Property development can be exciting; it is a diverse sector from converting small studios to large houses. There are so many ways you can manage the development. Funding options are incredibly varied and integrated. Particularly if you don’t have much previous experience in developing, there are plenty of pitfalls that you will need to avoid as well, and you will be learning as you go along as you would with any other career. Here we will be explaining some of the useful tips and information, so you don’t make the mistakes so many have made when getting started.
One crucial factor is to be realistic right from the start.
Assess your current experience, and what are you capable of doing, what is your financial situation? All these aspects will affect your ability to develop a project. We can help you understand what to expect when taking your application forward to potential lenders.
What are lenders looking for when assessing your development?
When they are assessing your development, lenders look carefully and critically at the quality that you are offering. Their primary considerations for doing do so are:
- What would they be able to receive if they had to take back possession of the property and sell it?
- What will the final value be of the building/dwelling?
- How easy it is to sell the property.
- If the land is residential or rural, usually there is a higher turnover of properties in the cities than in the countryside.
- Although this is something you cannot control once you have selected the development. The postcode of the property is part of the consideration process.
- If the property is a residential or a holiday resort, it can be easier to get financing if it is not a holiday resort.
As a property developer, you need to understand finance and what the banks look for when lending for development projects, which is very different to how they assess financing a simple buy and sale investment.
Today lenders are understandably scared to take on risk, and they want to look after their safety first. Before you decide whether to finance your project, they will assess the risk. They will evaluate you as an individual and how you can repay the loan, but then they will determine the viability of the development itself.
Banks will not lend money based on the security of the project. One aspect they are looking for is the track record of the person behind the development.
Until you have a strong reputation with the bank or a proven record in property development, the lenders will have to base their decisions on the professionalism of your proposition that you present to them.
Meaning that if you don’t already have a strong track record, it is even more essential to present your case professionally, including a detailed feasibility study that will show that you have allowed for all possible contingencies.
Consider getting a project manager
Although this can be costly, a project manager could save you money in the long term. A project manager also works as being a connection between contractors and different sources. A project manager can save you money by keeping your project on track and helping you avoid unexpected costs. An experienced project manager can prove extra information from their previous experiences. This information can give you a new perspective and peace of mind that your project will be a completed successfully.
Before you start any development project, it is crucial first to establish how much money you can borrow, also, how you will manage all the associated costs.
Generally, the structure of a development loan is that a lender provides up to 70 to 80% of the final cost of the development project. So, they will expect you as the property developer or your equity partners, to provide the rest of the balance to fund the development.
The amount you can borrow is called the Loan to Value Ratio (LVR).
Lenders class 2 or 3 property developments as “residential” and use less strict lending criteria for this type of project. Whereas with a more robust plan, they may need a much higher percentage of equity or a level of pre-sales.
You need to provide around 20% of the funds for a two dwelling project and approximately 30% – 40% for more significant developments. Lenders will start to classify more significant developments as a “commercial” loan.
A development of two townhouses or semi-detached construction, you should be able to receive a development loan at 80% LVR.
Meaning if your total cost of development is £2 million, your financier will expect you to contribute around £400,000 of your own money to the project.
Development finance works differently to standard investment finance. Usually, you can borrow the ongoing interest, and this can be part of your finance package.
You don’t have to pay interest during the build phase of your development, but the investment is capitalised. So, the interest is then added to the amount you have borrowed. At the end of each month, you must pay attention to the investment. You still will not be able to go over the total loan amount, for example, 80% of the project costs.
You will begin to start your repayments once you commence the marketing and on-selling procedures.
If you intend to keep the development, you will pay the project loan by refinancing the property and then taking out a long-term investment loan. However, remember the banks still won’t go over the agreed percentage, such as 80%.
To ensure the completion of the property development stage, the lender may send out its valuer. The lender may also request a certification from the project manager or quantity surveyor to confirm the work.
So, it’s worth remembering that even a development that can look amazing on paper. However, if it doesn’t tick all the right boxes with the lenders, it may never get off the ground.
We can help you to secure the right finance for your HMO property development. Just complete our quick enquiry form here and we will contact you shortly.
DISCLAIMER: These articles are for information only and should not be construed as advice. You should always seek advice prior to taking any action.