Watch: How to prepare your HMO for a successful sale

Richard Nicholls (00:07.982)

Can you hear me okay? Am I working okay? Quite a lot of familiar faces, so recognise you all. We all got the brief to wear a suit today, so that’s nice to see. Really pleasing to see. Just going to check the slides are on. Just click that way, it? Here we go. Slides are sort of, they’ll flow through, but really it’s everything I talk about every day to…

to clients, people selling HMOs. I think just a little bit of a background to myself first, so everyone who isn’t familiar, I’ve probably met 30, 40 of you and I’ve been around probably 100 HMOs in this room that you own, maybe more. But just to give you a little bit of background. So my company, The Property Advantage, decided, I know why, but I decided to take upon myself to be the HMO selling sort of specialist in the UK.

That job entails driving around literally hundreds of HMOs across the country, up and down, top to bottom. And it’s given me quite a unique perspective because obviously lots of other HMO specialists are kind of localized, whereas I’ve just spent the last five years driving up and down the country seeing all types of HMOs. So Matt Baker’s next level ones, right the way down, supported living, social housing, good, bad and ugly. So that’s been my day job. Probably been in about 4,000.

Smelly rooms already this year. I always say, I think the last place that I chatted, I’m going move away from that creaky bit. The last place I was doing a talk at a few months back, I said, if I could see myself in high school, the job I’ve got is driving around HMO bedrooms. I’d be embarrassed, but I’m wearing this, so I don’t embarrass easily. So that’s what we do. And I’m not too sure what the next slide is, but basically what I’ve found specializing in HMOs, stock’s not the problem.

estate agents have got stock all over the place. when I first started selling, I thought, my God, I’m going to make my fortune here because just stock came in. There’s so many HMOs available. you’ll, as HMO landlords or developers, you’ll see that. If you do some research in any area, you’ll just see HMOs all over the place with agents. So I went on a mad listing spree, took on all these HMOs everywhere. And then I realized that the same as these estate agents, the conversion rate between listing and selling a HMO must be about 25%.

Richard Nicholls (02:31.789)

because of all these inherent problems with HMOs, all the moving parts. So gradually, and it was a lot of fall throughs, a lot of pain, lot learning about, I’ll talk in a minute about the buyer A’s and the buyer B’s and the different types of people that do buy HMOs. It’s taken me, I’d say even as early as 18 months ago or so, I just started thinking actually my role, I’m better served, not just taking on the quick and instant stock that comes on with these inherent problems. I’m best served actually

talking to you guys and saying, well, you might be just developing HMOs now, but eventually you are going to want to sell them. So if we’re all learning about how to prepare them and bring them to the market, so you give them to me as a portfolio in two years, three years, or two weeks, they’re going to sell and they’re going to complete. And you’re going to avoid the traps of all the crap that’s on Rightmove and all the crap that gets passed around the WhatsApp groups. And the reason why HMOs don’t get over the line

the majority of the time when they actually get a buyer, they fall through constantly. And it’s because of the stuff I see daily. So I’d rather spend my time talking to a room like this, rather than being in an individual HMO with a landlord who I’m having to say, right, you’ve got to do X, Y, Z to get it listed and get it ready for sale. So that’s what the talk’s about, really. And even if you think, well, I’m not actually ready to sell, you’re going to sell eventually, is the point. And it was quite good timing having Matt before, because one of his last slides was

What was it? Future loading, something like that. So there’s all that talk around kind of future proofing your HMO. It’s an investment for you on entry. So when you buy it, when you develop it, taking all the skills that you get from the networking groups, learning from Matt’s next level or however you want to do it with developing it, it’s an investment when you’re managing it. So that room over there teaching about how to get the best out of tenants, how to keep the house optimized from a management perspective. But it’s also an investment.

when you sell, optimizing your sale. Because if you just give away all of that good work for the previous three, four years and undersell your asset at the end because you’ve not prepared for your sale, that’s what I’m seeing just constantly. So it’s about thinking of your ultimate exit as part of the overall investment plan. Because it’s not a family home. You’re not selling because you’re pregnant or you’re getting divorced. I’ve had four divorces. Things like that. You’re not doing it for that reason. You’re doing it as an investment. So you choose to sell at the right time.

Richard Nicholls (04:55.853)

So I’m a little bit ahead of myself because I wrap it on a little bit. Yeah, so this year, Jack missed the D off valued, I noticed this morning, but 1000 plus HMOs. I mean, I’ve probably valued 2000 HMOs this year. I’ve visited probably 700, been in 700 HMOs and sold up to, I think we’re just above 400 now, sold, completed on probably 300. Probably won’t complete on another one for the rest of the year now with what happened on Monday night, but there you go, it’s different story.

