Yield valuations: why so many HMO refinances disappoint

With HMOs, the goal for landlords and developers is usually a yield valuation, on sale or on refinance. That's where the value is based on the income rather than the vacant-possession, bricks-and-mortar value, and it usually adds a significant amount to the price, especially in the North.

Yield values are still supported by buyers, surveyors and lenders, but it can be a minefield, and there's a lot of disappointment around it.

How do you make sure an HMO can sell, and complete, on a yield value?

It's all about having a diverse buyer base. Sell only to one type of buyer, landlords using traditional lending for example, and you'll agree sales on everything, then watch them get down-valued on survey three weeks later, to everyone's frustration.

A huge amount of effort goes into finding quality buyers who understand the difference between bricks-and-mortar and yield value, and, even more critically, who can actually buy at the higher level. The right advice is different for every HMO, depending on size, location, tenant type, the seller's circumstances, planning class, income history and much more.

Why so many sellers come to it second

Lots of selling landlords come to a sale as their second choice. The first was refinance. If the lender's valuation came back much lower than expected, there often isn't enough left to repay joint-venture partners or get off an expensive bridge, so selling at the higher yield value becomes the only option.

When you work backwards with these landlords to see where their refinance expectations came from, the problem often traces back to the training they had, or the deal packager they worked with. Too much focus on BRRR and "no money down", and not enough due diligence on how lenders actually operate and what they look for.

I get asked every week for comparables from landlords appealing a down-valuation, and in many cases the horse has already bolted.

First posted on my Facebook page. Lightly edited.