Why MUFBs do not behave like the rest of the buy-to-let market
By Molo Finance
The multi-unit freehold block (MUFB) is the lesser-known part of the story when it comes to properties brokers place. HMOs get the airtime, while MUFBs are routinely valued at 10% to 20% below the figure a landlord has modelled their deal on.
The investor profile is shifting too, with around three-quarters of new buy-to-let purchases now made through limited companies. Landlords coming into the market look less like someone topping up a pension and more like an investor with a structured business set up. MUFBs tend to suit the latter, but they also carry mechanics that catch out borrowers who assume they are buying a slightly larger single let.
Before starting an MUFB application
A multi-unit freehold block is a single freehold title containing two or more self-contained flats, each with its own AST. That is the line that separates an MUFB from an HMO, where rooms are let individually and shared facilities sit at the heart of the property.
It is also the line that separates it from a block of flats with individual leasehold titles, where the freeholder and the leaseholders are different parties. Get the definition wrong at fact-find and the lender list can narrow quickly before underwriting has even started.
Finding the right valuation
Valuation is where MUFBs most often surprise borrowers. A smaller block of two or three units is typically valued on a bricks-and-mortar basis, with the surveyor looking at what the property would be worth if sold to another investor or, in some cases, broken up. A larger block, or one with a layout that does not lend itself to standard residential comparables, may be valued on an investment basis with the rental income doing more of the work.
The figures returned by each method can be materially different on the same property. A landlord who has modelled their deal on the sum of the individual flat values is often working from a number the lender will not recognise.
Another consideration is what the property is consented to be. A converted Victorian terrace running as four flats is only worth its MUFB valuation if those flats have the right planning consents and meet building regulations for such use. Conversions done informally, and without sign-off, become a problem at survey. Also, blocks where the freehold sits alongside any commercial element preclude most buy-to-let lenders from considering.
From an underwriting perspective, an MUFB is viewed differently than single lets.
The argument that complex buy-to-let like MUFB produces a yield premium is true on the gross numbers but is only sometimes reflected on the net.
Where MUFBs hold up better than the headline suggests is in void risk. With five units on five separate Assured Periodic Tenancies (APTs), a single tenant leaving is a 20% reduction in rent for a brief period rather than a 100% void on a single let.
What it does not protect against is the cumulative cost of running five tenancies and all that comes with them, from gas safety certificates to EPCs. A five-unit MUFB EPC is five smaller problems, often with different starting positions depending on which unit was converted when and to what specification.
The Renters’ Rights Act
The Renters' Rights Act is the other change to factor in, with phase one now live in England. For a block running five rolling APTs, the landlord loses some co-ordination across the units, but no single tenancy can sink the whole property's cashflow.
What separates an MUFB case that gets the green light from one that lingers?
The right cases
Cases that complete tend to share a few patterns, and most of them come down to the landlord having done the thinking before the application form is opened.
They know whether the block is being bought to hold as a single investment or potentially split into individual leasehold titles later, with each route having a different impact on the structure of the deal.
The conversions are already consented, and the units meet minimum sizing. There is an honest view of which units need work to achieve EPC C and how improvement work fits in with upcoming remortgage dates. And the valuation basis has been thought through early, rather than the borrower assuming the highest of the possible numbers.
Spotting potential hiccups in an MUFB case
The cases that tend not to complete share the opposite. The borrower has bought into a gross yield headline that the surveyor does not agree with, or they have inherited a block whose conversion history is murkier than the seller suggested. Perhaps they have not separated in their own mind the difference between an MUFB and a small leasehold block.
MUFBs reward landlords who treat them as the operating businesses they are. They are not a starter property type, but they are not the high-wire act some assume either. MUFBs sit in the middle of the slightly more complex buy-to-lets and deserve attention.
On an MUFB case, the work earns its keep before the application goes in. By the time the valuation is returned, the all-important conversations are noted and factored in.
For adviser use only. Please note this content has been supplied by our lender partner and as such, is their responsibility. No party shall have any right of action against Legal & General in relation to the accuracy or completeness of the information in this article.