Understanding HMO valuations

As a property investor, you’re constantly seeking opportunities to maximise returns and make informed decisions. With their increased yield potential, Houses in Multiple Occupation (HMOs) offer a strong investment potential, but their valuation can be complex. In this blog, we’ll explore the key considerations for securing an investment-based HMO valuation, equipping you with the knowledge needed to assess properties effectively and unlock their true potential. 

1.  The scale of conversion:

•    Assess whether the property can easily revert to a family home. If it can, achieving a commercial valuation becomes unlikely. Consider factors like bedroom layouts (ensuites, for instance). If conversion costs are high and the property is best suited for HMO use, this works in your favour.

2. What planning use class does it have:

•    C3: Single-family homes fall into this category. Their valuation is based on bricks and mortar, which relies on comparable sales in the local area.
•    C4: HMOs with up to 6 beds. C3 properties have permitted development rights to convert to C4 use (unless in an Article 4 area).

   Sui Generis: HMOs with 7 beds or more. Full planning permission is required for Sui Generis use.

3. Article 4 Direction:

•    Check if the Local Authority has implemented Article 4 Direction in your property’s location. This removes the permitted development right to convert from C3 to C4 use without planning permission. It helps manage HMO numbers where family home availability is at risk.

4. Lender Preferences:

•    Many mortgage lenders consider only bricks and mortar valuations, regardless of planning use or Article 4 direction. Investment-based valuations may not be feasible.
•    Some lenders, however, consider investment valuations based on the factors mentioned above.

Understanding how a lender will value a HMO isn’t straight forward and involves grasping their criteria and how they instruct their panel valuer.