First time property development finance

I’m a first time developer can I raise development finance?

Property development can be a very lucrative business, particularly in a good market, with good profit to be made. 

I am asked regularly by clients who are keen to start a project but don’t have any experience and need first time property development finance to fund the venture.

The great news is that absolutely, you can borrow money even as first time developer and I have options to suit all kinds of projects. 

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Property development finance for first time developers - what are the options?

Not all lenders will fund first time property developers though that doesn’t matter as there are plenty that will. 

There are two main types of first time property development finance you can apply for. The first, for development projects that don’t have too much structural work, would be bridging finance.

The second option, for projects that do require more structural work, such as ground up builds or large extensions, is full property development finance.

Bridging Finance used to be seen as a borrowing option of last resort. Traditionally used when a client wanted to buy a property before the sale of an existing property had gone through. 

In recent years property developers have been using bridging to fund their projects.

The loan products the bridging lenders provide have become more diverse and flexible making them a potentially valuable tool a first time property developer could use.

Lenders will help you buy the project property and also provide you with the funding to cover the cost of the work required, in arrears stages.

With so many bridging lenders in the market the rates and costs have fallen sharply over the last few years as lenders fight for business. 

Bridging finance makes for ideal first time property development finance as it makes your project more profitable and easier to get the finance in place.

If your project is new build or needs a lot of structural work you will need first time property development finance.

As a first time property developer this can be more difficult to arrange as the projects that require it are more complex. This pushes development lenders to prefer funding experienced developers who have experience and proven they can cope if there is an issue. 

However, there are a couple of ways you can get first time property development finance as a first time developer.

If you have carried out a similar project as a contractor or as an employee of a contractor or builder the experience you have is acceptable for some lenders.

Alternatively, you can have either a main contractor do the work for you or employ a project manager to run the site on your behalf. 

As long as the person running the project has the required experience lenders will  be happy to give you the first time property development finance you need.

How to access first time property development finance as a first time developer

First time property development finance can make or break a project for any developer regardless of experience. This is especially true for first time property developers.

First you need to be approaching quality lenders who have a good reputation in the industry. 

The company you chose to work with needs to be strong and stable so you know they aren’t going to run out of money part way through your project.

They also need to be experienced in funding development projects.

As you progress through a project your are bound to come across hurdles and delays. A good quality lender will help you through them to keep the project moving along.

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What information will be needed?

As a new developer with a first time project, the information you will need to provide will be looked at in detail by the bridging and development lenders.

Before going to your lenders with an application you should have the following:

Purchase price: experienced developers will tell you a project can succeed or fail depending on how much you pay for a site or property, long before any work is done. 

Paying too much for a site won’t sit well with a lender who will have an independent valuer give their value of opinion.

If the valuer doesn’t agree with your purchase price, the lender will side with the valuer and offer you property development finance based on the value they give it.

Build costs: To assess whether a project looks viable, the build cost is a huge factor. If the cost of work is too high it will take away too much profit from a project and make it not worthwhile. 

For an initial enquiry I can discuss just the costs without detail but to get a meaningful decision from a lender will require some detail.

At all times I would recommend providing costings as detailed as you can. As a first time property developer looking for finance, having detailed costings will give a lender some confidence you’ve properly assessed the project. 

They can also take you more seriously than if you just give a basic number without the workings out to show how you got to the final figure.

I work with clients who have used software to get their build costs to those who have had a builder put figures together for them. 

Lenders will have expectations of the total cost based on the cost per square foot, being too low will have them questioning your project.

End values: the Gross Development Value (GDV) of the project is, quite obviously, the most important figure you and lenders will look at. 

I do occasionally have conversations with clients who don’t know what their GDV is likely to be, which immediately puts them on the  back foot. 

Without knowing the end value, there is no point in discussing a project as that final figure will make or break an application.

As with the purchase price, the development lender will have the GDV verified and commented on by an independent RICS valuer.  So, exaggerating the end value will not help you, no matter how tempting it might be.

Development CV: even when applying for first time development finance as a first time developer a lender will ask for your CV or background in development.

Having carried out a similar project for a client or an employer will give some lenders enough faith in you to back your project with you in control. 

If you have no experience at all you can compensate for this by employing either a main contractor or project manager.

There is no point exaggerating your experience as you will be found out during the process and it will hurt your credibility. 

Your capital: as a first time property developer you will need to have capital to put into a project. 

The lenders who provide joint venture funding will not be willing to fund a developer without experience, so capital will be needed.

The more you can put in the more keen a lender will be to back your project. They all have their own criteria on maximums but bringing down the loan to value will be attractive to development finance lenders.

To give lenders confidence in your application it is important, I think, that you know how much capital you have available to put into a project. 

As with all the figures above the level of capital can make or break the development project. 

Lenders will not put time to an application without knowing how much you are going to need to borrow.

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The benefits and drawbacks of property development finance for first timers

Property development finance is vital for some developers, particularly those who are looking to take on their first project.

There are several benefits to have development finance for your first project.

The most obvious one is your own capital will limit the size of project you can take on. Using development finance will give you access to larger projects, leveraging the capital you have. 

Both bridging and development finance tend not to need interest payments until the end of the project. Not having to make monthly payments is a boost to your business cashflow. 

With so much competition for business another benefit of development finance is the rates are relatively low, even for first time developers.

Development finance is available on a wide range of projects and properties. No matter what you are planning to take on, there will be development funding options for you.

There are some draw backs to this type of finance, such as personal guarantees. Even if you are applying as a limited company, all directors will need to give a guarantee for the loan, so if there are issues you will be personally liable.

The application process can be quite complicated with various paperwork needed to satisfy lender criteria. 

There are several fees you will need to pay, before you get the development finance in place. You will be expected to pay for a valuation, Q.S. report and both your and the lender’s legal fees. 

These fees are payable as part of the process, so you have to spend it without guarantee the loan will go through.

Tips for first time developers looking to access property development finance

When you find a project and decide you need property development finance there are a few things you can do, as a first time developer, to help get your case through.

Firstly, have a clear understanding of the numbers. From purchase price to end value, the figures are the most important consideration, afterall you are doing work for a profit. 

Lenders and property development finance brokers will be able to tell, from talking to you, whether or not you have properly looked into a project and whether they can take your application seriously. 

Be realistic on the build cost and end value. Over estimating the end value is not going to get past a valuer and underwriter. Trying to force a project to work will be a waste of your time and money.

Make sure you are taking on a project where you have the capability to carry out the project, or have a team around you who can do it for you.

Thoroughly investigate the project you want to take on. Property development is a business so you need to be sure you are getting into a project that will be achievable in the time scale and budget.

Benefits of working with a broker

When you find your first development project and you need finance there is nothing stopping you going out to the market yourself. 

It’s not without its risks, though. 

You could end up paying more than you need if you go directly to the lenders. Without having a good understanding of the market how will you know you are getting a good deal?

Working with a quality, experienced broker like me can help you get your application in front of the right lender quickly and help save you interest and fees.

I know which lenders will fund particular projects and which ones would be happy to work with you when it’s your first project.

Conclusion: Is property development finance for first time developers worth it?

Without large amounts of capital or investors who are willing to back you, the projects you can do will be severely limited.

For a first time developer, the process to getting development finance can seem daunting but the rewards can most definitely be worth it.

By getting finance you can take on larger projects which can bring you higher profits, allowing you and your business to grow.

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