In my last post, we began to think about HMOs and so this week we are going to consider where we would find this type of property. Now, unless you are pursuing a sophisticated strategy and want to convert something like an office building, pub or similar into a house of multiple occupancy, then it’s likely you will be looking for a standard house that’s of the right size and specification. Perhaps a 3-bed terraced or semi-detached house. As such, you would approach this in the same way as you would a buy to let – through an estate agent.
However, whilst your approach would be similar to a buy to let, it’s not really advisable to walk into an agent’s office and state that you’re specifically looking for a property to convert to an HMO. Most agents are not overly experienced in HMOs (apologies if you’re an agent and this is not the case), and most wouldn’t necessarily understand what it is you are trying to do. As such, I would keep it simple.
When I’m looking for HMOs myself, I head to the estate agents as if I were looking for buy to lets. I would browse through the details of the properties on the market and would have in mind the type of property that would suit, as well as a rough idea of where in that particular town I might find that type of property.
Now, one thing which may surprise you is this. When it comes to HMOs, I don’t always negotiate too hard on the asking price because I essentially look for a property that can refinance itself.
For example, let’s assume I’m looking for a typical three-bed terraced house. In the town where I have bought and created my HMOs, this type of property is usually on the market for around £83,000. When this is the case, rather than offer £70,000 or even £65,000, I might be willing to pay £80,000 or £81,000.
I don’t necessarily try to negotiate too hard because I know that if I can get my hands on the right property in the right area – and if I do the right works – then I should be able to create a property which would refinance itself. In other words, a property that would allow me to get all of my money back out.
If I go through a specialist commercial mortgage broker and get the right type of commercial mortgage, then the bank will value my property up using the “Income Method” of valuation. This means that the bank would view the property as an income stream or cash flow rather than “bricks and mortar”, and the valuation would come out much higher pro rata than just the cost of the property and the conversion.
So, whilst a terraced house might cost £80,000 plus £40,000 to convert to a 5-bed HMO with en suite bathrooms, having taken into consideration the income stream the bank would value the property up to around £280,000. With this in mind – and with 70% percent loan to value – I would be able to get all of my money back out.
It’s for this reason that when it comes to HMOs, I don’t necessarily negotiate too hard on price. Well, not when I find the right property that I know will refinance itself and allow me to get my money back out.
Peter Jones B.Sc FRICS
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