How to Finance Property Development.
The best way to finance property development will depend on the amount of work involved, the amount of money you can put into the deal and your experience as a property developer.
The amount of work involved.
This is probably the most important point because the amount of work involved affects the risk of things going wrong. Looking at the two ends of the scale, a property that needs a ‘light refurbishment’ carries less risk than a new build (ground up) development.
A development finance lender will assess the asset they are lending on and also consider what they would be left with in the event of repossession. A property needing a new bathroom or kitchen would arguably be easier to sell compared to a part built new build property.
On the understating then that a property needing light refurbishment carries less risk it makes sense that the terms are more favourable for properties that require light refurbishment.
The amount of work involved puts lending into 3 distinct categories and they are:
- Light Refurbishment
- Heavy Refurbishment
- New Builds & Conversions
The fees you will pay and the rate of interest you will pay are directly affected by the amount of work involved and the category of lending you will require. In short, the finance terms increase in rate in line with the increase in the work involved.
The work involved in each category can vary between lenders but are usually classed as follows:
- New Kitchen
- New Bathroom
- Work that requires planning consent
- Change of use (single family property to multiple tenancy property) e.g. C3 to C4 planning use.
- Structural changes
New Build & Conversion
- Ground up new build property (residential or commercial)
- Conversion of a house into multiple flats
- Demolition and new build
The Amount of Cash A Developer Can Introduce Into a Deal.
The more money you can put into a deal,the less a lender has to lend, and consequently the less risk. The less the risk, the better the finance terms. In addition, the lower the loan to value the more lenders there are that will lend.
The lenders with the cheapest rates of interest are high street banks as they are funded by customer deposits. We have secured lending at 3.5% over bank of England base rate for experienced developers on their 3rd/4th projects and that require loan to values below 60% of costs (land, build and professional fees).
The issue with putting in a lot of your own money is that you then have your own liquid funds tied up in that one development. Most developers will constantly be on the look out for the next project and having all of your money in one deal can be restrictive.
If you can put in a lesser amount and pay a slightly higher rate of interest, then you afford yourself the option of having more than one development on the go at any one time and therefore increasing your earning potential.
A Property Developers experience.
Lenders are more inclined to lend to property developers with lots of experience but we all have to start somewhere.
In the case of light refurbishment ,less emphasis is placed on the builder that will carry out the work. In fact, if you are intending to do the work yourself but are not a builder by trade then light refurbishment to a property can be completed by yourself if you can demonstrate you have completed previous light refurbishments successfully.
In the case of heavy refurbishment it will be essential to have a builder and an architect working on the development. The lender will conduct light touch background research on your professional build team. Your professional team should have experience of the type of work you intend to carry out.
For new builds and conversions, the professional team you intend to use may need to sign collateral warranties tying them to the project. The team you will use will come under the scrutiny of the lender and will need to meet certain standards and have relevant experience.
Why You Should Use A Property Development Finance Broker.
A broker will bring experience of lenders, Fox Davidson represent over 50 lenders and that list keeps growing with new entrants to the market all of the time. By using a broker, you are ensuring that you approach the right lender, first time.
A broker will complete all of the paper work on your behalf, and they will manage the application process. A broker will have built up contacts within lenders that you would otherwise not have access to, this can be important when issues arise.
There are several considerations when choosing the right development finance lender:
- Their terms including, rates and fees
- The lending criteria
- The lenders timescales
A quality property development finance broker will make sure you are paired with the right lender for each development you complete.
What are the best terms for property development finance?
In 2017 we secured funding with a high street bank at 3.5% over base rate for a development in Bath. The lenders fee was 1% at application and no exit fee. Terms like this are substantially better than privately funded lenders but are only available to the right developer and on the right development.
What paperwork is required for property development finance?
- ID and address proof
- CV detailing your experience (if heavy refurb, new build or conversion)
- Development schedule including costings
- Details of your professional design and build team
- Full planning details
- A workable exit such as the sale of the development or refinance
Do I have to sell the development to repay the loan or are there other options?
No, you do not have to sell a development although doing so will allow you to realise the most amount of funds. The other option is to refinance on to a buy to let basis or in the case of commercial property to refinance on to a commercial investment loan.
There is also a lending product called developer exit finance. This is a product that you can apply for and draw down on post build, whilst you are in your sales period. Once a development has been developed there is less risk to the lender that there was during the build. Therefore, lenders offer better rates of interest whilst the properties are being marketed and sold. Every penny counts, and so we will assess the initial lenders exit fees as well as the cost of taking out the development exit finance and we will ensure it is cost effective to put it in place.
Top 10 Tips.
- Use a broker – They will save you time, money and a lot of stress.
- Put in place a good professional team; a builder, an architect and a solicitor familiar with development finance. Lenders will need you to have an experienced team working with you.
- CV’s – Make sure your CV of development experience (if any) is up to date and easy to read.
- Paperwork – Ensure that you have up to date accounts/tax returns and that bank statements are in order as some lenders will ask for these.
- Planning – If the development needs planning ensure you have full planning in place as it will be needed.
- Build schedule – We can work with you to put together a well-presented build schedule including costing. The costs need to be accurate as they will be tested against current material and build costs.
- Exit – Your exit needs to be sound. If not from the sale of the development then a lender will want proof that you can get exit finance by way of a mortgage e.g. a buy to let mortgage.
- Contingency – Any project should have a level of funds for contingency built in, ensure you plan for increased costs or delays.
- Time Vs Rate – Before you decide to take the cheapest rate bare in mind that some of the best rates come from lenders that also arrange commercial and buy to let mortgages but often these lenders take considerably longer than (slightly more expensive) pure property development finance lenders. What is more important to you?
- Contact – Keeping in regular contact with the broker (and therefore lender) at all stages during the application process, build process and sales/refinance period will ensure that the lender knows exactly what is going on and can work with you in the event of delays or requests for extra funds.
Development Finance Lenders
Note that not all lenders we work with are listed due to exclusive arrangements with some development finance lenders.