Development Finance for First-Time Developers
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Development Finance for First-Time Developers
What are the requirements for obtaining development finance for first-time developers in the UK?
Just because you’re a first-time developer, it doesn’t necessarily mean you can’t get development finance. There will probably just be fewer lenders, because you’ve got no track record to show you know what you’re doing.
If you do this all the time, lenders see you as a pretty safe bet. As a first-timer, they’re going to be more cautious. They might charge higher rates; there might be less choice of lenders; they might want a bit more involvement.
They probably will want to know that you have a team around you – you’re using an architect and project manager that have lots of experience so that the project’s going to be completed successfully.
Bridging finance is available on a plot with planning permission, so if you’re doing this for the first time and buying a plot that hasn’t got full planning or has outline planning, you can still buy it with a bridging loan. Once it’s got the planning, it’ll be worth more and we’ll turn that into development finance. That’s the basic headline.
Can you explain the different types of development loans available for first time developers in the UK?
I wouldn’t say there are different types of development loans available, but there are different projects you might do.
It might be a ground-up development, where you turn a field or a piece of land into houses or flats. Or it might be a refurb, where you take a building that serves a current purpose and turn it into flats or a house. That’s slightly different and might need a refurbishment product than a ground-up development product.
Both are available to first timers, probably with less choice, but it’s not something that’s impossible by any stretch.
What are the key factors to consider when comparing different development finance options for first-time developers?
I talked a minute ago about having the right team around you and this is what the lender is going to consider. What’s your experience? What have you done before?
It might be your first ground-up, but have you refurbed before? Or is this your first venture into property completely? If that’s the case, they want you to have people around you that know what they’re doing.
So a factor to consider is making sure you’ve got an architect and a project manager or, if you’re going to project manage it yourself, have a good contractor that knows what they’re doing. Then the lender can be sure that things will happen at the right time.
The lender will also monitor the development. It depends on the deal, but typically they send a surveyor out to monitor progress once a month or so. The money gets released in stages for a development loan, so the lender checks it’s being spent correctly and everything’s going according to plan.
They confirm that you’re not falling behind on time scales or budget too much.Those things do happen, but try to minimise that as much as possible.
Another factor is the choice of lender. Not every lender accepts first timers. Some will restrict lending to more experienced people, but that’s certainly not everyone. There will definitely be options.
How does the loan application and approval process work for first-time developers seeking development finance in the UK?
It’s the same process whether it’s your first time or 20th development. We start off with basic details – to understand a bit about you, who you are and what you do.
Assets and liabilities are a big factor in assessing whether to lend to you or not. If you’ve just about scraped enough money together to get a development off the ground, but you don’t own any other property and haven’t got any other cash, it’s harder than if you own a residential property with plenty of equity. Maybe you’ve got a Buy to Let in the background or other properties, and this is your first time developing.
So we look at your assets and liabilities and get some key information about the project: where it is and what you’re building. The lender will want to see the planning permission and plans. Once they’re happy with you and the project, they get a valuer to go and have a look at the project.
The valuation is going to cost a few thousand pounds, normally, because there’s a lot involved. They look at the value of the land now, what your plans are and what it’s going to be worth at the end. We need to make sure that we’re borrowing enough, and there’s going to be enough profit at the end for you.
The lender is thinking that if you default for some reason and can’t carry on, they need to either finish it, ideally, or sell it to someone else to complete. Either way, it will be expensive for them. So they’re only going to lend you as much as they see makes financial sense. They all have different Loan to Value limits, but there’s got to be a decent amount of profit.
Sometimes I see cases where people want to buy some land and build a house, but when you look at the end value versus what they will spend on it, there’s not enough profit there. Lenders will say no – because if you run over budget, go over on time or the market changes and you can’t sell it, they will be left with a property that’s cost more than it’s worth.
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What are the potential risks of taking out development finance as a first-time developer and how can they be mitigated?
If you’re doing this yourself on site, there’s the risk that you have an accident. Or if you fall ill, what’s going to happen?
Another big risk is unexpected costs, particularly before you’ve come out of the ground. Laying foundations often throws up things you weren’t expecting. If you run behind on cost, the lender will be flexible within a certain limit based on the end value, but not indefinitely. If cost starts spiralling, we might run out of money.
If it takes a long time, it costs more. The development finance will last a certain period, depending on the project. You might have 12 months to build and then a few months to sell or refinance, whatever you’re going to do.
If it goes on too long, we’re going to run out of time. We will have to refinance – and actually we do that quite a lot lately, because in recent times things have got more expensive and building can take longer than clients thought.
People come to us, having nearly finished a development, but they’ve run out of time and money and the lender is getting panicky. So we find a new lender for a loan based on the value of the project, to go and finish it. That is an option. But if you can avoid that risk, it’s much less stressful for you.
What should first-time developers look for in an advisor or a broker when seeking development finance?
You just need someone that knows how it works and what’s involved. We do a lot of these cases, so we know what the lender’s going to ask and what’s likely to crop up.
It’s about making sure you deal with someone who knows the pitfalls and which lenders to go to – and which not to – because there’s plenty of choice.
Going to the right lender for your project is key. Each lender likes different things. Some prefer offices to flats. Some prefer houses built from the ground up. It completely depends. So go to someone that knows how to find you the right one.
What are some common mistakes that first-time developers make with development finance and how can they be avoided?
Underestimating how much it’s actually going to cost is a big one. The lender will factor in what it would cost to get contractors in, so make sure there’s plenty in your plan.
If you actually plan to do it all yourself, and it only costs two thirds of what we put in for, that’s fine. But we need to allow for more.
This surprises a lot of people – lenders would prefer to fund the whole project. You might have enough to get started and just want to finance the last bit. But lenders don’t really want to do that, because they don’t know what’s happened up to that point.
Getting a lender to come in midway through a development is hard. They haven’t been monitoring it and they don’t know the quality of what’s been done so far.
Don’t assume that lenders would rather lend on a project that’s half finished because it’s worth more than it was at the start. Actually, it’s the opposite. They’d rather be in from the start and lending you money all the way through.
You also need to have agreed enough money to cover overruns in costs and time, and unexpected issues.
Can you provide any real world success stories of first time developers who have obtained development finance in the UK?
I’ve definitely worked with people that have built one property and sold it, and clients building a couple of projects. I’ve had people that have converted offices into flats. These are all cases where they’re first-time developers. Most people naturally migrate into this from already doing other property work.
You’re unlikely to wake up one morning as an accountant, suddenly decide to be a property developer and go and find some land to build on. It’s possible, but people are more likely to come in with some experience of Buy to Let, or doing a small refurbishment project and renting it out or selling it.
Once people get into property, they start to think about being a developer. It’s more of a migration path rather than a random career change. But I’ve certainly helped lots of people start their first projects.
What advice would you give to first-time developers considering using development finance to fund their project?
Just get someone like me involved right from the start, when you’re first thinking about it, talking to architects and looking at plots. Lenders need to be involved as early as possible.
We need to chat the project through, talk through figures and make sure it all stacks up. Some people expect their plots to be worth a lot of money but it doesn’t always make financial sense.
The cost also depends on who you are and what you’ve got access to – because as a seasoned developer with your own team of people, it’s not going to cost you as much as if you’re Joe Bloggs off the street who pays people to do every little bit of it.
There might be a difference of thousands of pounds between what it costs you versus someone else. We need to make sure there’s enough money left at the end. So involve someone like me right from the start so that we know that we’re going down the right path.
Some Bridging Finance is not regulated by the Financial Conduct Authority.
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