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Top 10 Finance Ltd, Development Finance Rex House 4-12 Regent Street, London, SW1Y 4PE
Property Development Finance and Property Development Loans are short-term funding options, used to develop either an existing building, i.e. refurbishment, conversion, or a new build. Development Loans are usually taken over a period of between 6-18 months. This really depends on the type of Development; with a light refurbishment it would be as little as 3 months, and with a larger scheme up to 18 months.
The thing to remember with any Development Funding is that you will need to allow for a reasonable re-sales period to be factored into the loan period. If you do not take this into account and your properties have not sold within the agreed loan facility, you could end up paying for another arrangement fee to extend your Development Loan.
Up until the financial crisis in 2007 most Property Development Loans were made by banks, even developers with little or no experience could walk into their local branch and arrange Development Finance over the counter. This all changed after the financial crash when high street banks completely withdrew from lending, and as such, it was nearly impossible to arrange any type of Property Development Loan.
As always when a void opens up in a marketplace, bridging loan companies and specialist lenders stepped in to offer Property Development Loans where the banks had withdrew. These were expensive but in the circumstances, developers had little choice but to turn to the new lenders for their Development Finance. The only other option was to stop developing and as such the extra cost was soon factored into the Loan appraisal and the market gradually began to recover.
As the market began to recover in certain areas of the country, banks began to offer existing customers Development Finance again. However, they would not consider clients from other banks and developers had to have a solid track record of completed schemes before they would even look at deals. In the meantime, the specialist lenders and bridging loan Companies went from strength to strength, rolling out many new products in an effort to compete with each other for business.
Although taking out Development Finance was expensive, at least it was available. In addition, they offered many more Finance Options that banks would not, including Development Finance for first-time developers with little or no track record.
Property Development Loans can be arranged at up to 90% of costs from specialist Development Finance Lenders. However, the interest rates are higher than with a High Street Bank. Most Property Developers are happy to absorb the extra cost, as it allows them to make their cash go further, i.e. they can do two developments rather than one. Even experienced property developers who can obtain Funding from their banks are choosing this option for their Development Finance, in this way they can preserve as much of their cash as possible and build more schemes.
High Street banks will usually offer Property Development Loans of up to 60% of costs, way short of a specialist lender. Usually, if you got an offer of development Finance from a bank, they normally want you to put your 40% cash in on day one. This option is far less attractive than taking out your finance from a specialist lender.
Refurbishment Development Finance is for a light refurbishment of a property; this would generally be described as redecoration and new fittings. It could also include things like a new heating system and rewiring etc. With this kind of Property Development Loan, you cannot do anything that is structural to the property.
Refurbishment Property Development Finance.
This type of Development Finance would cover the above, but could also include structural works. Obviously, you are now talking about a more serious scheme and all the complexities that structural works can bring to the development. Note this type of Property Development Loan will not cover heavy conversion projects where you create more than one property from the existing one.
Property Development Finance Conversions.
Probably the hardest Development Loans to get, unless you have plenty of experience. The problem here is that you cannot get an accurate account of what your costs are likely to be, and all Property Development Finance Lenders will take this into account when looking at a proposal.
Property Development Finance New Build.
New build Development Loans are generally available to experienced property developers only. Although if you are looking to develop a single plot there are a number of Development Finance Lenders who would consider offering Development Funding on the basis that you are selling the property when it is completed and you would need to use a fixed price contract for the works. If you intend to keep the property then this would be classed as a self-build (see next section) for Self Build Property Development Loans.
Self-Build Residential Property Development Finance.
Self-build Property Development Loans are completely different from traditional loans, and there are a number of specialist lenders who cater for this market. Generally you will need to arrange a mortgage on completion and with traditional Residential Development Finance you have to wait for 6 months before you can refinance the property
As with most things, it's all about presentation and with most Development Loans you only get one shot at it, so it’s important that you get it right the first time. It's best to use a specialist broker who is experienced in presenting schemes to the Lenders; they will package your deal and present it on a selective basis to the most suitable lender.
There are many lenders offering Development Funding and they all have their favourite type of project and or locations that they are comfortable with. We have many years’ experience in dealing with lenders in this sector.
What Costs to Expect on a Development Finance Loan?
This is dependent on the experience of the property developer. Rates can be as low as 4% pa and they can go as high as 20% pa for say an ex-bankrupt, so the range can be anywhere in between. Also, most lenders charge an arrangement fee of between 1-2% of the loan amount.
Some Lenders also charge an exit fee, although not all. This is usually a percentage of the GDV (gross development value), and around 1% to 1.25% depending on the Development Loan period, i.e. 1% of gross development value for a 12-month loan 1.25 % of GDV for an 18-month loan.
Experienced Property Developer, Development Loans.
So what is an experienced Developer? Generally, you will have completed at least 4 to 5 projects and sold on for a profit. A builder or building contractor would not be considered a Property Developer, neither would someone who developed and kept the finished properties in a portfolio. The key is the selling. Also, there are many skill sets that a Developer has that a Builder would not possess. As always, experience and dealing with the many pitfalls that come with Property development, selling on, keeping a tight control over costs and not overdeveloping (something some builders do proudly). It is great having the best spec and design but will it add profit?
How do Property Development Loans work?
First, the lender will look at the scheme and do their own evaluation of costs: what the profit is, saleability of the property when finished and the background of the applicant. If the deal is of interest, a meeting would be arranged with the lender to look at the site and get a feel for your experience, they would then prepare a report and submit it to a credit panel for approval. Obviously, if you do get to this stage, there is a high chance the Development Finance will be approved, although some do get rejected.
