First Time Property Developer Funding Solutions
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First Time & Inexperienced Developers
Finance companies can be keen to provide finance for property developers. But why do many first-time developers find it so difficult to get a construction loan?
Property development can be lucrative but there are plenty of challenges for newcomers to the sector- and one of the most serious is that of securing funding.
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The answer is to call on the property team at Rangewell.
Why do many lenders not lend to new and inexperienced developers?
A developer who can get in on the ground floor of a great project will be able to make a big profit even if they don’t have a long track record of success. However, many lenders are nervous about providing finances for borrowers who are just starting out in the industry.
As always with lenders, the problem is one of risk.
Lenders do not like risks - especially the risk that they will not be repaid. They will look very carefully at any project they are asked to fund with property development finance and get an expert in the sector to assess the proposal and the property - and the developer.
Obviously, the refurbishment of a tired semi in a desirable road presents less risk than the conversion of an industrial unit into flats, or the demolition of a derelict warehouse and replacing it with townhouses.
In the same way, a developer with thirty years of successful projects completed means much less risk than someone who is attempting their first project.
Not only will they set the interest rate they charge to reflect the risk, but they will also refuse to lend at all if the risk is too high. They see an inexperienced developer as having more chance of running into problems with a project.
What are the risks with property development?
There are many risks with any development project. The simplest will be cost overruns, from extra repairs required, to the discovery that a property is so unstable it will need to be demolished. There can be problems with planning permission which turn a project that should take a month or two into a year-long battle with local authorities. There is the danger that the completed project will not find a buyer, leaving a project standing earning nothing and profits never materialising to pay back the funding.
Their experts will look at all these risks - and more - presented by a project and price the loan accordingly. They will also look at the borrower.
If you have a long history of success with similar projects, have overcome the challenges they presented and turned a profit, the chances are that you will have an excellent chance of doing the same again. If this is your first foray into the world of development and your previous experience has been some DIY, they will have less confidence in your ability to deliver the profits you are aiming at.
Many will not lend to first-time developers at all for this reason.
However, at Rangewell, we know that just as past performance is no absolute guarantee of future success, a new developer with the drive and connections to access profitable developments could well prove to be highly successful.
So, while many mainstream lenders will not want to do business with new developers, we can help. There are plenty of lenders who are willing to provide the capital first-time developers need.
We know the lenders who can help - and we can help you find them.
Getting a loan as a first-time developer
Development finance lenders will always assess each applicant’s project on its own merits, and will closely examine all aspects of a deal before making a decision.
There is no set of checkboxes to be ticked, but the developer needs to be able to show that they have a clear, realistic plan for their development.
Detailed costing and a detailed understanding of the market you are working towards are paramount. Lenders will seize on any vagueness in figures - and they will not be impressed if your proposal does not suit the marketplace. Luxury flats in a run-down area of high unemployment may be easy to create, but very difficult to sell.
Lenders will want to see that you truly understand the costs involved in your development and that you can be expected to keep good cost control throughout the project. One of the biggest problems for inexperienced developers is overoptimism. They commonly underestimate the overall costs and rarely include sufficient contingencies - which an experienced developer will know will almost always be needed.
The most professional way to provide this information is with a schedule of works. This will require a detailed breakdown of the work and costs involved in the project, together with projected timings. The lender's valuer will assess whether the intended budget is realistic and if the time scale is achievable.
The more detailed and accurate your figures, the better.
They will also take a close look at you. You should have some experience of building projects, Experience in project management would be useful - and a relevant trade would be more useful still. Finance companies won’t consider applicants who approach them directly - not even experienced developers.
Your exit strategy
A key element in this proposal is the exit strategy that you will use to repay their loan, and the two most common ways of doing this are through a mortgage or through the sale of the property. The feasibility of the developer’s exit strategy will be assessed by the lender as a crucial element in their lending criteria, because if it is not realistic they may not be able to repay the loan.
Getting the lending you need as a first-time developer
Many property development lenders will only consider applications that have been “packaged” by experienced brokers such as Rangewell, especially when the applicant is a newcomer to the development sector.
