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  • HMO & Multi-Lets

    How to do due diligence on an HMO - guide



    The following is a post by Rassie on another thread about assessing an HMO deal in Burnley, but I felt is so valuable, that I have created a thread to highlight the information Rassie shared.

    Obviously change "Burnley" to the town/city you are considering.

    "You will need to do intense due diligence on the area, the property, and the tenants."

    Translated, this means:

    Area

    * find out all you can about the demand for HMO rooms in Burnley, and in that specific part of Burnley. For example, you can look at rooms wanted vs rooms to let in Burnley on spareroom.  It's a bit tricky as the way spareroom "groups" areas together isnt always obvious, but it's a good start.  This https://www.spareroom.co.uk/flatmate/fla...842960584& shows that there are 42 roommates looking, and 72 rooms available. To me, that suggests low demand. By comparison, for example, there are 145 flatmates chasing 24 rooms in Newquay. If you're not local, find an agent who focuses on HMOs, and ask them about demand.

    * ask the agent what tenants look for, how long single rooms take to rent out, prices achieved, etc.

    * what is the area like? Does it look reasonably safe? What are local shops, etc and what is the local employment / jobs market?

    * is it an article 4 area? article 4 relates to planning, NOT licensing (but many agents and sourcers get this wrong).

    Property

    * is title, etc (e.g. subsidence, knotweed, electric substations nearby, etc) OK for mortgage companies?

    * this does not appear to be significantly altered from a "normal house".  It looks like a 3 bed family home where there is a front living room with a bed in it, so I would expect you are VERY unlikely to get a commercial mortgage valuation on this type of "HMO" - but speak to a broker.

    * the floor plan shows the rooms are all 7.3 to 7.4 sq metres.  This means they are single rooms.  How is demand for single rooms vs double rooms?

    * The rental figure works out at £97.50 per room per week. All the singles in Burnley advertised on spareroom are on at between £65 and £80-ish per week. What makes the rooms in this house worth almost £20 per week more (given that tenants in the area do not seem too squeezed by a lack of supply)?

    * does it need planning for use as an HMO (4 beds IS an HMO for planning purposes, even if not for licensing)? In an article 4 area it will need planning unless it has been rented as an HMO before the article 4 direction came into force. The seller should be able to evidence this by way of tenancy agreements, or a certificate of lawful use as an HMO.

    * Does it need a licence (additional licence, selective licence)? If it does, does it have a licence? Do you as landlord need to be licensed there? What are the requirements for such a licence and can you meet those?

    * ask for evidence of the cost of bills (water, gas, electric, broadband, council tax, TV licence, etc).  Is the figure in the add accurate/realistic?

    Current Tenants

    * buying a property with tenants in is in my experience very risky.  You need to check them and their legal paperwork out VERY carefully.

    * when did the tenancies start?  Pre/post October 2015 changes legal requirements.

    * have they received all statutory paperwork at the start of their tenancies (EPC, gas safety cert, "How to Rent" booklet, etc).  If not, you may not be able to use s21 to get them out. s8 (based on breach) is harder to use. Eviction will cost at least £1000 per tenant.

    * are they tidy? Do they treat the property with respect?

    * are there any late or missed rent payments?

    This is not an exhaustive list, but hopefully this helps you (and others who hear the words "due diligence" but don't really know what it entails practically).

    ______________________________

    Here is a reprise of our "HMO Week" which shared many valuable insights for anyone thinking of getting involved with HMOs:



    HMO Week 2017 - powered by Platinum Property Partners

    Monday -          Launch of HMO Week 2017 with Steve Bolton - discussing popularity of HMOs and trends in
                             the market


    Tuesday -         Sourcing an area suitable for an HMO and finding a suitable property   

                             Financing of HMOs - insights and criteria                   

    Wednesday -   Legal and licensing considerations / refurbing an HMO and optimising the lay-out

    Thursday -       Small HMOs vs. "Super HMOs" 

    Friday -            Creating harmonious households

    Saturday -        Avoiding voids in HMOs

    Sunday -          Getting rid of a bad tenant from an HMO

    It would be great if we could expand this into a community-generated guide, so please add anything else you think that should be part of HMO due diligence.

    For further insights, you can also download our HMO partner, Platinum Property Partners "7 Step Guide to HMO Investment".

    SEE ALSO  -       "HMO Compliance Week" with HMO legal expert David Smith

    UP NEXT -           When to say "No" to an HMO?

    DON'T MISS -      HMO investments - where to buy safely?

    NOW WATCH:

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    I would add the following to list

    In Wales HMOs (3+ non related sharing) created after February 2016 require planning permission.

    If HMO rented on individual tenancies then need to check adequate fire safety. Mains interlinked smoke alarms in each room, FD30s fire doors, mains interlinked smoke alarms in hall, landing and communal space and mains I interlinked heat alarm in kitchen.
    1
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    Rooms In Cardiff info@highyield.property | Guaranteed RentSingle Let Management £50/month |Cardiff HMO Management | Cardiff Letting Agents & Property Managers | Delivering Double Digit Net Returns

    Rent Smart Wales Agent Licence Number: LR-37010-29907

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    Also check space and amenity standards which can be found on local councils website.  Make sure there is sufficient space and storage in the kitchen for number of tenants.

    Also property has sufficient WCs and bathrooms for number of tenants
    1
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    Rooms In Cardiff info@highyield.property | Guaranteed RentSingle Let Management £50/month |Cardiff HMO Management | Cardiff Letting Agents & Property Managers | Delivering Double Digit Net Returns

    Rent Smart Wales Agent Licence Number: LR-37010-29907

    The Property Ombudsman: E1405 

    ICO: #ZA276375

    We operate Client Money Protection