A Guide to Property Development.
This is a guide to property development and looks at all aspects of buying land or property to develop and then to sale or hold.
Working with Fox Davidson.
Our purpose and value to our clients is to provide expert advice on how best to finance your property development. Our advice will ensure you can maximise your profits and use reputable lenders that have clearly laid out fees.
Fox Davidson are NACFB accredited and regulated by the FCA.
Our clients are not necessarily professional property developers, many of our clients have full time employed jobs but have seen the profits that can be made from developing property. Many of our clients started out as builders working for other people and decided to build for themselves. We work with all types of developers from first time developers to SME house builders.
What is a Professional Property Developer?
A professional property developer is anyone that earns their living from buying property or land and then refurbishing, converting, renovating or building that property or land for profit.
How to Make Profit from Developing Property.
It is important to identify opportunities. An example may be a property that has been owned for a long period of time and is now in probate, the property could be run down, dated and in need of refurbishment and renovation. Another example would be a property that you can clearly see has a space in the garden for an additional property, this will of course come with calculated risk with regards the planning. There are plenty of opportunities to buy property that need the core elements that allow property development:
Refurbishment & Renovation
In a nutshell, the less structural work required and less amount of work you need to carry out, the less paperwork will be needed by the lender. A light refurbishment consisting of new kitchen and bathroom will require significantly less paperwork and planning than a new build house. The funding will also be cheaper.
Build & Conversion.
Where you intend to build or convert a property, perhaps under current permitted development rules, the more complex the paperwork, surveys and legal’s are going to be but at the same time the profits are likely to be more too, otherwise you wouldn’t do it.
Converting a property from a single unit residential use to a multiple unit for residential use (up to 6 bed C4 planning) or even sui Generis use as in the case of some student housing can see great rewards but also needs careful planning. In the case of an HMO you will need to assess whether the local council requires you to license the property.
Building a property has obvious profitability. One method to ascertain profit is the third, third, third calculation: land value, plus build cost x 30% increase = sale price. This figure isn’t true of all areas of the UK and will be affected by many factors including market demand for the type of property, as well as labour and material costs and several other external factors.
If you do not intend to sell then final valuation will be important as you will need to refinance on to long term buy to let or commercial investment finance.
Planning is essential if you will need approval for the works you intend to carry out but even just planning how you will buy a property, how you will fund it, how long the work will take, who will do the work, what if something goes wrong, do you have plan B, do you have a plan C?
When it comes to property development finance the lender will wish to see that you have thought of every aspect of the build. We will need to work together to demonstrate to the lender:
- You can carry out the work and if not yourself, then who? Larger builds will require more experienced reputable builders and will involve charges over the building company to guarantee their involvement.
- You have planned every detail and costed every phase. We will need to produce a full development schedule including the costings for materials and labour. The lender will stress it against previous projects they have funded in that area to ensure your costings are accurate. They will also obtain professional valuations to confirm the value now and the value at the end of the project.
Property development has become very popular over the years, especially with TV shows such as grand designs and homes under the hammer, amongst others. Whilst there is the scope for large profits to be made, there are also many opportunities for mistakes to be made. We will work with you to ensure that if you need to finance the property that you have planned every aspect from start to finish.
When is the right time to buy?
We often get clients asking us for our opinion on the local areas we know well, Bristol and Bath and areas of London. The best time to buy should probably follow these rules:
- Buy the right property. Buy a property that matches your current expertise/ability.
- Buy in the right location – Consider logistics for you and your professional team and consider demand for what you will have to offer for sale or to rent at the end of the project. It is no good buying a property to refurbish because it is cheap but 100 miles north of where you live. Buy in an area you know or have researched well and have easy access to.
- Buy at the right price –Buying a property at auction for an over inflated price is not a good start. Commit to your costings and allow for contingency or a drop-in market demand as you never know what is around the corner and bid within your pre-agreed limits. Auction finance is in a category of its own due to the time constraints. Other options are to source undervalue properties. These are harder to find but getting ‘pally’ with agents and property buyers is one way to get notification of opportunities before others do.
- Buy at the right time – Past performance of the property market is not a guarantee for the future. Timing may also involve your use for the property, for example, If you are planning to build student accommodation it should be ready to be let in time for the new term, when students are actively looking for accommodation. In the case of a multi-let are new rules being introduced by the local council that will affect licensing? If you are building a new property, ensure that a new build site is not about to launch around the corner that could affect the price you can achieve. Matters affecting timing are endless and all comeback to planning.
How Will You Hold The Property?
If you have identified the opportunity, completed your costings and have a team of professionals ready to work on the project then you next need to consider how you will hold the property. Options include:
- In a pension fund
- In your own name
- In a Limited company
The implication of each will affect the tax you pay and the terms for finance. It is our experience that many property developers are buying property held in a limited company. The limited company can be an existing trading company (such as ABC Car Auto’s Ltd) or a special purpose vehicle (SPV) ltd company set up for the sole purpose of developing that property (such as 1a the street development ltd).
You should consult a tax specialist and/or accountant that is au fait with property tax.
Property Development Finance.
We have gone in to the finance in more detail on our property development finance but as a basic guide these principles apply:
- Light refurbishment – No planning, non-load bearing alterations will offer the cheapest rates of interest. Expect to pay 0.5%pm with fees of up to 2%
- Heavy refurbishment – Planning needed or structural alterations or change of use. Expect to pay up to 1% per month and fees of up to 2%
- Full property conversions and builds – Much more involved and as such fees will be up to 2% in and at the end of the finance and rates from around 0.85% to 1.2%pm. Monitoring surveyor fees will apply.
Loan to Value:
- 75% for light and heavy refurbishment projects.
- 100% of build costs and professional fees up to a total of 80% of all costs including land purchase costs.
- Additional funding possible from mezzanine funders (2nd charge lending behind the main development lender)
Note that for very experienced developers requesting low loan to value funding we can finance projects at bank base rate plus 3.75% to 4% per annum.
Additional Property as Security.
Many lenders can cross charge additional property to being down the overall loan to value. If you are asset rich then we can potentially avoid the higher costs of development finance all together by securing bridging finance on an existing residential or commercial investment property.
Contact Fox Davidson
With offices in Bristol, Bath and London we are well placed to finance property development in all 3 areas of the UK. Do get in touch to find out how we can help you to maximise your profts by fuding your next development in the right way.