Buying A HMO Property In Edinburgh - What's Involved?

If you are considering buying an HMO property in Edinburgh you’ll need to understand the process of buying and letting a property, particularly if you’re not familiar with the Scottish system for buying and selling houses. It’s important to be familiar with what happens before and during the transaction process if your goal is to let out a high-quality residential HMO property.

At Cullen Property, we have decades of experience in Edinburgh’s residential property investment market, and are a trusted and registered Edinburgh Letting Agency which specialises in the ongoing long-term management of HMO property in Edinburgh. We also provide a sourcing and acquisition service to help clients purchase HMO properties with the best rental potential and investment returns. 

Buying A HMO Property In Edinburgh – Pre-Transaction

If you have not bought an HMO property in Scotland before, the typical sales scenario starts with the seller obtaining a Home Report at their own cost (usually around £600). The home report provides independent information including:

• the condition of the property, including any repairs required
• A valuation provided by a chartered surveyor
• Background information about the property such as council tax band and previous alterations
• An Energy Performance Certificate describing the energy efficiency of the home

Once the Home Report is obtained, the property is put on the market, most typically with an asking price of ‘offers over’ a price which is usually slightly below that stated on the Home Report valuation.

Viewings are arranged for prospective purchasers, and there are often ‘open door’ viewings between set times (typically 7pm-8pm Thurs, and 2pm-4pm Sun) as well as at other arranged appointment times.

Interested parties can ‘note interest’ meaning that their solicitor advises the selling solicitor that they may be interested in offering/bidding for the property. The seller can negotiate or accept any offer at any time. However, if there is good interest from several parties, a ‘closing date’ may be set and all prospective purchasers who have noted interest are invited to submit their ‘offer’ via their lawyer.

Once a closing date has been set the seller and selling solicitor should honour that and cease any discussions or negotiations until all parties have had the chance to offer. Although, it’s important to note that this doesn’t always happen.

These offers can be either below, at, or in excess of the valuation, although the latter is usually the case. Offers are often submitted ‘subject to’ various conditions such as; mortgage, entry date, roof report, etc but usually the highest offer is taken by the seller. However, the seller can also accept any offer or may choose to not accept any at all!

Buying A HMO Property In Edinburgh – Transaction

Once an offer has been successful, the purchasing solicitor will request title deeds, coal board reports, roof reports, financial charges (over the property) reports and any items that were listed under the ‘subject to’ matters in the offer. These might include tenancy documents (if being bought with sitting tenants), safety certificates, HMO licence or guarantees for previous works (such as roof and wood treatments, etc). The purchasing solicitor will also require proof of any mortgage offer which is being used to buy the property.

Once the purchasing solicitor is completely satisfied that everything is in order, he/she will ‘conclude missives’ (this is the Scottish equivalent of ‘exchanging contracts’) on behalf of the purchasing client.

The purchaser is not legally bound until conclusion of missives has taken place which is usually 4-8 weeks later and often just prior to completion/entry date.

On the completion date the two lawyers confirm that funds have been sent/received by one another and the purchaser can then collect the keys from their solicitor.

Thereafter, the purchaser has seven days in which to notify their solicitor of any issues which may be wrong with the property (e.g. boiler not working) and the seller can be held liable to put anything right which was part of the contract of sale.

One very important point to remember is that if the buyer is buying a property with an existing HMO licence in place and looking to ‘renew’ it in their own name, the buyer must be a registered Landlord before the date of completion, otherwise the existing licence will be deemed to have lapsed and a brand new application will need to be submitted. This can take 2 - 6 months and the property could not be marketed or let until the HMO licence has been issued.

Buy-To-Let Mortgages

If you are taking out a mortgage to buy your HMO, you will need to inform your lender that you are intending to let out the home. Most mortgage lenders offer a product called a Buy-To-Let mortgage for this purpose and they will insist that you take out one of these when borrowing for an investment rather than a home that you are going to live in.

Buy-To-Let mortgages can usually be taken on a repayment or interest-only basis, giving you the choice of paying a smaller monthly amount on the basis that you will pay off the main amount when you sell the property.

Fees And Costs

There are several costs involved with a buy-to-let property that are different from those paid when you buy a house to live in. 

Firstly you have the Land and Building Transaction Tax (LBTT) which is paid on any purchase from £145,000 upwards. The tax starts at 2% and goes up to 12% for the top range of properties, with a purchase price of £750,000 upwards.

You also have to pay an Additional Dwelling Supplement of 8% on second properties of £40,000 or more. This is a ‘slab tax’ rather than a progressive one like the LBTT above. I.e a purchase price of £300,000 will attract and ADS tax of £24,000.

Finally, remember that your investment property will be subject to Capital Gains Tax when you come to sell it again.The rules are complicated and so we suggest that you take professional advice at the time.

Becoming An HMO Landlord

Of course, buying your property is just the start and there are multiple steps to take before you can start letting out the home. By far the easiest approach is to engage a specialist Edinburgh HMO letting agent from the start. There are many conditions to fulfil when it comes to getting an HMO licence, and having an expert on your side can make the whole process much more straightforward.

A good HMO letting agent will work with you to obtain all the necessary licences and submit your application to the council, then liaise with the council throughout the approval process to fulfil all their requirements. They will also look after all the necessary repairs, maintenance and regular safety checks to ensure that you are compliant with the relevant laws and regulations.

When you are ready, with your HMO licence in place, your letting agent will be able to help find and vet tenants, arrange tenancy agreements, collect deposits and rent, and deal with ongoing communication with tenants.

Your HMO licence has to be renewed every three years. If your letting agents are on top of your certificates and maintenance, there should be no issues when it is time to renew.

If you have any questions at all about buying an HMO property and obtaining a licence, our experienced team is just a call away.