Harry Midgley from Funding For Business Network explores the options open to housebuilders seeking finance for new developments.
The recent recession was a watershed for sourcing finance as High Street banks abdicated from their role as main funders of business. Subsequently a multitude of secondary lenders filled the vacuum.
For property developers this presented both the challenge of replacing existing relationships with new funders, but also the opportunity of borrowing more on each development.
The choice of funder can greatly affect the profit retained by the developer and depends on a number of factors, including the cash available to the developer. At one extreme a developer can simply borrow 100%. This will seriously deplete the profit level, but as there has been no investment, the return on investment, however small, is excellent. Similarly, a small loan of below 50% is also not uncommon. However, the most common loan is where the developer owns the land and borrows the construction cost.
We work with over 100 funders who lend on property investment, development or bridging. Terms and conditions, the percentage of loan to value and interest rates vary a great deal. Some lenders have relatively low lending ceilings, others have high thresholds. For those unfamiliar with the landscape there can be many pitfalls.
Some lenders have relatively low lending ceilings, others have high thresholds
Finding a new, or suitable, funder is challenging. Doing everything yourself can also be time consuming. Using a general broker without development expertise can also be problematic – unless you work with a specialist.
Many developers opt for appointing as many brokers as they can find which is often disastrous. Funders presented with multiple applications presented in different ways are not usually sympathetic.
The key is to prepare well. The information a funder needs includes:
Funders charge fees both at the start of a development and at the end. Initially there is an arrangement fee and a procurement fee paid to the broker. Sometimes there are also exit fees, but care must be taken that any exit fee is a percentage of the loan and not of the GDV.
Finally, relationships matter. Developers should not necessarily go with the cheapest options but with a funder with whom they are comfortable and one they feel they can work with.
WANT TO KNOW MORE?
HBXL Building Software are proud to be partnered with Funding for Business Network (FFBN) who provide development finance using their unique portfolio of specialist lenders who are used to working with developers of all shapes and sizes.
If you'd like to know more about how FFBN can help you obtain Development Finance, simply fill in the form below and a member of the FFBN Team will be in touch.
[gravityform id="64" title="false" description="false"]
By completing the form above you consent to HBXL Building Software sharing your contact details above with our trusted partner.
As featured in the May 2018 Issue of Professional Housebuilder & Property Developer