So you’ve bought a building ready to convert into an HMO. Congratulations, these are exciting times particularly if you are pleased you got the building for a good price. The next step, however, is critical to making the overall project a success. If you nail the quality of the refurb and bring in the costs in line with your projection then you should achieve the holy grail of property investing – creating cashflow whilst realising equity from day 1.
My name is Geoff and I’ve been developing HMOs for myself, my business partners and clients for 14 years, mainly in the North West of England. I’ve done 4 bed HMOs, 9 bed HMOs up to 16 bed hotel conversions. I’ve had some good builders, I’ve had flaky builders, I’ve had outright crooked builders that should have ended up in prison. If Forrest Gump was an HMO investor, this part of the process would certainly be the box of chocolates.
So, employing the right HMO builder, at the right time and with the right brief is critical to achieving your investment goals. We’ve created this 30 step guide to agreeing the perfect HMO builder to help you navigate the murky, and sometimes shark infested waters, that come with the process. Learn from the mistakes that we have made over the last 14 years and hopefully save yourself a few pennies in the process. And if you get me for a beer I am sure I can tell you a fair few tales! I hope this empowers your HMO investment journey…
Write your detailed building specification.
It’s crucial to draft a detailed specification of the refurbishment work. This should outline every task, from electrical rewiring to room configurations, to ensure both parties have clear expectations. Make sure all details are on there, even go as far as to the pantone colour paint you want.
Get 3 builder quotes to compare
Obtaining multiple quotes is essential for making an informed decision. Aim to get at least three quotes from different HMO builders. This allows you to compare costs, timelines, and the scope of work. Some builders will be crazy high, some will be way too cheap. Middle of the road seems the safest but analysing the quotes at each poles is essential. There could be items unnecessarily added in or missed out.
Reviewing the Quote
What format do you want the quote in
Do you want a written word doc, a PDF doc or itemised in excel. Do you want it split by trades or by the room? I personally prefer an excel spreadsheet – it means I can easily add notes to each item. A PDF document is much more clunky but builders can feel like it’s more professional. I also much prefer quotes split out by trade and itemising all jobs across the property per trade.
Is everything in the quote that was on your original brief?
This takes time to assess but go through it and make sure your brief is covered. Watch out for items on their quotes that say “everything is covered in this quote” as opposed to referring back to your brief. If you have 3 quotes in 3 different formats then this part of the process can be painstaking so make sure you get quotes in your required format.
What is the total cost?
Most important question of the day! But don’t look at a total figure and make a decision just on that, you need to get under the bonnet! Easy maintenance tasks within your quote should come in around £200 per sqm, more expensive stuff like adding a new bathroom or ensuite will be around £750 per sqm. A ball park should be £500 per sqm across the whole property assuming a fairly intensive refurbishment but it really depends on the spec that you need and how far the refurb goes, for example do you need a new roof and do you to damp proof course throughout.
Make sure you analyse your build cost in conjunction with your purchase price. Make sure you have agreed the right HMO valuation on the deal before you transact otherwise you may be at the risk of over investing in the deal. We provide Free HMO valuations, just follow the link.
Is the project itemised by job or by trade?
This should be covered in your building spec and request to the building for his quote, however it’s common that builders will provide an itemised quote per trade or per room. I personally don’t like it by the room, it just doesn’t make sense to quote that way or even project manage. Having a itemised quote per trade makes far more sense.
What is cost split between labour, materials and project management?
Sometimes builders can be cagey on this, particularly if the quote is broken down into estimates without trades having been into the property. The builder can also be putting fat into this quote as either contingency for them and/or project management cost for themselves. This can be quite high particularly if the builder is unsure about where real costs will land. 50-60% of costs should be labour and 40-50% should be materials. Once you know this split you will also want to know what VAT is being charged on each because conversions are charged at 5% VAT.
How will costs be managed during the project?
This is such an important consideration to discuss with builders before you start. The worst part about a refurb is having a builder phone up early Friday afternoon begging for money because he has 8 needy trades people that want their £500 so they can go on the lash that weekend. Everyone should be paid fairly but we first need to make sure the work has been done to a satisfactory standard which comes to the approval process. Therefore, decide are you paying week, monthly, per trade or how else. Be wary of builder project management fees that have 75% upfront and 25% on completion – he’s taking his margin upfront for no work! The landlord therefore holds all of the risk.
What is the sign off procedure?
What is the approval process to verify a) work has actually been done and b) the quality of work done before issuing payment. Agree this upfront before commencing.
What budget is held in reserve for final sign off of the overall project?
Some budget should be retained at the end of the project when you sign off the whole project with your builder. This should correspond to the project management fee so the builder who is project managing it gets paid on successfully doing his job. Otherwise what skin is there in the game for a builder to make sure it’s done? I’ve seen it many times where builders don’t complete projects, they’ve taken their money already and there’s no fat left at the end to get it to completion.
Who is the site lead?
You could agree a project with an HMO builder but he’s out winning the next project and you never see him. You want someone accountable. Who will be on site every day to make sure the project is progressing? This is normally a joiner of some site, they are normally first on site and last one off and will see all the trades through the project. Find out who this is before you start, and do your DD – how long have they worked with the builder?
What VAT is being charged?
This can hit a project hard if you haven’t sorted it beforehand. Conversion of HMOs is at 5% VAT however this is only with the principle contractor. If your builder subcontracts out work then the work they provide is still technically charged with 20% VAT.
Who actually is your HMO builder?
Is it a person, or is it a company entity we are paying? What is their company status? Are there multiple company SPVs of similar names? Are some dissolved? Get into the detail of who you are really dealing with and get a feel for their track record.
Do we pay individual trades directly or do we pay the project management company? In which case is there unnecessary VAT on top?
