Is this the next property scandal brewing – and are investors being sold too many HMOs?

Are developers selling a dream with HMOs or a future nightmare?

As an agent with 15 years in the letting industry, I used to find that when there was a manageable amount of this type of accommodation on the market you could fill the rooms with decent tenants for a reasonable rent.

Over the last few years, companies have sprung up everywhere offering to source, renovate and manage HMOs – with promises of huge returns and future riches.

The reality we are seeing is very different. In my area thousands of rooms have been created, but for a market of maybe just hundreds of people.

This has resulted in:

  • Room rates plummeting.
  • Many unfilled rooms.
  • Lots of problems due to these houses not being built to home this amount of people.
  • High maintenance and annual refurbishment costs.
  • Anti-social issues.
  • High level of maintenance and tenant issues.
  • Quality tenants shunning HMOs due to bad experiences with shared houses.
  • The quality of the HMO tenants is dropping in line with the prices.
  • Many landlords saying that for the first time they are really struggling to find tenants for their HMOs.

This has had a knock-on effect meaning that apartment/flat prices are tumbling due to lack of demand as HMOs have flooded the market and lured in tenants who would otherwise have had their own apartment.

In turn, apartment prices have had to drop to try and compete with HMO prices.

It is the same with the student market as shared houses have taken a real bashing this summer.

The only winners here are the developers who are selling a dream that is not a reality.

They get paid handsomely for sourcing and renovating, so tenanting and managing is just a nice little bonus.

I worry for landlords who have sunk all their money into HMOs, as if the rent does not cover the mortgage you will find an HMO very difficult to sell.

The Government’s attack on landlords financially has created this market as developers have seen the opportunity to sell a dream – but that is what it is – of making thousands of pounds each month in rent from converted terraces.

HMOs have created an over-supply of rental accommodation in our area, with the level of demand not having risen to match it.

To me, this has the feel of the property clubs of 15 years ago that were selling similar dreams with promises of sky-high rental returns that in reality were unachievable.

The end result was that thousands of investors had their properties repossessed and ended up going bankrupt. I have a bad feeling we are going to see this again in the next few years.

The only winner I see in the long run is the developer.

As always, the freehold family homes have performed well in the rental market and this is the property type we advise all of our investors to look at.

I would be intrigued to see what other agents’ thoughts are on this.

I am sure that in places like London, demand will always outstrip supply, but I do not think this is the case for the rest of the country.

* Bill Rockett owns Rockett Home Rentals, in Newcastle-under-Lyme

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3 Comments

  1. Mark Walker

    I am not sure that this is a property scandal in the sense of scandals where there is some redress likely.

    This is more caveat emptor.  There’s no subterfuge here that some common sense due diligence and risk management could not uncover any potential issues.

    My home city of Lancaster has seen and is still seeing the construction of masses of new build student accommodation and refurbishment into student accommodation of any empty commercial properties.  I will be pleasantly surprised if it is all filled.

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  2. Vanessa Warwick

    Well done to Bill at Rockett Homes and EYE for highlighting this issue.

    It is something that the Property Tribes community has been discussing for some time as there have been many people who share similar concerns to those expressed by Bill in the article, including myself.

    HMOs are typically the domain of more experienced and “hands on” landlords who have a track record of managing tenants in single occupancy properties.  Lenders definitely like to see a degree of experience, as, wherever there are higher rewards, there are higher risks.

    Most of the companies offering these HMO deals operate in a sector that is completely unregulated.  They can make huge unsubstantiated claims about returns and occupancy levels and attract in people who want to “get rich quick” and have no clue as to the reality of managing an HMO or their many responsibilities as a landlord.

    This mentality/sentiment is bad for tenants, bad for the local area, and bad for the sector in general, especially when there is so much anti-landlord propaganda being spread at the moment.  It can incite headlines like “Greedy landlords turning to multiple occupancy properties for higher returns”, with stories of tenants being packed in like sardines in non-compliant HMOs.

    Of course, if done correctly in a suitable area, typically where Article 4 is in operation, HMOs can be a lucrative strategy, but they are not for the faint hearted or the newbie imho, especially with stricter legislation coming into effect on 1st October.

    This article has proved to be a real “conversation starter” both on Property Tribes and on the facebook property groups, so thanks to EYE and Bill for creating greater awareness of the issues surrounding HMOs.

    As a result of this article, I have arranged to follow up with Bill with a video interview, so I will share that on my next “Landlords Barometer” column.

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  3. GeorgeHammond78

    Would echo VW’s comments, HMO’s only work if undertaken as a full time business by a hands-on Landlord. Letting Agents however good they may be at ‘normal’ letting don’t have a clue how to manage the intricacies of an HMO. To do so, they’d have to invest a huge amount of staff time and energy to properly manage and that would require proper payment – ergo, a hands-off HMO landlord would lose the majority of his income and that ain’t the point of an HMO is it? High risk equates with high returns if managed on a very strict basis but the number you see on new build estates where the owners are sleep-walking into an expensive disaster is frightening.

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