You may have one HMO you want to sell or you may have a portfolio of HMO’s you need to sell. But how do you go about selling your HMO property or properties? Let’s take a look…
So how do you sell an HMO property? The best way to sell an HMO is direct to an HMO investor or use a specialist HMO agent. Agents charge sales commission, whereas a sale to an investor will be free. Either way it’s ultimately sold to an investor, so why not simply cut out the middle man? The valuation method used for an HMO is affect by bedroom numbers.
Where do you sell an HMO?
An HMO or a House of Multiple Occupation isn’t necessarily a property you can sell in the conventional way using a high-street estate agent.
This is partly because a House of Multiple Occupation requires specialist knowledge to value the property. But also HMO properties tend to get sold already tenanted.
A conventional estate agent will be experienced at selling residential homes with vacant possession. But you don’t want to have your HMO vacant.
This is because it’s the income is often what creates it’s value (see below). Plus you want to keep the rent coming in until it’s been sold to the new property investor.
Find a specialist HMO agent
There are specialist HMO agencies that sell both HMO’s and buy to let properties. Of course these agencies will charge a commission for the sale.
But at least they will know how best to sell your HMO property, as they have specialist HMO experience and valuation knowledge. They will also likely have property investors already looking to buy HMO’s like yours.
Sell direct to another HMO investor
As the sale of your HMO will end up with another property investor, you may as well cut out the middle man and go direct to investors.
This sounds like a great idea, but how do you find another HMO investor?
You could advertise your HMO property, or HMO properties if you have an HMO portfolio, in a local newspaper or perhaps online. This way you will save the agency fee from using a specialist HMO agent.
However, you will be dependent on finding an HMO investor who is looking to buy in your area. This might be a challenge depending on the area where your HMO is situated.
But if your HMO is in the North of England in places like Birmingham, Leeds, Manchester or Liverpool, but your likely investors are in the South of the country, your dilemma is where do you advertise?
You could try Gumtree as there are other investors selling their HMO’s here.
As it happens you have also found an HMO investor, as Bowfin are looking for HMO’s to buy across the UK.
So if you would prefer to sell your HMO property or HMO property portfolio right away, but without any agency commissions, please contact us to find out more.
How to value an HMO property
The way in which an HMO is valued will depend on a few variables, which include the following:
- The size of the HMO in terms of room numbers will impact the method of valuation.
- The location of the HMO both in terms of where it is located in the area it is, plus in terms of where it is in the UK as a whole.
- The condition of the HMO, its state of repair and compliance with HMO regulations for the part of the country.
- The quality of the tenants in the HMO.
- Tenant demand in the area where the HMO is located.
- Is the correct planning in place for the property to be an HMO.
- Having your paperwork in order.
Let’s take a look at each of these HMO valuation factors in turn.
1. The size of the HMO in terms of room numbers will impact the method of valuation
Generally speaking HMO’s fall into three different valuation types, as follows:
- Small HMO’s: This is typically HMO’s with between 3-6 bedrooms and will generally be valued on a bricks and mortar basis.
- Mid-sized HMO’s: These are HMO’s with between 6 and 9 bedrooms and will in some cases be valued on an income-based valuation. However, the valuation method is location and lender dependent.
- Large HMO’s: Typically any HMO with bedrooms in excess of 9 bedrooms is considered a large HMO. These HMO’s are very much commercial and will be valued on an income-based valuation model.
2. The location of the HMO both in terms of where it is located in the area it is, plus in terms of where it is in the UK as a whole
You’ve heard the expression: Location, location, location. HMO’s are no different to this general rule.
Tenants who tend to live in an HMO tend to prefer to be located in town. They like to be near to where they work and within a short distance from all the amenities.
It’s good if the HMO is near to transport links like railway stations and bus routes, as tenants living in an HMO tend to travel using public transport. Or better still, if the property is a student HMO, students tend to be lazy and like to be able to walk to university and to the bars, take-away’s and cafes.
