Valuing HMOs in the UK: Navigating Licensing, Space Standards, and Mortgage Assessments

The valuation of Houses in Multiple Occupation (HMOs) in the UK is a nuanced process that balances local authority licensing standards, planning considerations, lender policies, and market dynamics. For investors and buyers—especially in cities like Portsmouth where housing standards and market demand intersect sharply—understanding how these forces interact is essential. 

The Nitty Gritty

This article explores the complexities of HMO valuation through the lens of a real transaction involving a licensed four-bedroom HMO that was only valued as a three-bed by the surveyor. We'll also clarify space standards, licensing categories, and how mortgage providers approach risk. As is often the case this article is based on a real situation and a discussion between 5 of our members when one hit issues with a valuation on a property she was buying.

The case in question concerns an existing HMO licensed for four occupants, with planning permission in place and a current licence issued. However, the valuer—acting for a lender—chose to value it as a three-bedroom HMO, citing inadequate communal space.

This situation highlights a key tension in HMO valuation:

• Local authorities may issue licences using discretion, especially for existing use cases that narrowly miss current published space standards.
• Valuers, particularly those instructed by lenders, often take a conservative stance to mitigate liability. If the communal space or room sizes fall short of official standards, even slightly, they may assume future licensing changes will reduce the occupancy.

As Sarah, a peer contributor, pointed out, even where a five-year licence has been granted, some lenders will not consider the fourth room in income calculations if they fear the property may not meet standards in the future. This affects the Interest Coverage Ratio (ICR) and borrowing potential, regardless of the property's current legal use.

In Portsmouth (PCC) and many other local authorities, published HMO standards are divided into two categories:

1. Space standards for new HMOs, for properties undergoing increased occupancy or physical enlargement, including new planning applications.
2. Standards for HMOs in existing use, where no change to occupancy or property size is being made.

This distinction is critical.

From a licensing standpoint, simply buying an existing HMO does not make it "new." The standards apply based on the property's configuration, not the identity of the owner.

Sarah summarises this well: "In the standards document there is no mention at all about whom is the licence holder/owner, just the use and size of the property itself..."

This means a buyer of an existing licensed HMO should be able to renew the licence under the existing-use standards, provided no alterations are made to occupancy or layout.

• Applying to increase occupancy (e.g., from 4 to 5 occupants).
• Submitting a planning application for physical enlargement (extensions, loft conversions).
• Change of use (e.g., converting a single-family home into a new HMO).

Minor internal modifications, such as removing a wall to increase communal space, typically do not trigger reclassification as a new HMO. In fact, licensing officers often encourage such changes in existing HMOs to help them meet amenity standards.

As Alice and others noted, the most significant constraint may not come from the council—but from lenders and their valuers. They often apply space standards rigidly, even where councils have exercised discretion.

This has direct consequences:

• Lower valuation: If a 4-bed HMO is only valued as a 3-bed, the capital value can fall, particularly under an income-based approach.
• Reduced lending: Mortgage offers based on projected rental income may decrease if one room is excluded from income calculations.
• Saleability risk: Future buyers may face the same issues, reducing liquidity.

1. Verify the Licence Terms
   Check if the licence explicitly limits occupancy to three or four, and whether any conditions or caveats are noted (e.g., improvement works required).
2. Contact the Local Authority Early
   As Heather suggested, contact the licensing officer to confirm how the property will be assessed on re-application.
3. Assess the Gap to Minimum Standards
   Work with a specialist (e.g., HMO consultant or architect) to determine how close the property is to meeting standards for communal areas and room sizes.
4. Consider Reconfiguration
   If the communal space is only slightly under the threshold, minor changes (e.g., knocking through partitions) may bring it up to standard and support a 4-bed valuation.
5. Know Your Mortgage Lender
   Some lenders apply stricter interpretations than others. If your valuation comes in low, another lender with a more flexible valuer may be a better fit.
6. Prepare Evidence for Tribunal
   If challenged, documentation showing the property's licensing history, current use, and space configuration can help justify a 4-bed classification.

The valuation of HMOs remains a grey area where planning, licensing, and lending practices don't always align. Buyers should proceed with caution but also confidence—understanding that council officers have discretion, existing-use standards can apply, and marketability depends not just on bricks and mortar, but also on how well you manage risk and regulation.

As the shared discussion shows, even seasoned investors face setbacks, but with a strategic approach and careful due diligence, many issues can be mitigated—or avoided altogether.