So yeah, so this is all about the best way to understand your optimum HMO sale. So what I wanted to do is, first of all, put a little thought in your heads about the mindset of your likely buyer. What I call, I’ve separated them out and I call them buyer A and buyer B. And I’ll explain a little bit on both slides what we mean. So I’d probably class most of you here as buyer A. So you own HMOs.

ultimately, but you’re probably happy, you’re looking to add value, you’re probably raising finance, JV finance or private investment, or you’ve got some capital of your own, but ultimately, you’re happy to add value and do the developments, do the C3 to C4, do the planning applications, work with builders, develop and create HMO. So ultimately, buyer A and buyer B end up being HMO owners, but they come at it from very different routes. So if I showed a buyer A,

tenant in HMO, 12 % gross yield in Doncaster, all the value rinsed out of it from their perspective, they’re going to say, you know, actually, I’d rather buy the three bed terraced house and develop and create my own equity and create my own value. But if you showed that same property to a buyer B, the buyer B wants no stress. They want cash flow at end of month one. They want all the decisions made for them. If you’re in Hong Kong, or if you’re in a busy

someone in London with 500 grand spare, they just don’t want to go and even consider doing a three bed conversion in Doncaster. Where do you start? There’s obviously lots of horror stories about sources and deal packages and builders and materials going up. there’s a big distinction between buyer A and buyer B and what we do. We normally sell for buyer A to buyer B. That’s how it works. So you guys will always be buyer A, I would imagine. And this is why…

Richard Nicholls (07:18.029)

You never really, lots of people say to me, why don’t you just list your HMOs that you’ve got for sale on all the Facebook HMO groups? Because the HMO groups are all buyer A. Everyone go, I’m not paying that for that much. I bought one down the road for much cheaper. I’m like, know, fucking hell, that’s 100 grand over bricks and mortar. But if it’s 100 grand over bricks and mortar because it’s justified, buy a B over in Hong Kong, we’ll pay that. Because I’ve gone through a due diligence process and made sure that HMO is good quality. All of the USPs are there, the due diligence is done, so they will.

in your eyes, overpay for a HMO. But in their eyes, they’re not getting stung by a builder, they’re not losing money on developments, not having to do planning delays. Things like they can buy an Article 4 where maybe you’re moving out of Article 4, that kind of thing as well. Just practical issues make a distinction between buyer A and buyer B. But the reason why I want to put that up there is just so you can start, so you’re, I would imagine most of you thinking that you are probably buyer A. But we focus as a business on buyer B, primarily who we sell to.

buy a bee, they want everything, all the decision made and these are your HMO buyers ultimately. So what do they want? And in that category, I’ve mentioned overseas buyers and things like that, but you can also include REITs, funds, supported living buyers, all of these different types, they’re all ultimately buy a bee, they all ultimately want everything. We sell lots to some of the large REITs, they won’t do a planning, they don’t take on planning risks, they don’t take on…

properties that have got any inherent problems. You’ve got to wipe their bum during the conveying symposium and they’ll pay good money for it. It’s the same, they’re all buyer B and you’re buyer A, which is our seller. So the point of what I’m going to say is getting the HMO right to suit that biotype. you may be forced, and the reason why I started clocking on to thinking about this and having this dialogue with landlords is…

Half of my HMOs, people are coming to me and selling for a negative reason. I put on my, anyone heard of Facebook? So I’m on Facebook. I put on like a pie chart on Facebook, because I did some analysis of my current sold pipeline, the reasons why people were selling. Half of them were positive. Half of them had gone through a process, made good money from the HMO, decided to, lots of people, don’t know, see HMOs, buy to let HMO development, or they might.

Richard Nicholls (09:36.461)

just have owned them for five years, want to move out from dealing with tenants or they might do a lot of HMO flips, a lot of people do because it’s good money to do a flip. But half of our pipeline is filled with people that are selling for negative reasons. So JV partners falling out, separation, chosen the wrong property, wrong location, refinance too high. So the current energy costing, it’s left them exposed. Whatever it is, negative reasons are there with HMOs because just as much as developing them or managing them,

variables of why you might have to sell are also much more higher than they are with buy-to-let. They’re the most transient property type, HMOs. People keep them the less than anything else I’ve ever known. You know, get landlords say, I’ve owned a block of flats down the road for 25 years, but I want to get rid of my HMO within two. You know, that’s, people keep buy-to-lets longer, people live in their family homes longer, they, HMOs churn a lot quicker. So understanding how to prepare your HMO. It’s not like, you know,

anything particularly onerous that you’ve got to do suddenly after today go, right, okay, now I’ve suddenly got to think about selling my HMO. But, you know, if I get a property that comes to me with all of these things in place, ready, so the license is in place. Crucially, the license isn’t breaching the planning. So many people phone me up and say, yeah, I’ve got license for eight people. It’s a six bedroom HMO. it’s like, when we bring brokers in, first thing I teach them is that barrier between six and seven.

Because quite often licensee will be a seven person or an eight person. so many people come to us and mistake licensing for planning. And that’s why we’re doing a lot of our little podcast episodes now, just literally on that subject. And if someone needs to sell their HMO because someone that’s lent you money needs that money suddenly back, or your son’s just suddenly got a gambling addiction, or whatever it is, something will pop up. If you’ve not got the license and planning married up and you’ve not got the right

lawful development certificate in place for your property, then you can’t sell quickly. You can’t bring it to me as a quality prepared HMO. So certain things will take a little bit of time. Occupancy history is one. Lots of you might have managing agents managing your property. Our buyers, to give you an exact example, we sell around the Kent, Medway area for say 10 % gross yield. So a little bit above bricks and mortar, 10 % gross yield to get you a nice Medway, chat them, gilling them around there.

