Best property development finance tips
It’s no secret financing a property development project can be a challenge.
There are a variety of financing options available, and each has its own set of pros and cons.
To help you get the best possible property development finance for your project, keep this list of the best property development finance tips in mind.
Know your finance options
When it comes to financing your next or first time development project it’s important you know the options available to you.
The type of project you want to take on will determine the finance option you will want to go for.
Are you looking to do a new build or a conversion or refurbishment project that needs a lot of structural work?
If so, you will need to look into property development finance. This is a specialist finance option designed to fund projects from the ground up and complicated conversions.
Typically a property development loan will be split into two parts.
Initially you have a tranche of money for the purchase of the site or project, then you will have the rest of the facility available to cover the build costs.
These are provided in arrears stages, provided as the project progresses.
You will find the costs of property development will vary depending on various criteria including loan amount, experience, location and type of project.
If you are looking at a refurbishment or perhaps a conversion with limited structural work a bridging loan should be a good option for you.
These sorts of projects are looked to be less risky than a new build so you can get some very good property development finance rates and terms.
They work in a similar way to property development finance in that you will have a portion to buy the project and a facility to pay for works, in arrears stages.
Do your research
No matter what the project you will be investing significant amounts of your own money into a project. (Even joint venture finance requires you using some of your own capital)
With that in mind, being armed with information is the next best property development finance tip.
Knowing the local property market is a must for a successful development finance application and project.
There is no point building a large detached house in an area where flats are in high demand.
There are plenty of online tools, such as Rightmove and Zoopla you can use to see what the local market demands.
You can also talk to local estate agents to get their opinions on the local market.
Researching the likely costs of work is very important.
You will be carrying out a project to make a profit, underestimating the cost of a project can significantly eat into those profits.
It is also worth researching local contractors and trades people. The chances are you won’t be carrying out all the work yourself and will need someone to help.
Knowing, from the start, who you can rely on will help make sure your project stays on time and budget.
Work with a reputable lender
The market has plenty of reputable lenders who are keen to help you succeed and work with you for the long term but there are those who are just interested in taking as much of your money as they can.
This is where using a quality development finance broker can help.
If you do go to lenders directly, it is important to know who you will be working with.
Keep in mind, you are going into business with these companies and they are the ones that hold the purse strings.
Without the support of the lender your project could be doomed to fail.
You should look into any lender before you deal with them – are they well funded, are they experienced in your type of project?
Get pre-approved for a loan
You can talk to lenders, or a broker like me, and see what finance may be available for you.
The specific loan amount you can borrow will be determined by the project itself and the various parameters lenders use to calculate what they can lend.
But, before you find a project you can talk to me about whether I think I would be able to find finance for you, assuming the project is sound.
Even if you are looking for first time property development finance, I can help, so your own experience doesn’t have to be a barrier to finance.
Presentation of the facts
While well presented cases won’t necessarily make the difference between a successful and failed application lenders (and brokers) do appreciate a well put together proposal.
It is very helpful for anyone looking at your case for the first time to be able to easily find the core details of the proposal.
The purchase price (or current value), build cost, end value and how much you need to borrow should be very easy to find – it’s the first thing we all look for as they are the basis of whether a project will work or not.
The figures should also be realistic, lenders will have various professionals such as valuers and Q.S.’s to verify them so exaggerating will only end up wasting your time and money.
When it comes to the application forms they should also be filled out as fully as possible.
No one likes filling them in but lenders will all ask for them so it’s easier for all if you just do what’s asked during the application.
Consider the total cost of the project
Most of the conversations I have around property development finance focus, initially, on the likely rate a client might pay.
For some finance the rate is the be all and end all, such as a car loan or mortgage. Those are lend and forget models where you and the lender need not talk to each other again for years.
With property development finance the realist is different, you will be talking to the lender every few weeks throughout the build process.
It’s important you can work with the lender and if they are slow at releasing draw downs, the cheapest rate in the world will harm your project.
There are also various other costs you need to be aware of what will affect the overall cost of a property development loan.
Arrangement fee, exit fee, Valuation report, Q.S. (quantity surveyor) report, Non utilisation fee, legal fee and broker fee. There are also other, less substantial fees, charged during the loan.
Find out more about property development finance fees and rates.
The effect of these fees can make a significant change to the total cost of your property development loan.
