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HMO deal requiring finance but...


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Hi Hubbers,

 

i have found a great property with a great price in a good area, and I ask myself why!

 

This property is on the market for £205K and has 1 x 2BD apt and 3 x 1BD apts. Two of the apts have their own separate entrances from the main entrance. Each apt will fetch approx £500 pcm. 

 

I have no idea how much money is needed to upgrade the property but it's mostly cosmetic so I'm guessing approximately £25K. 

 

I have spoke to a local property HMO mortgage expert who says due to no. 1 N. Ireland having less options anyway and no. 2 the property having separate entrances, it technically isn't considered a HMO and therefore private finance is not an option.  He says I would need commercial Finance to make it work. 

 

I listen often to investers who go that extra yard to get deals that everyone else can't make happen.

 

 

What do commercial bank lenders need to know when considering such a proposal.  I have two other properties and my dad has a few properties.  We could raise funds up to 40/50 LTV on this if squeezed. 

 

I would really appreciate any help you could give me. 

 

Regards

 

Eoin

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So what you have here is a multi unit let. Essentially 3 independent flats under one freehold.

 

You have a few options here and the fact its in Northern Ireland is a problem as there is a limited selection of lenders who cover N.Ireland unfortunately and i really dont know why that is:

  • Buy the property for cash/bridge and then split the titles. Form a limited company that owns the freehold and you personally own the individual leaseholds. You then remortgage each individually perhaps just 2 immediately to pay off the bridge.
  • Buy the property with a mortgage lender who accepts multi unit lets. 

Barclays will lend on multi unit property, and in N.Ireland i believe but their criteria is fairly strict. Each property has to be worth over £46k each.

 

Barclays criteria:

  • Where the borrower is also the sole freeholder and has divided the property into self-contained flats for letting, security will be charged on the freehold together with the leasehold on the units being let
  • All conversion works must have been carried out in accordance with Planning Consents & Building Regulations
  • A maximum of 2 studio flats are allowed in the Freehold
  • All the units/flats must be fully self contained with an average open market value in excess of £46,666 (75% LTV) for each one where further product restrictions apply such as max LTV/Min Loan amount the minimum required property value may increase.
  • Each unit must be let on an acceptable letting method
  • All lending on newly converted properties, where the first registration of the new Leasehold/Freehold Title(s) was less than 2 years ago, must be restricted to 75% LTV – See New Build Section

They will have a haigh threshold for property quality though so if its pretty run down that might be a problem. Also expect a down valuation potentially if the surveyor feels the demand for such a place might be low, and/or the area unappealing to a wide demographic, such as young families, young professionals and first time buyers. The overall property will be assessed on a "bricks and mortar" basis meaning that the increased revenue from the subdivisions wont help the overall value.

 

Its an option, but i wouldn't expect it to be an easy ride with Barclays, they like safe stuff and this does not really fit with their overall appetite.

 

The bridge option is risky because again you are reliant on being able to finance these individually and remember lenders often wont lend on more than 25% of a development, meaning each flat needs to be with a different lender.

043_logo_final_03.png.0cdf828351f81e6097208048ac2d018d.pngStuart Phillips

Independent, Whole of Market Mortgage Broker

AALTO Mortgages Ltd

Web  www.aaltomortgages.com

Email  sales@aaltomortgages.com

Call  020 7183 1101

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Hi Stuart,

 

I really appreciate you taking the time to respond. I have found it extremely helpful and it gives me a few things to work on.

 

I might contact my solicitor and see if they could shed some light on the likelihood of splitting the titles and the potential time frame for that. 

 

I will run the Barclays option past my financial advisor and see what Barclays say.

 

I also can research how much the bridging/cash might cost to factor that in.

 

Thanks again for an excellent answer. I will keep you informed.

 

Regards

 

Eoin

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Just out of interest (because many people posting here say something similar) If you have a financial advisor, why were they not the first person you spoke to about this?

 

Dont take this as a criticism. As i said its pretty common, and for me as a broker, i want to understand why someone who clearly has some experience in BTL wouldn't be emailing their broker with the property details and saying "who is going to lend on this and at what cost?". I can imagine the conflicting advice coming from estate agents and the like over how this is classified and how commercially viable this might be as an investment is a really good question to get straightened out here in the forums, because you get (hopefully) many voices from different angles and come away with a good sense of what's definite and what still needs research on your part.

 

From the finance perspective though, this is really simple stuff and took me all of 2 minutes with my sourcing software and a quick look on Barclays website to see that technically they could consider this. I would expect any broker, no matter their experience or knowledge to be able to get to that point. I would add some very heavy caveats to using Barclays, the val is free and so i'd give it a punt, but i would be expecting it to fail and have a plan B lined up, a perspective that comes with a little experience.

 

My question is: Did you post here about the mortgage because you thought your financial advisor wouldn't know, that you thought they would only be interested or assist you once you had a an offer accepted, or because you didnt want to be entirely reliant on their advice (ie you were testing them essentially)? Was it something else? 

Im asking because i wonder if i need to be clearer with clients about how involved i'm prepared or want to be. (I'd sooner warn you about issues after a viewing than after you have had an offer accepted.)

043_logo_final_03.png.0cdf828351f81e6097208048ac2d018d.pngStuart Phillips

Independent, Whole of Market Mortgage Broker

AALTO Mortgages Ltd

Web  www.aaltomortgages.com

Email  sales@aaltomortgages.com

Call  020 7183 1101

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Hi Stuart, thanks for the question. None of the above really. I have followed my usual channels. First I asked my usual financial advisor and he couldn't get me anything. I then went to a specialist property FA around Belfast area who pointed me in the direction of commercial finance as private finance wouldn't be possible with the three entrances. I still haven't contacted a commercial FA as yet.

 

I have used the forum to see if I could find out anything else to help. It's also a confidence thing I suppose, this will be a big deal for me, a game changer if it happens and I want to be as prepared as possible! 

 

I think you need to pat yourself on the shoulder here, they didn't find anything.  It mustn't be as easy as you suggest.

 

Regards

 

Eoin

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Thanks, I dont think it will be easy. There's a big difference between a lender 'considering' something and actually having an appetite for it. Surprised you've been through a few broker already though. I'd be interested to hear what the lawyer says about the titles iven the mix of entrances etc.

043_logo_final_03.png.0cdf828351f81e6097208048ac2d018d.pngStuart Phillips

Independent, Whole of Market Mortgage Broker

AALTO Mortgages Ltd

Web  www.aaltomortgages.com

Email  sales@aaltomortgages.com

Call  020 7183 1101

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  • 1 year later...

Hello Eoin,

I was just wondering how you got on with this property in the end.  I had a similar property in Bangor which I tried to purchase in the last 6 months.  It was one house with 3 self contained flats operating under an HMO license.  The lender (Barclays) was willing to lend until we discovered the house was on a good leasehold title.  They wanted a charge over the freehold but we could not locate the freeholder.  I was told then by my NI solicitor that it is commonplace in NI for properties to be leasehold and to not be able to find the freeholder.  It cost me the deal in this instance.  We are looking at trying to finance another project in NI (conversion to HMO) but are struggling to find lenders for a 7 bed HMO, and also trying to find out info on the title well in advance this time.  It is a difficult area but others are doing it so there must be a way...

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