Myth 1: Valuations are for the benefit of the buyer.
Valuations are carried out for the lender’s use and the lender has the right not to release the report to the client. Reports are created at the request of the lender and are for the lender’s protection. For example, some lenders will not offer mortgages on properties with Japanese knotweed or structural concerns.
Myth 2: If I do not like the valuation, I can challenge it.
Valuations given by surveyors are much more accurate than estate agents’ valuations, which are only based on market conditions. Clients are entitled to appeal a valuation but must have evidence to do so, such as comparable recent property sales or current rentals.
Myth 3: I cannot get a valuation if the property is not finished.
Where works are to be carried out, it is called a residual valuation. The valuer will work from the end value backwards in order to reach the Day 1 figure to lend against.
The valuer calculates:
- The value of the development once it is complete (Gross Development Value).
- From this, the total development costs would be deducted – these would include professional fees, a contingency allowance, together with any other related development expenses.
- Finally, a percentage of the profit for the developer is deducted.
- The result, or residual amount of this calculation is the amount one would wish to pay for the land or property.
Myth 4: My small HMO will automatically be valued on an investment or “commercial basis”.
If your HMO has six bedrooms or fewer, there are two type of valuation available:
- Bricks and mortar valuation: The value of the property as a single residential property
- Investment basis or “commercial” valuation: Valuing the property as an ongoing business based on rentals
Some investors believe commercial valuations are the norm and they tend to want their properties valued on an investment value basis, believing this will result in a higher valuation. However, it does not always happen like this. It is more common for lenders to value HMOs on a bricks and mortar basis. The reason for this is that an HMO must have had significant works done to be worth the premium HMO price. If an investor could buy a single residential property next door and easily do the works themselves, then why should they pay a higher price for an HMO?
Main stream lenders that offer the lower rates choose to lend based on a Bricks and Mortar value, whereas commercial lenders offer terms on a commercial yield based figure, as an investor you need to decide which project is better for your business plan i.e. monthly cashflow against the loan advance and then build the rates etc into your forecast / business plan.
For more myths about HMOs see our dedicated blog.