In particular look at the arrangement and exit fees, these are normally the biggest fees charged.
In some cases, a lender will charge the exit fee based on the end value of the project. This can skew the total cost of a loan in the lender favour but keep a low rate so the unwary can be caught out.
Create a realistic budget
Before you take a property development finance application too far it’s important you have a realistic budget.
The value in a development project is at the end, when you can sell it for the maximum profit.
Having a build budget that’s not enough will hinder you being able to finish a project and cost you by missing out on the maximum profit.
You don’t want to risk losing credibility with a lender if you come to them with what they would deem or find out to be too low a budget.
Not having a realistic budget can also make a project look a lot more attractive than it actually is.
Have a contingency fund
With the best will in the world, no matter the level of experience, projects can hit snags which cause a build budget to increase.
Having some spare cash built into your build facility or in your bank can be a very valuable tool to be able to call on.
With issues ranging from archaeology reports being needed to the cost of materials increasing, there are numerous ways the cost of a project can increase.
Having a good contingency fund gives you peace of mind that your project won’t fall short if something you didn’t expect crops up.
Most lenders will insist on you building one in to the facility, or will do it for you, to try and protect against the unexpected.
Choose the right property
You can’t guarantee a profit at the start of a development project but you can guarantee it will lose you money if you buy the wrong property or site.
You need to look at the location, condition, planning, cost and demand for the finished development project.
Property development finance costs you more the longer you keep it, so having a project you can be out of quickly can make a big difference to your project profit.
Some clients fall in love with the property they want to buy which can cloud their judgment. This is a business transaction and should be treated as such with analytical thinking.
Hire an experienced contractor
Having the right people on your project is also crucial to a project being successful.
Some developers don’t want to do the work themselves, they are better at finding and making opportunities so they prefer to employ a main contractor.
Those looking for first time property development finance also do the same, as they lack the experience themselves to run a project.
An in demand contractor might be more expensive but any savings in someone less qualified can soon be lost in delays and bad workmanship.
Understand the building process
Learning as much as you can about your craft is always a good idea and it’s no different in property development.
There are numerous hurdles to overcome when developing property so make it your job to know as much of it as you can.
From the planning process to building to the right standards, it’s all important to understand and be comfortable with.
Get planning permission
Although you can start a property development loan application without it, you won’t be able to draw down funds without it. (There are some lenders who will help you buy a site without planning, at reduced loan to values)
Starting a property development finance application without planning is risking your time and money on the various reports and costs you will incur during an application.
When very confident planning will be granted some developers are happy to take that risk.
You shouldn’t start to build before planning is in place and when it is, you must build in line with what’s been granted.
Stay organized and on schedule
Property development can be a very lucrative business to be in but to maximise profit and minimise the risk of spiraling costs you must be organised and stay on schedule.
Most lenders will ask for schedule of works before they fund your project. Those figures will be given to their various professionals to confirm they are realistic and accurate.
Not sticking to the plan can not only cause lenders concern it can become costly.
Delays end up costing more in interest which will bring down your profit.
Lack of organisation can also be a big problem. Having too many trades on site at once or in the wrong order can all be avoided along with the additional costs mistakes will bring.
Be prepared for the unexpected
Even the best run into problems so they should be expected.
For the most part, as lenders will work with you to resolve issues it’s more about how you deal with them rather than if problems will crop up.
Have a exit strategy
Before taking out a property development loan you should have a clear idea of how you will be repaying it.
For most developers the exit will be sales to pay off the development finance.
Equally valid is refinance either on a long term option, such as residential buy to let mortgage or a short term development exit facility.
Development exit finance are a relatively new addition to the range of loans bridging companies provide.
They can work in two ways.
Once a development project is wind and water tight, you can refinance on to a development exit facility which will have lower rates than your development loan.
It gives you lower rate finance and an additional period of time to complete the work and get a sale. Even with the costs to set a development exit loan up, it can still be very cost effective.
Property developers also use development exit to “buy” extra time to achieve a sale.
For example, if you have a 12 month development loan term with only 6 weeks left it won’t be long enough to get a sale through.
Development exit can be used to give you another 12 months to get a sale and stop you going past the development loan term and into potentially very high default interest rates.
Keeping these best property development finance tips in mind will help you get the most from your project and property development finance application.
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