Price vs Value: The Mindset Shift That Makes HMO Deals Happen
In my purchase mentoring capacity, it has become increasingly common over recent times for the expectations of buyers and sellers to be too far apart for a deal to be done. The bricks and mortar values of some smaller HMOs (4, 5 or 6 beds) in certain decent residential locations are considerably higher than the yield based commercial valuations.
The seller sees the other 3 or 4 bed houses in the same area which are identical to how his house was before he converted it into a 6 bed HMO, being sold for £100K more than the best offer he has had from a “cheeky” HMO investor. Both parties walk away from each other and never the twain shall meet.
Let’s look at an example: John is selling his 6 bed HMO and sees other comparable size houses in the area being sold around the £400K mark. So that sets his expectation. Peter likes the look of this area and likes John’s HMO. He needs a 75% LTV HMO mortgage to buy it and must take into account the obscene stamp duty costs plus the monthly management costs (he isn’t local). With all this in mind and armed with the current gross rental figures with a deduction for monthly running costs, he has worked out a minimum yield figure he is prepared to accept, thus giving him the maximum purchase price he is prepared to pay. In this case it comes out around £300K.
John and Peter decide they are too far apart – no deal. However, John is not considering the fact that Peter is unlikely to be alone in his thinking and rationale. If he is to realise a price close to or at or above his £400K mark, he will likely have to empty the house of tenants (costly in itself now if it is to be done in a timely manner, but that’s another story!). Then he will need to spend money removing the trappings of the house as an HMO, pay his mortgage with no income while he sells the house and experience a lot of mental anguish, there being no way of telling how long this will take.
Let’s get back to Peter: Peter is forgetting that he intends to keep this house for at least 10 to 12 years. The Bricks and Mortar (B&M) value at that time, if annual growth in the housing market is to be 3%, will be around £570K. Interest rates will probably be coming down while rents will go up with a growing shortage of good rental accommodation, so his figures will look a lot better as the years go by. So, if Peter was to pay £350K (£50K more than he wanted to) and take a short term hit on his preferred yield, as time goes by, he will be so pleased that he thought longer term and bought this great house in a location he likes.
If John accepts £50K less than his desired B&M valuation, he does not risk losing that amount or more over a period of extreme hassle and concern and sells with a minimum of fuss to a motivated buyer. He can then get on with his life. Win-win - and all it required was a change of mindset by both parties.
As I said, food for thought!
