Photo by Innova Property
This month I have got a case study for you – something that I am constantly being asked for! This is one which is current, we had the valuation back last week. It is for an experienced client, someone who we have worked with for several years.
The Purchase
The property was a 3-bedroom terrace in Manchester. The client bought it for £90,000 last August. It was in very poor condition, and they negotiated it off the open market directly with the vendor.
We used a standard bridge to purchase the property. With small properties like this, there isn’t the option to borrow for refurbishment costs, so we arranged a bridge to lend the client 74% net of the purchase price (interest and fees were added to the loan). He put in £23,400 plus stamp duty and legal.
The Refurbishment
The refurbishment cost £60,000 for a conversion to a 4-bedroom all en-suite HMO (which the client funded). There were no structural works to be carried out, it was a case of moving stud walls to add in the extra bathrooms as well as opening out the kitchen to allow more communal space.
The Refinance
This is where we had some options. The property was only a 4-bedroom HMO, so we weren’t expecting a full commercial valuation to be available. Most of the time with 4 bedrooms, the valuer will feel that it is more likely to be sold on as a home (with a wider market and easier sell) rather than an HMO. This meant that the options available were:
A Bricks-and-Mortar Valuation Option…
This is the lowest cost option; however, it involves a Connells valuer! They must use sold comparable properties and this can be very restrictive with HMOs. They disregard the fact it’s an HMO, so will use sold houses of a similar size, location, and condition as their comparison properties. This is often where we see comments around ‘down valuations’; it is usually where clients are expecting the property to be looked at as an HMO when it is not.
We do have an option of a lender who uses Allied and does ask them to consider the property as an HMO. This is a good middle ground and works well for 4-bedroom HMOs where there is unlikely to be a considerable uplift with a commercial valuation. The rate is somewhere in the middle of the two other options and it allows the works carried out on the property to be considered.
These lenders are very ‘belts and braces’ in their approach. They require a debenture on the company, a personal guarantee for the full loan from every applicant, and legal advice for everyone. It can make the legals time-consuming and costly, and as you grow your portfolio is something to consider.
The client estimated a figure of around £220,000 if we used this route.
A Commercial Valuation Option
This isn’t an option I would usually look at for this type of property, but as the client had got it at a really good price initially, I felt that there may be an opportunity for a bit more of an uplift on the total spend. The benefit of using a commercial lender, even on a property that isn’t going to achieve a commercial valuation, is that the valuer has a bit more leeway on their figures. They aren’t tied up with sold comparables in the same way as a standard valuer, and we do tend to see more generous values even on a brick-and-mortar figure.
These lenders are easier to work with, in that they don’t generally require a debenture on your company, and can have a lower personal guarantee requirement. We don’t usually need legal advice either. That all makes for a simpler legal process, so we can generally complete the refinance more quickly.
The client decided to go with this option after considering them all, and we achieved a valuation of £245,000. This has given the client an extra 10% above what they would expect from a standard Connells valuation.
The new mortgage will be 75% of the £245,000, so will give the client a loan of £183,750. This allows the bridge to be paid off, as well as reimbursing the refurbishment costs and still have over £45,000 left!
I know I often say that pulling all your money back out is the unicorn deal, but I wanted to use this example for a few reasons:
- It shows that they are still possible – this was bought in a busy market last summer.
- The importance of your purchase price, as this is usually where your money is made on the end valuation.
- Looking at the options of the refurbishment and number of rooms you can achieve. This is a great example of not spending too much, as an increase in cost may not have led to an increase in the value of the building.
- Understanding that it is not all about the cost of the refinance. I know we won’t know the valuation that we would have got with another lender, but we have achieved exactly what the client expected with this valuation, giving more funds for the next deal!
As always, I hope this has been useful, and if there is anything you would like to discuss then please get in touch here.
About the Author:
Ellie Broadhurst is a specialist mortgage broker working at Baya Financial in partnership with The HMO Roadmap. She works with HMO property investors throughout their journey, from clients starting on their first project through to experienced portfolio landlords and developers. Learn more about Ellie here.