Richard Nicholls (12:01.851)

And there was a large company that went into liquidation around that. probably, most of you know about that liquidation big portfolio. So the asset management company approached us to sell. We sold 11 HMOs on behalf of a company that had gone bust and they’d been operated really badly. We got just below bricks and mortar on those 11 properties because none of these are in place because the person that was running them has gone bump. And at the same time, exactly the same properties for a different landlord, probably two or three different landlords.

they’re all getting 100 grand per house more because they’re an attentive landlord and everything’s in place. And that was quite extreme because one was liquidated stock and the other. But all we said to the asset management company, the buyers don’t need to know it’s liquidated stock. But we’re asking you for occupancy history or for decent marketing material, for access to the properties. And they’re saying no. So they’ve got to blow bricks and mortar for the sale. So that’s an extreme example. if we get a property that comes to us where you can’t find out

occupants of history because you’ve had a rent to rent contract in it or you’ve had a managing agent that’s been dealing with everything. Our buyers are going to, well, why can’t they show it? What’s the problem? you know, it makes a massive difference with confidence of buyer B and me justifying a premium for the sale. Marketing material, settle tenants. A key one is transferable management because we deal with a lot of self-management. It goes without saying the best HMOs that we go to are the one where the landlord walks in.

Hi Dave, hi John, they know the tenants, they are self-managing, might have one or two HMOs. That’s not a transferable product, so we need to get in the head of these landlords before we list that that property needs to have a structure in place where buyer B can obtain it, because buyer B isn’t suddenly going to self-manage because they don’t self-manage. So going through everything and making sure that some of them may be a planning application that is worth doing anyway, Lawful Development Certificates now.

or certificate of lawful use, they are worth getting in place, even if you’re not in an Article 4 area, because lenders are requesting it now. If lenders are requesting it, then if you’ve not got one, then your buyer’s pool is reducing, because you want to make sure that you’re appealing to the most amount of buyers. So getting certificates in place that your development was lawful, making sure you’re on top of your occupancy history. And I’d add into that now, optimizing your HMO. So we’ve just turned down this week, because we’ve pushed back 50 properties probably till next year.

Richard Nicholls (14:28.04)

because we need to go through a phase of optimization in that property to make sure that energy costs, that the rents are where they can be because you’re trying to hit that stable net yield, whatever it is. So plan your exit weeks, months, or even years ahead is basically the point of what I’m saying. I don’t want to be fighting with the right move stock that’s just out there. The HMOs that get listed on right move, you may have tried to inquire them. The estate agent stock.

I want to be working with the best landlords that are preparing their HMOs. They’re running them brilliantly anyway, but then you’re preparing and thinking, so when you do ring me up, which is already happening because I’ve started doing this for last 18 months, they go, right, I listened to what you were saying and now here’s my HMO. Right, here’s your financial template that we get filled in. Here’s all your requests for documents. And they just go, there’s a Dropbox folder with it all in. We’ll get you so much more money for that HMO. If we’ve got to fight and battle through it.

doesn’t seem important because it just seems like, oh, there’s a dickhead estate agent telling you to prepare your HMO for sale, things like But it’s your investment property. It’s got to be investment all the way through to sale and exit. And the amount of properties that comes to us where we’ve got to go through all that hard work when we’ve listed it. Then we’re losing traction to sale. The buyers are going cold. So it’s all about impact and getting that launch right first time. Yeah, and I mean, I covered that.

And the reason why, you wouldn’t believe the negative reasons why people sell their HMOs, it happens all the time. You see these Instagrammable HMOs, amazing companies, amazing sort of power couples on social media with all this. We had one last year where I had a guy phone me up and he says, is that the property around, it’s this Irish guy and it was a Cayman Islands number and he was calling in money, he’s not been paid his interest on his loans.

And I go, and it so-and-so’s property. I think they’re all over social media, the most successful HMO developers. And I’m getting phone calls from the Cayman Island. You know, so it’s out there. People negatively will sell their HMOs. And it can happen to any of us that something can change. yeah, it’s all about make sure your sale is on your terms at the right time. And you aim your product at your perfect buyer B. So that’s basically the point of the talk. So hopefully, that on 15 minutes? Have I done all right?

Richard Nicholls (16:44.828)

I’m such a waffler, I’ve quite well. Yeah, so that is the gist of it. So you’ve got any questions, particularly around that, it’s going to be too boring for everyone. So do it later when we’ve had some beers, I think is probably the best thing to do. Does that all make sense? Everyone kind of familiar with that? It is about thinking about your exit, even while you’re doing the development at the very beginning. When you’re assessing everything, assess your exit, come to me and ask me and think, well, who is my buyer? Because buyer B changes per property, by the way, as well, per location, per who are they.

So keep in touch with me. I’ll be happy to assess and appraise your property three years in advance. That’s not a problem. You don’t have to make a decision to sell. Just run it by me. I’ve had 100 in this week. It’s the day job because I want quality stock that’s prepared properly. There you go.