However, this can work in your favour. We can help you prepare your proposal as a fully-fledged business plan with a timeline that includes:
- Purchase of the land and/or building
- Build costs
- Other costs - finance, marketing, insurance, architects and professional fees
- Your exit plan - how you will pay off the funding
Our experienced team can work with you at every stage to test and polish your proposal before presenting them to the funders who will be most ready to want to work with you. As part of the negotiations we carry out for you we will try to secure the most advantageous deals on the key aspects of your finance:
- Interest rate
The interest rate you pay will directly affect the profitability of your project - and with large sums involved, even a fraction of a percentage point will affect your profitability. We will aim to secure the lowest possible rate on the best terms, and we can also negotiate for your interest to be “rolled up” so that you only have to pay it at the completion of the loan term or point of settlement – this leaves more money available to you for your project.
- Staged drawdown
We arrange with your lender a staged drawdown sequence. This means that you only take money from your facility when you need it and, as a result, you won’t pay interest on the balance of the facility which has not been drawn down.
Stages may include:
- Purchase of land and/or existing property
- Land cleared and work begun
- Footings installed
- Building watertight
- First and final fixes
Even with the tightest scheduling and most experienced project manager on the job, your project may overrun. We can help extend the length of time you have to pay back your facility - and if things move more swiftly than expected, arrange the option of no interest penalties for early settlement.
The types of funding you may need
Heavy refurbishment funding - funds both the purchase of a property needing work or with potential for extension, and the funds to carry out the work required.
The work may take many forms: conversion of a single building into multiple letting units, or a major extension. Refurbishment finance is based on the gross development value (GDV), the value of the project once completed. This is also known as the post refurbishment works value.
Loans may be available from £100k to £10m. Lenders may consider lending up to 70% of GDV, with funds released in stages. These funds may cover both the property purchase as well as refurbishment works, although funds may also be available for developers who already own a property in need of work.
Terms of up to 18 - 24 months are available and interest payments may be rolled up in the total loan amount.
It may be difficult to arrange heavy refurbishment funding as a new developer - but if you have relevant experience, it may not be impossible.
Light refurbishment funding could provide for the purchase and redevelopment of an existing property that may not be suitable for a mortgage because it lacks modern heating or kitchen and bathrooms do not meet modern standards.
Work may be light and be little more than decorating and the replacement of services, although it could include some conversion and extension work.
A business Bridging Loan is a short-term loan secured against property. Bridging loan lenders will provide construction finance of up to 65% of the value of the property. You can access the funding within a few weeks (depending on the nature of the project and your circumstances) and loan periods can range from one month to three years.
Bridging Loans are usually repaid quickly, either by the sale of the property or by another finance product designed for the long-term, such as a mortgage.
Bridging Loans are often used to fund property purchases. The loan can be as short as one day and run up to a maximum of 12 months. Loan amounts start at around £25,000, and there is no maximum.
Short-term finance is always more expensive than long-term lending. The costs of Bridging Finance can be relatively high but in some cases, all fees and interest can be rolled up into the loan, which can be settled with a single repayment. If you are using a Bridging Loan as a short-term solution for a property purchase it can often be paid off by a long-term solution designed for the longer-term, such as a Commercial Mortgage.
What about the costs?
Inexperienced developer finance comes in many forms, but it’s likely to be more expensive than the loans provided to experienced developers. Those who are new to development must consult a financial expert before committing to any sort of loan package, in order to ensure it’s the right choice in their situation.
There are many factors to consider. The deposit required, the interest rate offered - and whether it is possible to roll up interest payments until the end of the loan. This allows you to pay the costs of a loan off in one lump sum right at the end, rather than servicing the loan through monthly payments. This is especially valuable for inexperienced developers who need to do everything they can to keep overheads at a minimum. You Can defer the interest and arrangement fees until they’ve sold or mortgaged the property, thus minimising their loan’s impact on their day-to-day running costs.
As with all property finance, there will also be fees:
- Arrangement fees These are charged by the lender for arranging the loan and are typically 1.5% to 2% of the loan amount.
- Exit fees Not all lenders apply exit fees - those that do may charge a percentage of the loan amount or, sometimes, the gross development value.
- Valuation fees Lenders will instruct a surveyor to value the property both before and post refurbishment works. The scale of these fees will depend on the size of the project.
A key and widely-used feature of development finance’s flexibility is to roll up the costs of a loan.
Get the help you need from Rangewell
Whether you have a straightforward, small-scale funding need for a single property, or require a complicated ‘Jigsaw’ funding plan made up of a combination of financial products for a major holiday home development in Britain or overseas, we can work with you to find the answers.
Call us now to get our experts working for you.
Last update: 17 May 2022
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