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  • HMO & Multi-Lets

    HMO oversaturation - warning signs & remedies



    There is a lot of talk on the forums about the over-saturation of HMOs appearing in certain areas.

    Indeed, one lender told me that they are no longer lending on certain post-codes in Liverpool due to this concern.

    According to Investopedia, market saturation is a situation that arises when the volume of a product or service in a marketplace has been maximised.

    At the point of saturation, a company can only achieve further growth through new product improvements, by taking existing market share from competitors or through a rise in overall consumer demand.

    Over-saturation in the HMO space can be caused by a number of things:

    >  Too many landlords piling into an area, many doing Rent to Rent HMOs (so no barrier to entry).

    >  Lack of Article 4 in the area.

    >  Institutional investors building blocks and halls of residence for students.

    >  Decrease in demand from tenants looking to rent rooms.

    >  When prices of HMO rooms become comparable to what it costs to rent a one bed flat, demand may decrease.

    I therefore thought it might be helpful to curate a thread of discussions where there is concern over HMO saturation:

    Liverpool

    Concern over investors being sold HMO dream 

    Saturation of HMOs - Reading/Swindon

    HMO Viewings (Coventry/Birmingham)

    Falmouth

    Cardiff

    If you are seeing over-saturation in your area, please add the name of your town to this list.

    According to Investopedia, even in light of market saturation, many companies choose to remain in operation.

    When a company operates in a saturated market, there are a few concepts and strategies that they can use to stand out, remain solvent and possibly even increase sales.

    The first is creativity. In a saturated market, a company's product or service offering has to be more innovative than that of its competitors to entice customers to buy.

    The second way to stand out is through effective pricing.

    Companies can approach this one of two ways. A company can either choose to become the low-cost provider of a product or service, or it can decide to operate as a premium option for the product or service.

    Either strategy requires competitive pricing against other companies that choose the same pricing structure; however, companies that operate in a saturated market usually end up waging "price wars" with each other, continuously undercutting prices to attract customers. Using unique marketing strategies is a final way a company can stand out in a saturated market.

    We have a video on this topic:


    When thinking of investing in HMOs, tenant demand must be a key part of your due diligence and also see how many other HMOs are operating in the area and to what standard they have been finished.

    SEE ALSO  -        Launch of HMO Compliance Week 2018

    UP NEXT -            Solution - HMOs not meeting minimum room size
                
    DON'T MISS -       When to say "no" to an HMO?

    NOW WATCH:

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    Article 4 areas naturally put off investors because purchase prices are higher (and sometimes the risk is higher if the property doesn't already have its HMO status confirmed with the planning department) but actually in the long term they can provide good returns by capping the supply of HMOs in the area.

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    This is the reason why there are en-suites in all my rooms, to set the business apart from the competition, many landlords do not choose to pay out the 40k to 50k it costs to do this.  Most opt for the 10k 15k shared bathroom configuration.

    But only time will reveal if this strategy holds up.

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    But risks each unit being separately council tax banded...

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    DISCLAIMER just my personal opinion - for legal advice consult a qualified professional grown-up.


    And also presumably makes it hard to return the house to being a single family unit for resale?

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    I agree.

    We've got one with all ensuites and when market saturation occurs here we can adjust the price so that our rooms are always filled before HMOs with shared bathrooms. If you look at the VOA's guidelines it is clear they can impose individual banding on rooms without ensuites if there is a separate AST  and locks on the doors.

    So individual banding is definitely going to be a thing in the future.

    And this should knock a lot of the Rent 2 Rent operators out of the market and make it better for those of is who invested a lot of money into refurbishment

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    Adapt or die - Charles Darwin

    I think the days of a "quick buck" are gone with HMO's & property in general...and more long-term investment is required...in terms of spend, planning & consideration for the customer!

    Houses need to bought in the correct locations, and landlords need to invest properly to stay ahead of the competition. If you want to avoid problems of over-saturation..then your house needs to be the best HMO in that location. I also think Article 4 is good, as it limits supply & therefore increases prices ...therefore protecting your investment.

    If you are just focused on quick profit & cash-flow...then I suggest finding new areas with low HMO saturation...but careful research needs to be done to see if there is a market in the first place.Even then... a long-term approach is advisable.

    I also dont think it's enough any more just to create a beautiful house (...although this is still necessary to stay ahead of the competition)...but more focus also has to go into creating a good "customer experience!" Therefore how you engage with your tenant is becoming more important.

    In my opinion...we are due a correction in the property market, so this is time to step back & think! Be different...don't follow the flock!

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    This is an excellent topic and crying out for discussion.

    Friend of a friend (NO prop experience) recently asked for my advice after they had committed to a property for conversion to an HMO, through a company that they ‘trusted’. Their reason was to fund their child’s education.  I was absolutely astonished at this kind of expectation.  IMHO one HMO won’t even ‘fill the gaps in my teeth’!

    There are companies promoting ‘great wealth from HMOs’ and not aware of nor providing real facts! Just Lying!

    I’ve just received a notification from Thames water that they have installed a water meter and they calculate that my bill will triple!  In addition to increased CT rebanding by room, Section 24, etc, etc, HMO’s really are a tough call.  The new licensing regs are asking LL to treat HMOs as a proper 'business', maybe a 'little too late'.

    I think that Luton should be added to the ‘Over saturation’ list (unsure how to add this).

    My Jan 2017 research indicated over 5 people chasing 1 room within xxx price range.  12 available rooms in Jan – March 2018 have taken over 6 months to let (some still empty).  High quality ensuite, reduced pricing etc. Following advice from Spareroom that over 90% of HMO tenants struggle to find a deposit, we removed it and pay £75 for Rent Guarantee instead.  I know of several other HMO landlords in the area with similar problems.

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    Hi Polly,

    Thanks for commenting.  I share your concerns of guru's selling HMOs to novices.  It will very likely end in tears for the "investor" and I am already hearing of stories where HMOs have not worked out as the guru claimed, and the investor wants to exit - but suddenly that deal of the century they were told would be a goldmine is not so attractive to potential buyers and the newbie is left high and dry.

    This was discussed here:

    Concern over investors being sold HMO dream 

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    Here in leeds you are seeing student pods been built next to student pods next to student pods next to......you guessed it, student pods, i actually dont understand the developers thinking, they seem to be building far too many to even be able to compete amongst themselves let alone your regular landlords, you can guarentee if an old office building goes up for sale in leeds within 18 months it will be student pods

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    The thinking is that at some point the council may be able to buy back some of these lovely buildings to rehouse people.

    It's already happened in Canterbury: 

    Why would a council turn down regeneration of an otherwise rundown property/area?

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