When is the best time to sell an HMO?
As an owner of a house of multiple occupancy (HMO), it can often be difficult to judge the best time to sell an HMO. There is so much to consider when approaching a sale. For example, is the market at the time right to maximise value or to secure the right buyer type for your HMO? Knowing when to sell an HMO is difficult, so continue reading this helpful guide from The Property Advantage to help with your decision-making.
When to sell an HMO
So, you’re considering selling your HMO but aren’t sure when the best time to do so is. Well, at The Property Advantage, we can confidently tell you that tenanted HMO values are actually on the decline – or, yield expectations from buyers are increasing, at least.
Investors are always looking for a good deal and try to save money when purchasing HMO property. Lower offers from buyers, the amount lenders are valuing properties and the end value of completed sales all indicate that investors are scouring the market for better value.
Investors are aiming to save money at the purchasing stage in order to mitigate the running costs of the property, navigate a tough market, and higher lending costs.
All of these factors have affected the quality of HMO stock that was valued and listed for sale between March and August of 2022. These properties didn’t have the benefit of full rent increases that boosted incomes and value. Plus, they had been valued at yields prior to Kwasi Kwarteng’s appointment as Chancellor. His decisions while in the role sent the property market into chaos, resulting in his resignation.
These HMOs have been difficult to sell, especially ones where asking prices were increased over the summer months without the knowledge that the market was about to decline just a matter of weeks away.
The HMO properties that The Property Advantage is appraising and selling right now fit into two specific categories:
● HMOs that have performed well post-pandemic
● HMOs that haven’t had any rent increases in recent months
HMOs that have performed well post-pandemic
The HMO properties that have done well following the Covid-19 pandemic have provided sustainable rent increases for investors and owners. Even when we value them today at a 1% yield increase, for example, the increased rent that the yield is calculated with doesn’t actually reduce the asking price.
For example, a 6-bed HMO property in Manchester that was generating £43,200 per annum was valued by us at an 11% yield in February 2022, equalling £392,000. That same 6-bed HMO is now collecting an average of £650 per room and was valued at £46,800 at a 12% yield, equalling a value of £390,000.
The seller does not get any increase in value that they normally would now that the HMO collects a few thousand pounds more per year, but it hasn’t depreciated in value either. The buyer does get an extra percentage yield wiggle room that makes the numbers stack up.
However, one thing to remember is that this situation only works if rent increases are genuine and sustainable.
HMOs that haven’t had any rent increases in recent months
Our second category of HMO properties are ones that have not had any rent increases recently or added unique selling points. These properties will have a reduction in value in most circumstances.
Most HMOs that we value at The Property Advantage have benefitted from increased rent roll in 2022, so we do expect the majority to fit into our first category. Or, at least they won’t feel the full pinch of the higher selling yield.
So, what about the landlords that we work with? If you’re retiring, you’re doing nothing with your funds, and your HMOs haven’t increased rent in 2022, it probably isn’t the best time to sell an HMO.
Sorry to break the news to you but 2023 probably isn’t the best time to sell your HMO either. There will be too much available stock in competition that will ruin supply and demand. We suggest that you sit back and wait three to five years if you want to maximise your values. Or find a way, via improvements, changing tenant types or lease types, to increase rent roll.
You could also take a percentage yield hit to trigger interest from buyers and investors because the cash in your pocket can work harder or mean more to you right now than selling.
When to sell new HMOs
New HMO property flips are selling well and rents are high but are adding a percentage on the yield you were expecting to exit at. We have a lot of clients who are selling their HMOs to free up cash because there are deals at auctions, or via agents, right now.
Other properties have been caught in the cold harder than HMOs. So, even if the HMO declines by 5%, for example, the deal at auction might be available at 15% less than it was.
2023 and beyond
Unfortunately, we do not know the full extent of any price reductions in the HMO sales market until the new year. We need this current batch of HMO sales to get beyond a mortgage offer and we require the new sales we’re processing to get valued and appraised by specialist lenders.
We will also require a three or four-month conveyance drag to play out. Plus, we need the aggregators to have their funding agreed at what level and to what criteria.
Once we have these aspects, we can then see where mortgage markets are heading after 2022’s chaotic economic climate.