Assuming you get credit approval, a formal offer will be issued. Normally, you will then have a set period of time to accept the offer; usually between 7-10 Days. If the Lender includes a commitment fee, this is normally payable on acceptance of the offer of finance.
The next stage in arranging your Development Finance will include the Lender instructing a Surveyor who will evaluate the scheme and prepare a report including the value of the finished properties, how long they are likely to take to sell, and also if your costs and profits stack up.
You will pay for this report at a price pre-agreed with the lender. You usually get a choice of two or three surveyors, so that you can ask them for a quote. This report is used by the lender and unless it all stacks up, you will not get your Development Finance.
Note this report is also a great leveller. As we all think our deal is great and the numbers all work, it’s good to have a second professional opinion that is backed up by detailed analysis. Assuming everything is ok with the report solicitors are then instructed (whatever time you think it will take to complete, double it, as Development Loans always take longer than expected).
Once you have completed and drawn down the first tranche of your loan for the purchase, funds are then drawn down in accordance with the amount of work you have completed on the site. A surveyor will come out and inspect the works and agree on an amount that can be drawn down from the lender. Once agreed this will usually be in your bank within 48 hours.
You will have to pay the surveyor a pre-agreed amount for each report and draw down during the course of the development. You can usually have a drawdown whenever you want during the construction stage, although most take one once a month.
Obvious things to look out for that a lot of people don’t see.
Do not over spec you developments; you need to do just enough to sell them. Over specification is basically your profit down the drain.
Keep it neutral; it’s better to have something that buyers cannot dislike, rather than trying to please with your own taste.
Don’t let your architect go overboard designing an overcomplicated scheme. Remember, they are not interested in your profit but do want impressive properties built that they can refer to.
Don’t let the Estate Agent tell you that you need a top specification to get the best price, going overboard on specification will always help to sell the properties, but if you cannot get a better price it just makes the agent’s job easier to sell them and comes out of your profit.
If you want to spend your cash somewhere, always go for quality where a potential buyer is likely to touch i.e. door, window handles and appliances leave a good impression.
If you agree to a sale before the property is complete, NEVER EVER agree to make changes to your specification. “Can you just move that wall” or “can we design our own kitchen or bathroom”. Don’t It will all end in tears.
Do not assume you have a sale if you have a deposit, whatever the amount. Until you have exchanged contracts, the buyer can walk away at any time and you will have to give all of the deposit back.
Never leave it to the Estate Agent to sell your properties, meet potential buyers yourself, as you are the seller and best placed to show them around. However, never haggle with a potential buyer yourself as you will sell for less than you wanted. Agents are for agreeing on the price and managing the sale, no more. If you have built the right scheme and priced it correctly property sells its self whatever the market conditions.
Cash is king. Don’t hold out for a top price; if you can get a sale and move on to your next project then do so.
With flats, keep to small blocks, as you have to build them all before you can sell one; with houses, you can build and sell according to how your sales are going.
If you are building Houses keep to small numbers. It’s better to have two sites with two houses rather than one with four, it spreads the risk. Not only that but buyers want to know whether the scheme is going to be finished soon, on a site with four houses the first one will very likely not want to be in occupation whilst you finish and sell the other three.
Start thinking in sqft and sqm, not the number of bedrooms, all experienced Development Valuers and Development Finance Lenders work with the floor area, not the number of bedrooms.
Never get carried away thinking you want to build the best, most luxurious development. It has no relevance, it should always be a business transaction that you want to spend only as much as you need and get the best price you can.
Never over develop i.e. say you are not going to build boxes, but that’s what you are doing. Just keep your box to the right size; otherwise, you are just burning your money. Look at it this way: if the top house price in the street is £200k and the maximum achieved sq ft price is £200.00 and you can only build a 1,000 sq ft house. If you build a 1,200 sq ft one the chances are you have a great house for the buyer, but you will not make any profit.
If railways and water are close to the site try and keep it to flats as families do not like to be close to either.
How Much Profit?
As a general rule Developers look for 20% of profit, some developers work on costs and others on the end value. So if you spent £200k and you want £40k on costs the end value of the property needs to be £240,000 giving a profit of £40,000 if you are working on 20% of the end value then you would want 20% of £240,000 giving a profit of £48,000.
Property Development Finance What do these terms mean?
GDV stands for Gross Development Value of the scheme; it basically means “what will the properties sell for?”
Drawdowns are the points at which you take stage payment from the Development Loan, usually once per month, but they can be whenever you want.
Sq. Ft/ Sq. M2
Used to value a property and also work out ball park costs. It can be Gross or Net and excludes garages. The difference between gross and net can be up to 10% so beware.
Property Development Loans Commitment/ Arrangement Fees
A fee agreed when arranging Property Development Finance, normally paid when you agree to take the finance to show your commitment to the lender.
Exit Fees you will pay on a Property Development Loan
Paid on the sale of the properties, this can be a percentage of the Development Loan amount or the end value of the property. Obviously, the latter is a lot more expensive.
Schedule of works to get a Property Development Loan
This is a list of all the works you intend to carry out on the development. It is given to a lender for Development Loans.
This is a breakdown of all of your outgoings set to a monthly program pre-agreed. With the Quantity Surveyor, you don’t always have to keep within this, but it sets a goal.
Development Funding is from £50k up to £20m for New Build, Conversion and Refurbishment projects