What’s involved in valuing an HMO – Arnold

We have seen an increase in demand for the valuation of HMOs, particularly in London where yields are tight and landlords are looking at ways of driving more income through their property.

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, as it is now easier to fund the purchase of an HMO, greater demand.

Whereas lenders will take a factory-line approach to valuing more standard properties, an HMO requires a specialist valuation.

Fewer comparables, more complexity

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 will 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.

Licencing and room sizes

From 1 October, a licence will be needed for HMOs occupied by five or more people from two or more households, regardless of the number of storeys.

The government is also introducing minimum room sizes for bedrooms in licenced HMOs.

Currently some local authorities prescribe minimum room sizes, while others set out advisory standards, and this new approach will dispel confusion with a standard approach to all licenced HMOs.

From 1 October the minimum room sizes will be:

• Single bedroom to be used by one person over 10 years should not be less than 6.51 square metres.
• Double bedroom to be used by two people over 10 years should not be less than 10.22 square metres.
• Single bedroom to be used by one person under 10 years should not be less than 4.64 square metres.

In addition to considering regulation, local authority requirements and the Royal Institute of Chartered Surveyors (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, and this is why lenders will look for a specialist valuation before they will agree to a loan.