As with all aspects of the mortgage market, knowledge of this niche area is essential to getting the deal done which is where the importance of financial advice comes into its own.
Most recently rising interest rates and high inflation have had an impact on the sector, forcing substantial increases to the cost of labour and materials required to complete projects, resulting in a squeeze on margins for many property developers.
Placing business in the current economic climate has been challenging due to tighter lending criteria and more scrupulous underwriting practices, but it is not impossible, as demand for development financing remains high.
At Clever Lending, we receive enquiries ranging from larger £2m plus deals to small-scale property developments with many of these clients seeking funding for heavy refurbishments, change of use, or extensions to existing properties.
For example, not all lenders will finance small-scale developments worth less than £750,000, which is why using a specialist broker familiar with this area is important.
Lenders will also always require a detailed plan of the proposed project — as well as proof that it can be completed — before any agreement can take place.
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Preparation and planning play a crucial role in property development cases, and it is essential that all required certifications and insurances are signed off and in place before an application for funding is submitted, as this will help to streamline the process and prevent the application from stalling.
Having a detailed and itemised schedule of works that clearly lists the costs and timescales associated with each stage of any planned development, as well as a JCT contract, is important as it enables the lender to see how the project is expected to progress towards completion.
It is always recommended that inexperienced developers employ contractors, builders and architects with previous project management experience, as this helps to reassure lenders that deadlines can be met.
As with all types of short-term funding, having an exit plan is vital and the value of the land and/or project in its current state, build costs and the estimated end value of the completed project need to be determined before a loan amount can be agreed.
It is also recommended that all applications be submitted with full planning permission where possible, as this can help to ensure the funds are released quickly.
The application process is often more efficient for those clients who have equity to put into the project, such as those that can buy a property outright but need to borrow funds for the actual development.
This is an important consideration for smaller developments as the funds released on day one of drawdown typically amount to between 55-65% LTV, so those developers that already own land are likely to find the deal progresses with greater ease.