Flipping Heck
Can you still develop high-end HMOs to flip on?
Over the years, I’ve had great success working with developers to sell on their brand new HMOs.
Who doesn’t love a sexy new refurbished property?
The HMO Flip is something that I’m quite big on.
There’s a huge opportunity for developers to add an extra exit to their strategy.
Most HMO developers I know aim to keep their developments in their rental portfolio as a first option but having an eye on a sale at all times can help them in a wide range of circumstances;
➡️ Create a sold comparable for themselves locally for future refinancing
➡️ Build up more capital for the next purchasing/development onslaught
➡️ End business partnerships that have run their course
➡️ Take advantage of high buyer demand
➡️ Exit out at the desired value when a bank comes in lower than they’d hoped for
In the good ol’ days of “pre-Covid”, or even “post-Covid, pre-Liz Truss”, these HMO flips would perform brilliantly on Rightmove or to active hands-off buyer groups.
The premium they paid for the brand new product was a trade-off for the quality, effort and experience-backed skill that had gone into executing the finished HMO.
Things got harder in late 2022 when lending became more expenses and running costs increased (it wasn’t just utilities at this time but also worries (or the realities) of individual VOA banding per room).
The Rightmove buyers disappeared and the off-market active buyer groups started getting nervous (or got told no by their lender) around paying sub-10% gross yields for large Sui Gen brand new HMOs.
There was a bit of an impasse and no real thought process into how to break the deadlock and get HMO flips back on the menu for the discerning HMO developer.
So what’s needed in 2024 to make HMO flips the secure exit that they once were?
1. Understanding that the buyers who like these type of HMOs want more than just photos, a floorplans and some numbers. They want to know who the developer is, what their experience is, why their product is the best around and how the HMO will remain at the cutting edge of design and rent optimisation. New build premiums are common in property sales but only from trusted developers who make an effort to get brand familiarity with their target market. A Redrow home will sell for more spondoolies than exactly the same house built by ‘Bob and Sons’.
2. Having an extended marketing plan that can showcase both the developer and the HMO in question over a duration of, ideally, 2 months. From build progression and concepts through to completion, staging and tenanting.
3. Focusing on the USPs as to why these types of HMOs are worth buying. I’m getting into conversations with developers over their knowledge on tenant habits and trends and how they implement this into their design, about energy savings, insulation, heat sources (and how running costs will be optimised) or the sustainability and durability of materials and fixtures and fittings. All this improves the P&L and is the difference between what you read on a ‘deal sheet’ and what a portfolio landlord actually makes.
As one developer said to me last night, “it’s these tiny margins that add up across a portfolio that you start to realise how important they are”…
4. Offering accountability and assurances over the product and management. Buyers for these type of HMOs do not want any comebacks or stress. They want to lay their landlord insurance and collect their net rent. Build in trusted management (if it’s the same company as you, the developer, uses then this is a huge ✅). Build warranties, guarantees, legacy aftercare – these are all huge positives and selling points.
5. Of course, make sure that you have the planning, licensing, compliance, regs and certifications all tickedy boo.
👀 You can’t convey all of this on a Rightmove listing or a lazy Mailchimp circular.
A holistic approach to developer-led HMO flips is the key to getting a deserved premium in 2024 and 2025.
Think to yourself “why is it a buyer would want to pay too whack for a brand new HMO?”
HMO flips are record breaking occurrences. The break the average house sale prices by a country mile.
You have 2 factors at play;
1. The sales yield goes down (value goes up) because of the USPs and new build premium
2. You have higher rents for the same reason
📈 A lower yield calculated off higher rents is a recipe for a huge uplift 📈
Example;
Normal HMO in {insert mid-range city} is valued at 11% gross yield and brings in £600 per room across 6 rooms = value £395,000
Brand new optimised HMO in same {insert mid-range city} is valued at 10% gross yield and brings in £700 per room over 6 rooms = £500,000
Same house, same City, same size.
Buyers will pay more if they know what that extra cost is giving them.
