Buying a Property, Selling an HMO?

by Readers Question

14:13 PM, 16th May 2017
About 2 years ago

Buying a Property, Selling an HMO?

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Buying a Property, Selling an HMO?

We all sell properties from time to time, just as we buy, but as Landlords we are usually buying a house and selling a business, and there are few agents that seem to recognise that difference.

I’d be really interested to open up some discussion on how to get the best value out of the sale of, say a 6 bed HMO, grossing £31000 rent pa (6 x 100 x 52) with say £27000 net income. If the local value of a similar house is £225000, I would contend that £270k is nearer the value or even £310k. Many agents would be happy to get £230 and claim that as a premium!

Or are there specialist agents who know and understand the values and are able to get a premium for the business being sold on? I totally appreciate that market dynamics are fickle and change with the wind, but there must be an underlying principle that should make sense to us all.

No market can sustain buying BMV and selling AMV perpetually, but I’d welcome your thoughts on the subject.

Bill



Comments

Neil Patterson

14:26 PM, 16th May 2017
About 2 years ago

Hi Bill,

Yes of course your ready made business will have more value to a person looking to purchase an HMO. However, here is the issue; how many potential purchasers as a percentage of the whole buying market are looking for an HMO? quite low I would have thought.

The Property Market is mature market and operates very closely to the classic supply and demand principles and you also need to consider Price Elasticity.

Supply being equal as demand falls so does price or vice versa. Therefore, if as a percentage, the demand for an HMO is only a small amount more, then the price you can command will only increase by a small percentage.

As a small portion of the total housing market, and the fact that a suitably sized property can be converted to an HMO, the the Price Elasticity for HMOs will be quite high eg as the price increases the demand decreases comparatively rapidly.

As a non market forces factor to consider: banks lending on a BTL basis will look at worst case scenario and assume they may have to take possession and sell quickly so will be more comfortable valuing the property as a single dwelling. Hence finance is harder to find and thus reducing demand further. Although you can consider more commercial lenders but at a higher price.

Rob Crawford

12:14 PM, 17th May 2017
About 2 years ago

It's a nice thought Bill but as Neil points out it all relates to demand. I for one would not purchase an HMO as a going concern at the business prices suggested. It's more cost elective for me to purchase a potential HMO below market rate and convert. My conversions are generally reversible so that when the time comes for me to sell I can restore it if necessary to a single dwelling quite quickly and at minimum cost. Also at this point in time there are quite a few HMO going concerns being advertised. Landlords are selling in anticipation of Clause 24. So it's a buyers market and if I was looking today I would certainly consider a purchasing a going concern but I would be aiming to screw the seller on price (with respect!).

Gromit

14:37 PM, 17th May 2017
About 2 years ago

I agree with the comments made so far. There's another factor as well which is licencing/planning consent.

In some places with high densities of HMO's the Local Authority will not grant change of use to HMO if it considers the current density surrounding the proposed new HMO is too high. This significantly changes the dynamics of an HMO versus buying/converting.

Bill O'Dell

17:05 PM, 17th May 2017
About 2 years ago

Thanks to those that have posted here, all your points are well taken.
Barry, that's usually where there is an Article 4 Directive in place requiring planning consent for a C4 HMO - C4 to C3 (normal residence with less than 3 familes) is permitted development.
In my experience, the HMO's I have sold have been to new investors so there is then the opportunity to present the offer as a business rather than as a property, and it is this scenario I was thinking of when I first posed the question. I agree that seasoned investors will be looking to pay market or below on a purchase and so I have never targeted them as prospects.

Charlie Vaughan-Lee

12:09 PM, 19th May 2017
About 2 years ago

Hi Bill - Allsop are almost certainly the best informed national agent for HMOs. We specialise in Student HMOs. If yours is in a student area we would be interested in buying it. Best, Charlie Vaughan-Lee (Student Cribs)


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