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What qualifies a property as an HMO?

HMOs are a typical point where a clash of opinions occurs.

HMOs get valued as commercial properties, but HMOs converted from what was an ordinary residential property, rather than a commercial to residential conversion such as a pub or offices are NOT a commercial property, but a residential property temporarily being used for a commercial purpose.

These are the main differences between actual commercial properties and residential properties converted to HMO.

Commercial HMO
  • Leases are long, up to 20 years
  • Leases are rarely longer than 12 month ASTs
  • Lenders take comfort from the lease providing an increased likelihood that the loan will continue to be serviced
  • Sometimes licenses are used, rather than a lease


  • Leases are often fully repairing, meaning the tenant is responsible for the upkeep
  • ASTs give lenders less comfort in continued serviceability of the loan
  • Leases have built in break clauses and rent reviews
  • The landlord is always responsible for the upkeep
  • The value of the property reduces considerably when vacant, in some cases by 50%
  • The value of the property remains largely stable whether tenanted or vacant
  • The property has a designated commercial usage with the local council i.e. A1, C1
  • The property has domestic dwelling status with the local council
  • The property cannot be used for a domestic dwelling if not occupied by a commercial tenant
  • The property can always revert to a single AST or a main res home


  • Commercial tenant’s run a business of whatever sort and can therefore be viewed as generally more financially aware.
  • HMO’s tenants can often be quite financially naive


A Lender’s surveyor’s default position is to value an HMO on a bricks and mortar basis, unless they see compelling reasons not to.  Their expectation is that they are valuing a normal residential property and will always have in mind how they will cover their investment and costs if they have to repossess the property.

A lender will never consider selling an HMO as a going concern; they will want to sell it with vacant possession.  So tenants will be given notice to quit under the terms of the Assured Shorthold Tenancy Agreement (AST) and all the furniture will be cleared.

The key concern of any lender’s valuer is how the property’s appearance compares with adjacent properties?  If you enter the house, does it resemble the property next door?  If it does, it will be valued as a private dwelling.

HMOs that are valued on a commercial multiple of the rental income have undergone a far more significant conversion or transformation so they cannot be marketed as a family home.  These changes would include:

  • En-suites in every bedroom.
  • ‘Kitchenettes’ in every bedroom to provide the ability to make a cup of tea and a basic breakfast
  • In the communal kitchen, two range cookers would be installed and often two separate sinks.
  • Wired-in smoke, fire and CO2 alarms.
  • Floor or skirting-board based emergency exit lighting (similar to that on aircraft).
  • Sprinkler system.

That would probably cost you £40-50K and the property cannot be marketed as a family home.

In order to fulfil your expectation of getting a commercial income-based valuation there needs to be at least:

  • A provable local demand for an HMO
  • OR Article 4 is in place
  • OR planning permission or Sui Generis planning
  • AND the fabric of the building has been significantly changed.

Surveyors will work on gross and net multiples of income taking into account void periods, letting agency fees, repairs and maintenance and utility bills.

Income multiples used can vary in different parts of the country so it’s important to do some research to ensure you know what to expect.


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