How Does Your Lender Value HMOs?

The issue of valuing HMOs was recently raised at The Specialist Lending Event, with brokers asking why HMO properties are frequently given unexpectedly low valuations.

One reason for discrepancies in valuations offered by the lender panel was that there are two ways of valuing an HMO – on an investment basis and a bricks and mortar basis – which can deliver very different results.

This is certainly one explanation, but it is still too simplistic. The truth is that, just as specialist mortgages require an individual approach to underwriting, carrying out a valuation on a specialist property, like an HMO, needs specific expertise.

HMOs have traditionally been considered as commercial lending on a residential property, but as more specialist lenders have created dedicated products, HMOs have become a specific asset class. This has created more traction and greater demand. However, the approach that lenders take to valuing HMOs has not always advanced in line with this product development.

Specialist surveyor panels are needed so that a square peg isn’t forced into a round hole. Whereas lenders will take a factory-line approach to valuing more standard properties, an HMO requires a specialist valuation. With a valuation of an HMO, there are more things to consider and fewer comparables than a more standard property.

A key element of the valuation is the achievable rental income and yield of the HMO and so a surveyor should consider the location and potential to sustain regular letting of individual rooms. This means thinking about whether the property is near a transport hub, university or hospital and the realistic rental price for each of the rooms.

A surveyor should also check against the local authority Article 4 direction to ensure that the HMO does not contravene any local planning regulations and that the property can be let on a room by room basis.

And, in addition to considering regulation, local authority requirements and the RICS Red Book guidelines, a surveyor also needs to be cognisant of the specific criteria of the lender that is involved in the case, as different lenders will have their own guidance notes.

It is this layering of multiple considerations that makes carrying out a valuation on an HMO a much more complex process than a standard property.

A specialist valuation on an HMO will be able to deliver an accurate market value for the property in its proposed use by factoring in all of the considerations. This specialist advice does come at a premium, however, so lenders chasing low fees will get a poor service as described by the broker comments at The Specialist Lending Event.

So, when it comes to choosing the most suitable lender to fund your client’s HMO investment, one consideration should be that lender’s approach to valuations and whether it employs specialist valuers to provide accurate information or a factory-line approach that can prove to be inconsistent.