HMO Conversions masterclass

In the second part of our focus on how to make HMOs work in today’s market, Alex Daley really drills down into the detail with a duo of experts on planning and conversions. If you want to get it past the council you need to read this

Last month we sat down with Rick Gannon, who gave us a good overview of the HMO strategy. If you missed that, it’s a great place to start, go back, give it a read and we’ll see you back here in about five mins….

You’re still here…

Why haven’t you gone back?

OK good you’ve read it now, we can continue.

This month, we take a deep dive, getting into the nitty gritty with HMO Architects founders Ryan Windsor and Giovanni Patania. Their assignment was simple, give us the details that we all want to know and skip all the surface-level stuff. They understood the assignment.

Giovanni Patania and Ryan Windsor

Rick, last month, was very adamant the best place to start with HMOs was creating them yourselves. So, let’s kick-off, what sort of properties might you look to convert?

“The most typical kind of conversation are family houses, usually three beds converted to six bed HMOs with a rear and dormer extension. These are great ways to add value.”

Patania explains.

“Investors need to familiarise themselves with full compliance with HMO development, they don’t want the council coming around and threatening planning enforcement, the investor needs to be compliant with not one, not two but three sets of regulations. Each one is completely separate and independent from the others. Planning, building control and licensing. A lot of investors make the mistake of thinking planning and licensing are the same thing, it’s not true, they’re separated, different council departments who rarely speak with each other,” he continues.

Windsor, who we also interviewed about his own portfolio-building experience which will be released in the next issue was keen to reinforce just how critical this is.

“I can’t stress this enough, we probably get five calls a day wh people have developed a property, and done everything right but haven’t done the very simple change of use. They keep referring that they’ve got the licence but the planning change of use can cause a lot of problems - with the mortgage lender or council.”

PROPER ARTICLE

Article 4 direction is a phrase you often see mentioned on the Facebook group, often abbreviated to A4, it essentially means the removal of permitted development. I.e., the right to develop certain aspects of the property without seeking permission.

Patania explains: “Normally HMO conversions

up to six occupants can be done from a family house to HMO under permitted development (PD), but in some areas, where the concentration of HMOs becomes unreasonably high, the council try to balance family and HMOs. This is often no more than 30% in an area - postcode, or area of the city, it depends on the council.”

He continues… “A4 is a tool to remove the PD rights that normally you’d have. It doesn’t mean you can’t do HMOs but it means you have to apply. This depends on the council, sometimes it’s black and white, and sometimes you can get an HMO through.”

INSIDER KNOWLEDGE

Now for the good bit - Patania was able to explain exactly what the council looks at when deciding whether to grant or not.

“There are three deal-breaking categories, in our experience, if any of these applies, you can’t do an HMO, doesn’t matter how beautiful the design or spacious the rooms, you won’t get it through,” he says.

1. Concentration - for example, Liverpool has a threshold of 10%, Kensington in Liverpool has 43% concentration and A4 came in, so in Kensington Liverpool, there just won’t be any more HMOs. Other areas are maybe 4, 5% so you can still convert HMOs. Having a relationship with the council here makes it easier to find out concentration etc, some councils make it easy, some don’t and it’s quite complex.

2. Sandwiching - some councils won’t allow an HMO conversion if the property is attached to another existing HMO or if there is one just one property away from your one, assuming terrace houses. If this policy is in place, it’s black and white. And this is regardless of the number of occupants, the policy will apply.

3. Size - we see this often in London and its surroundings, where they really want to protect specific types of family housing stock. Some councils will say if the property is bigger than 120sqm (for example) they might accept conversion. If it’s less than that, they want to keep it for families so will say no. They still complain if the property is only a little above the limit. The safe way is to buy a property well above the limit they set. e.g if it says 120sqm, you ideally have 150 sqm.”

The key learning here is that just because there’s an A4 directive in place, doesn’t necessarily mean it’s a no go. There may be pockets where there’s potential, there are other pockets where you’d get laughed out of the door. This is partly where Windsor and Patania, along with their team, can help.

“We offer a specific service to do all of this due-diligence pre-purchase. Reports, design appraisal, sketching, basically highlighting all of the risks and constraints. We’d rather do that and if it’s a real bad situation with one of the deal breakers, we’ll tell you and you don’t waste time and money.”

ORDER, ORDER I SAY!

So, the question then is, where does this all fit within the buying process? What’s the order? Do you buy, apply and build? Do you apply, buy, and then build?

Windsor says: “If you can do an offer on a property subject to permission that’s the dream, but you have to get the other party to agree, many sellers won’t want to. Most of our clients will come and speak to us, we’ll give them some general advice in terms of how to assess deals, they’ll go away, do their viewings and run their calculations, discount a few, and then they’ll come to us on a pre-purchase consultation call. From that we’ll work with them to discount any of them, and prioritise the remaining into a preference order. Then they secure it, we then do more due-diligence and then they make the final decision on whether they push forward.

“We always want to get as much of planning application done as we can before they actually take on the property and take on the liability of the mortgage or the bridging (to minimise time paying financing costs, this can save thousands),” adds Windsor.

On timelines, he told us: “On an average HMO we’re looking at six weeks to submit an application and then the council on average, you’re looking at three months for their decision. One of our colleagues who was head of planning in her council said that, on average, a council officer should have 10 applications on their desk at any time, she says many have over 170 on their desks at the moment which is just mental.”

OTH Mag wishes to go on record here to say that on hearing this, our interviewer, Alex Daley, cracked the gag “must be a pretty big desk!” Which was greeted with absolutely no laughter. Not even a pity laugh. Whilst Windsor and Patania may know what they’re talking about when it comes to HMO conversions, they clearly don’t appreciate good banter when they hear it.

FAILED BANTER ASIDE…

But look, there are negatives to this whole conversion business as Windsor explains: “If you get the wrong advice you can get scuppered straight away, it can be more of a risk. With any development, there’s a risk, during the pandemic building sites got shut down for example. It can also open up a can of worms, when you knock down a wall, you might see more problems than you bargained for, so you need a contingency fund at all times. Of course, having the right build team involved is key.”

Final words from the gents: Windsor - “I always try to look at loft conversions, they cost about £35-40k depending on where you are in the country but can see a great return on investment, we often see 20% ROI from that based on what they bring in. Let alone value add. Some of our clients will even offer that room

as an AirBnB room.”

Patania - “Many people underestimate how slow councils can be, so if they’re using bridging, they really need to take this into account. Managing timelines is one of the biggest challenges.”

And there you have it, we’ve snorkeled with one of the most known HMO investors in the UK last month, taking a good look at things from a high-level perspective, and now we’ve gone deep sea diving with the detail-crazed HMO architect nerds.