I like paying trades direct – why create extra turnover for a building just to pump up their VAT requirement. That way the builder can invoice just for his project management and/or any trades he has under his direct employment.
Do we have contact details for each of the trades enlisted?
Nothing worse that having a delay on the project because “Steve the spark” just isn’t showing up. Well if you have his contact details you can find out yourself what is going on and try and trouble shoot the problem if you need to get involved. Otherwise the project becomes unnecessarily locked being your builder being a gatekeeper and this can delay the project.
When can they start?
You might find a great HMO builder but they can’t start for another six months. The maturity of your refurb is hugely important, if you spend 12 months refurbishing whilst you have £100k plus in the deal then based on today’s inflation data (2023) you have lost £15k or 15% of your investment in real terms. Time is really of the essence!
What are the timescales to complete the job?
Same as above, your money is deflating so get it cashflowing ASAP. Also it’s important for the HMO builder to put his neck on the line and be S.M.A.R.T – tell me when you will get it done!
How will extras be managed?
Extras will come up, that just happens. Put aside in your head that it will cost 10% extra than what you have been quoted. If there’s a broken lintel or a wall that’s not structurally sound you need to address it and the builder can’t be expected to foot the cost or foresee something unknown. When they come up how will it be managed, cost agreed and paid?
Is there a contract between us and the builder?
This depends on your preference but you should be using JCT contracts with HMO builders. If you are paying a lot of money to the builder upfront then you’ll need contractual protection and make sure that you have a good legal recourse should you need to go to court if it falls out of bed. If your costs throughout are staggered proportionate to the work delivered then you may opt for something more lose.
Security of the site
How will security be managed for the site? We don’t want tools and/or materials being put in the property and them being stolen. We’ve had radiators and copper piping going missing and the builder comes knocking for money to buy more. You want the builder to make sure any materials bought that they are responsible for keeping safe, I am not buying more materials if they have effectively been “lost”. If the property has been broken into then that’s a different story.
What guarantees are offered on the job?
Sometimes builders offer a guarantee for X period of time. This normally comes with a time period and at an extra cost. Find out beforehand and who is the contractual guarantee with? Many of these guarantees aren’t worth the paper they are written on.
Health and safety management
This is easily overlooked but it’s becoming a more important consideration for HMO builders. You can’t just have builders on site without having done a proper risk assessment and someone being appointed “principle contractor” and in charge of health and safety. Someone on the project should be designated to manage the health and safety and ensure everything is safe. Agree this before the start of the project.
Upfront Builder Due Diligence
Do they have all the trades or are they trying to secure the job and then recruit later?
I’ve seen HMO build teams quoting for jobs and then on their Facebook page they are frantically posting asking for joiners and plasterers. Is this because of more work they are taking on or is it because behind the scenes they don’t really have team? Find out more details about what previous projects will help with this.
What insurances do the build company have in place?
If there is an issue on site what personal injury insurance does the HMO builder have? Also what public liability insurance does the HMO builder have?
How does this job fit with other projects they have on-going?
They could also have lots of projects on and they have stretched themselves too thinly. Builders are like bees, they follow the honey. You don’t want them to agree to do the refurb but 2 weeks later take on a few more refurbs that are logistically better placed and at a higher margin. You’ll end up with a project that takes twice the amount of time to complete, and maybe not at all with the same builder.
Is this a good fit for these builders?
This could be a small project and not get any attention. This could be really big for them that they don’t have the experience. Do they have any other distractions like new companies being set up? I’ve seen builders with many SPVs on companies house, and some that have new companies set up the money before they quoted for the work for a company in a completely unrelated field. You need do your DD and get an idea of what the builder is trying to achieve themselves personally. Your HMO refurb project should be aligned with their personal business aspirations.
Look for HMO builders that have some credibility with qualifications themselves, such as Federation of Master Builders, NAPIT etc
Background Builder Due Diligence
What third party verification do we have on this HMO builder?
Get recommendations. But, get into detail of those recommendations – we’ve had builders that have come recommended who are part way through another similar job but haven’t actually finished a successful build before winning the next project to suck the liquidity out of. Get recommendations from clients who have seen these HMO builders through to the end.
Have we seen similar projects that this HMO builder has done?
Proof is in the pudding, show me a comparable project recently. Simple. It’s not much of a problem if they are experienced in BTLs and not HMOs, but what you want to be wary of is a builder saying they do full refurbs but they only do kitchen fitouts. You also have builders experienced in extensions and never really project managed full refurbs.
Does the company have a reputable digital presence?
If the company or HMO builder has little presence then this is a concern. Their digital credibility is an important thing to put on the line, there are many deceptive HMO builders that you want to make sure you working with a good one. You want an HMO building firm that have a reputation that they are effectively putting on the line.
Here’s one last bonus point because lets face it, 30 points clearly wasn’t enough 🙂
What does your DD of the HMO builder personally tell you?
I have had builders who have seemed great when I meet them but their true colours have shone through after engaging them. Do some personal DD where you can – Facebook profiles are great, social media profiles etc. Do they have wife, kids, are they local, are they well connected in the local community. Sometimes you get a feel for someone when you look into the whites of their eyes. Are they a fly by night type builder or are they established in the local area?
Finding the right HMO builder isn’t straight forward. You could compare it to the iceberg analogy where 1/3 of the iceberg above water represents the actual building work, well the other 2/3 under water is actually your preparation, recruitment and due diligence work outlined above. Once you’ve found the right HMO for sale and you’ve got the sale agreed we recommend getting on the recruitment drive. The building team and works is a crucial part of the process to make the deal stack up. Once you’ve got a good builder make sure you look after them and they will look after you in return. Good luck in your journey and if we can help further please get in touch.