What to do when your property project runs out of money
The UK is short of homes - and bringing old property back to life can be lucrative.
Property development can range from simple refurbishment of a tired home to prepare it for 21st-century living - to conversions or existing structures into apartment homes - to ground-up building.
All present plenty of opportunities, if you can arrange the right funding at every stage. But all share a common challenge.
What can you do if the money runs out?
Whether you are a builder, an experienced developer or a property owner with redevelopment plans, you should know that even the most carefully-prepared costings can become just wishful thinking once work starts.
What goes wrong?
Every development project will throw up problems that are almost impossible to predict. Even newbuild, where the cost of building a home should be predictable down to the last brick and the final coat of paint, can run into problems if there is unforseen work below ground level, with groundwater or soil conditions that mean landrains and additional preparation before work can start.
On conversions and refurbishments, the list is endless. The walls that have stood sound for a century are found to require underpinning. The pipes that looked adequate when you inspected them are full of fur. The previous owner's DIY has left upstairs walls unsupported - and papered over rot.
“We bought an old Victorian pub to convert into five flats. It was in the perfect location close to the station. Problems started when we found the cellar was flooded. Damp had started rot, and we had to replace the entire ground floor. We were £50,000 over budget, and down to the last week’s money to pay the contractors.”
The costings you need
Arranging the finance you need is key to a successful building development. A careful costing of the work required will be essential - you might need to call in a surveyor if you are unsure what might be required.
This will help you provide costs for each stage of the project, carefully broken down to cover every item and the labour required. It can help you ensure that the project can be brought in with a profit, and a meticulous approach will be important to reassure any lender that your approach is professional, and that lending to you is sound business for them.
“We’ve been caught out before, and it makes sense to have a good contingency fund - you probably will go through it, even if you think you won’t.”
They will expect you to include an extra sum - perhaps as much as 10% - for contingencies. But you will want to keep your borrowing to a minimum to keep your costs under control, and so maximise your eventual profits. You will want to keep those contingencies as small as possible.
This can mean problems when your project hits a snag. If unexpected extra costs mean you run out of money, you can’t pay your workers - and the work will halt.
What happens if the money runs out?
This can lead to problems if your estimates don’t keep pace with the reality, and costs over-run.
Property owners can find that projects that they thought they had sufficient resources to cover mean major additional costs, and when problems really arise, the contingency can be eaten up very quickly.
“We had supplies to bring in, trades to pay - and no money to do it. You can’t tell people they will need to wait for their money. Word gets out fast. Your site shuts down that day.”
You can’t simply walk away from a project when you have no funds to continue the work. If you borrowed to buy the property and start work, the interest charges will keep on going up. And, sooner or later, the lenders who provided your initial funding will be ready to seize not just your abandoned project, but whatever other property you might have used to provide security.
Your home, as well as your business, could be at risk. If you don’t have cash to deal with the extra costs, a relatively minor cost - a few £thousand for extra work on a property that has already cost £ ½ million or more - could snowball into a financial disaster.
“The end was in sight - but with no cash left, it was going to stay out of reach.”
Extra funding to deal with the extra costs
Of course, you have a property, and it should be possible to borrow additional funding - but lenders may be concerned by the fact your initial estimates were inaccurate. Your original lender may be able to help - but they may be wary of advancing further sums when there could be further additional unforeseen problems ahead.
However in most cases, you will need to find Continuation Development Funding from another lender, probably in the form of a Second Charge Bridging Loan
A ‘first charge’ is the primary mortgage or other loan secured against your property. This will be the funding you arranged to start the project. This will be repaid first - even if your property is seized by the lenders.
If there is sufficient equity in the property, however, you might be able to arrange a ‘second charge’ loan against it. This will be a short-term loan - but because your primary lender will always be repaid first, the risk to the lender making a second advance will be higher - which means they will charge much more for this type of loan.
Second Charge Bridging Loans may cost a minimum of 0.85% per month. The lender will usually charge an arrangement fee of 2% of the loan, and you will have fees for inspections by valuers and structural engineers.
How will you repay continuation development funding?
Continuation Development Funding arrangements are flexible and can be agreed around your circumstances. Interest will be charged monthly, but this can usually be added to the new loan, meaning there are no monthly payments to make.
You make a single repayment when your project is complete, and either sold or refinanced with a Commercial Mortgage or similar arrangement.
Why you need help to find continuation finance for your projects
Any type of property development, from light refurbishment projects that over-run to major new builds which have hit groundwater, mean additional costs.
With Continuation Development Funding it may be possible to secure the extra finance required to save the project. However, this type of emergency funding must be arranged on an individual basis.
“We had the funding agreed, but it was staged payments. When we discovered rot in the roof timbers, it put everything back. We could not access the funds we had agreed. Continuation Development Funding was our only way to fix the roof and get on to the next stage.”
This ‘continuation’, or emergency funding, is only provided by specialist lenders.
At Rangewell, we know who they are - and which lenders will be able to help when things go wrong for your project. Plus, we can help with any property funding need, including finance for property developers, land purchase finance, property development finance, second charge bridging loans, and development exit finance.
So if you run into problems with your project, call us. The sooner you start talking to us to arrange the extra funding you need, the better the chances of getting your project back on track - and back into profit.