Buyers will see the value in this – lenders may clip it to £200,000 or thereabouts at the moment but the property will still sell for a decent premium above what an average terrace on the street sells for.
📈 Jumping up again, we have been told that the owner has now created a 6-bed HMO (2 x en-suite, 4 x studio style rooms).
Bloody hell, the rents are now £48,600 PA.
The owner drops a Shawbrook revaluation on my desk of £400,000.
How can I argue with that.
The lenders say it’s worth £400,000 and the developer is chatting with me describing the difficulties, pain and expense of creating this beautiful beast.
Not only have we had value-add via a rental increase, we’ve also had a yield compression too. The gross yield has shifted down from 14% to 12%.
🏚️ PS – you can’t sell for a premium if you have a shit HMO. There, that was easy.
