The valuation of House of Multiple Occupation (HMOs) can be undertaken under two methods:
- Residential Buildings Valuation (common)
- Commercial Valuation (rare)
Which type of valuation is up to the lender, typically Buy to Let lenders will use a standard valuation, and commercial lenders may in some circumstances use a commercial assessment. A general rule is if the property looks like or is a converted residential property – it will be on a standard valuation. If it is an ex-care home or other purpose-built or substantially not residential – the lender can value it on commercial terms. There are some disadvantages - commercial terms often come at low loan-to-value and often higher rates. They may require the mortgage on repayment terms and other commercial contract obligations. Such as having life insurance. There are some advantages - the property as a commercial entity can be valued higher based on the rental income generated by the business, rather than bricks and mortar valuation. Most HMO Mortgage lenders base their valuation on bricks and mortar. Those that do offer it have varied conditions such as having C4 planning approved (not automatic C3 to C4 planning).
Brick & Mortar valuation is your standard residential property valuation. It is based on the resale value of the property as a typical home. Comparable with other none-HMO properties on the street.
An Investment Valuation instead calculates the value as a business. The surveyor will base the amount on a multiple of the Rental Income of the property as an HMO. It is based on the resale value to another HMO Investor.
In different circumstances, one may be better than the other. An Investment Valuation may give a higher value. Except mortgage products are fewer, giving higher rates and lower LTVs.
The decision of which valuation type, is not yours. It is up to the mortgage lender. Some offer investment basis and others dont. Some have conditions such as the property being a certain number of rooms, as well as having a licence.
HMO Investors should note that the Purchase Price and Value are not the same things. If you agree a higher Purchase Price than what it is valued on a Residential home, you often negotiate it down. On HMO's it's not unexpected to pay money on top of the mortgage & deposit.
What is a Commercial HMO Valuation?
The commercial surveyor will take a view on the value of the property as an ongoing business. Instead of valuing the property as if a homeowner would buy it, it's valued as if an HMO Investor acquires it. The surveyor thus will take a view on a multiple of the income the property can generate. Though they will always be mindful of the Residential Buildings Valuation.
Can I request a Commercial Valuation?
Not all HMO Mortgage Lenders offer commercial valuations. Those that do stipulate when they should be used. You can ask your Mortgage Adviser to recommend a Lender that allows Commercial HMO Lenders. This will reduce the availability of HMO Mortgages and may mean higher mortgage rates. HMO Valuations are not available in all circumstances. Lenders may restrict it to Large HMOs or those with certain planning consent.
What are the Advantages and Disadvantages of Commercial Valuations?
Obtaining a mortgage with a Commercial HMO Valuation will mean higher costs. These include higher valuation costs and legal fees compared to standard HMO's. Few lenders off this, reducing product selection and availability with reduced criteria variation. The mortgage products are often worse with Higher Rates and Higher Arrangement fees. Those lenders offering Commercial HMO Valuations offer lower loans to value. Compared to standard HMO Mortgages that can go up to 85% LTV. Commercial Lending is often on repayment terms with few Interest Only Offerings. The advantage of Commercial Valuation is known to most property investors. The property as a commercial entity can be valued higher based on the rental income generated by the business, rather than bricks and mortar valuation.