Bricks and mortar valuations

The “bricks and mortar” valuation is a prevalent approach used for assessing the market value of buy to let properties, including Houses in Multiple Occupation (HMOs). This method bases the property’s valuation on comparable properties that have been sold recently, specifically, those transactions occurring within the last six months and situated within a quarter-mile radius of the property being evaluated. On larger HMOs this method can be unsuitable and could reduce the outcome of your valuation. Below we will discuss what scenarios may be suitable with a bricks and mortar valuation and why some large HMOs may need an investment valuation on the HMO mortgage product.

Suitability for Different HMO Types:

1. Larger Licensed HMOs: Challenges: Larger HMOs, especially those with more than six rooms, typically do not fare well under the bricks and mortar valuation. These properties often serve higher numbers of tenants and have complex rental structures which can generate significantly higher revenues compared to standard residential properties. The traditional bricks and mortar approach, which primarily considers physical characteristics and comparable in residential sales, usually fails to capture these unique income-generating aspects. Resulting Valuation Issues: Consequently, this method can lead to down valuations, as it does not reflect the full economic reality of operating a large, licensed HMO. The valuation might come in lower than what could be achieved through an investment valuation method, which would consider the property’s income potential and adjust the market value accordingly.
2. Smaller or Unlicensed HMOs: Applicability: For smaller HMOs, which might include properties with fewer rooms and potentially without the need for a license, the bricks and mortar valuation is often adequate. These properties are typically more comparable to ordinary residential properties in both structure and function, making traditional valuation methods suitable. Advantages with Standard Lenders: These valuations are usually preferred by standard buy-to-let lenders, who often offer the most competitive mortgage rates for such properties. Since the financial and operational complexities are less pronounced in smaller HMOs, the risk to the lender is perceived as lower, leading to cheaper HMO mortgage products available.

Recommendation:

When securing an HMO mortgage, it’s essential for lenders and borrowers to consider the adequacy of the valuation method in relation to the type of HMO property. For large, income-driven HMOs, opting for an investment valuation can provide a more accurate and fair market value, ensuring that all financial facets of the property are duly recognised. This approach not only aligns the valuation with the business model of larger HMOs but also supports better-informed lending decisions.

Buying, refurbishing, and refinancing a small HMO using a “bricks and mortar” valuation is a common strategy within the HMO mortgage sector. This method is often referred to as the “Buy, Refurbish, Refinance” (BRR) strategy, and it can be particularly effective for investors looking to maximize the value of their properties in a cost-efficient manner.

Day one re-mortgage with HMO Mortgages:

A “Day One re-mortgage” is a specific tactic within the broader BRR strategy, where the property owner seeks to refinance the property immediately after purchase, essentially, from “day one.” This approach is particularly advantageous if the initial purchase price was significantly below the market value due to the property’s condition, and swift refurbishments have rapidly enhanced its value.

• Process: In a Day One re-mortgage, the property is appraised for its potential market value post-refurbishment rather than its purchase price. The idea is to quickly establish the new market value that reflects all improvements made, allowing the investor to secure a new mortgage based on this higher valuation.
• Advantages: This method can be highly effective in releasing equity from the property, which can then be reinvested into other projects. It also helps in mitigating the cash flow impact of the initial purchase and refurbishment costs.
• Considerations for HMO Mortgage: Using a bricks and mortar valuation for a day one re-mortgage on a small HMO is advantageous because it simplifies the lending process with standard buy-to-let lenders who may offer better rates based on the perceived lower risk of smaller, less complex HMO setups.