The better the location of the HMO within the area it’s located, the more likely it will remain tenanted and therefore will command a better valuation.
But then the actual location in terms of town or city where the HMO is located will impact on its valuation too. For example, an HMO in London vs an HMO in Leeds will command very different prices.
3. The condition of the HMO, its state of repair and compliance with HMO regulations for the part of the country
An HMO is no different to selling any other property. If its state of repair is good its valuation will be entirely different to a similar HMO that’s in a state of dilapidation.
The better the state of repair, the more likely your HMO will command a better valuation.
There is also significant legislation and compliance regarding HMO’s across the UK. I’m not going to go into detail on the legislation in this article, but it’s worth noting that if your HMO is non-compliant, it may not get a buy at all.
However, any interested buyer will have to take account of the non-compliance when considering the correct valuation.
For example, if any of the bedroom sizes are too small for an HMO, this will mean they cannot be let out to tenants as an HMO. Or if the building doesn’t have the correct kitchen space or the right amount of communal space for the tenants, this will also make it non-compliant.
Certain HMO regulations are different depending on the area of the country. Make sure your HMO is compliant with the rules for its location.
4. The quality of the tenants in the HMO
Depending on where the HMO is located and the standard to which it is refurbished will depend on the quality of tenant in your HMO.
The better the location and the better the quality of the HMO, the better the quality of tenant.
This will impact on the value of the HMO, as you’ll find that better tenants tend (on the whole) to look after the property.
An extreme is students who are not the best tenants to have and can end up trashing your property.
5. Tenant demand in the area where the HMO is located
The higher the tenant demand, the higher the rent you can command and therefore the higher the HMO will be valued.
This is especially true of HMO’s that are valued in an income-based valuation model.
6. Correct planning is in place for the property to be an HMO
There are two sides to renting out an HMO. This is having the correct C4 planning in place to let it out as an HMO in the first place.
Then there’s the HMO licencing. So long as the property has the correct planning in place this won’t affect its value.
7. Having your paperwork in order
Having all your paperwork in order may not necessarily increase its value, but it will certainly make the sale happen a lot faster.
However, it’s much easier to get a true value for an HMO if the correct paperwork is to hand about the rental income and associated costs to run the HMO.
One piece of paperwork that will help the sale is a record of how well the HMO is tenanted. Buyers will want to know how many void periods your HMO has and whether or not you struggle to find new tenants when people leave.
Having a record of the movements of tenants and the AST’s will help a smooth sale.
Valuation methods to value an HMO
The two valuation methods describe above to value an HMO are either based on bricks and mortar or an income-based (or yield-based) valuation.
The bricks and mortar valuation is not really much different to any other property in the area. Which means the bricks and mortar value of the HMO concerned will be area and location dependent.
Income-base or yield-based valuation method of an HMO
For the larger HMO’s in excess of 6-bedrooms, the income-based or yield-based valuation model is used.
To value an HMO this way you need to know what yield is used in your area, as this can change. But as an example: If the income from the HMO is say £50,000 per annum. Using a 12% yield, this would make this HMO value £416,667 (i.e. 50,000 x 100/12).
However, banks use RICS valuers to value HMOs. Often times the bank’s valuers won’t take the gross rent to calculate the valuation.
Instead, the valuer will reduce the gross rent by an amount to represent a deduction of running costs. This is often set at around 20%.
The yield calculation is then applied to this reduced number. So in the above example, the rent is reduce to £40,000 (i.e. £50,000 x 80%). Let’s say in this example the valuer applies a lower yield rate of 10%, that would make this HMO worth £400,000 (i.e. £40,000 x 100/10).
If you are selling through a specialist HMO agent, they will be able to help you with the yields. However, in the end the yield used and hence the ultimate value of your HMO needs to be agreed by the investor who’s buying your HMO.
This will be no different whether you sell via an agent or direct to an investor.
I hope this article has helped on how to sell an HMO property
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