It is vital to make smart decisions when developing a property. It is not all about choosing the right development loan. There are common mistakes that even the most experienced developers can make. So read on if you want to find out more about avoiding development finance pitfalls.
Here is a guidance list to follow
Shop the market
Every lender will give you different loan amounts and different pricing structures. By shopping around and speaking to non-bank lenders, you’ll have far more visibility of the best available deals. Putting down a large deposit can be avoided, simply by finding a more generous loan offer with an alternative lender. This can free up funds for investment in other schemes and bigger sites, and prevent or reduce hefty profit share payouts to investors.
Do your due diligence
Navigating the fragmented development finance market of non-bank lenders inevitably brings increased risk, alongside greater opportunity. Whilst many of these lenders are credible and bring a different dynamic to the market, unfortunately, some are less trustworthy. If a lender is offering far cheaper rates or more leverage than anyone else, question why, as they’re probably taking undue risk. Remember how hard you’ve worked for your equity, and don’t risk your future by betting on a bad lender.
Make sure you dig deep. Ensure your lender passes the credibility test and has the infrastructure to underwrite loans properly, especially if they’re new to the market. Also watch out for hidden terms, and ensure you have full transparency. For example, a lender may offer you a great rate but insist on a 100% Personal Guarantee, or additional charges on other assets, rather than the industry standard of 15-25% of build costs.
Assess skill gaps and weaknesses
The three skills you need to get ahead in property development are:
- risk management,
- people management,
- and decision making.
These all need to be used interchangeably across the key stages of a development project; buying, building, and selling. As an individual, it’s unlikely you’ll have all of these skills or extensive experience in each phase.
The most successful developers are the ones that take a realistic view of their skill and experience gaps and look to fill them. This is normally by collaborating with partners. For example, if you’re a project manager by trade, you’ll be all over the building stage, but may need some help when it comes to tailoring the end product to your prospective buyers. Perhaps you know an interior designer or local agent who could be retained.
Choose the right partners
Whilst joining forces with the right partners can strengthen your case for securing a property development loan, choosing the wrong ones can do more harm than good. This includes everybody from contractors, to shareholders and lenders, to professional partners as we described above. We’ve all heard the stories of feuding partners and sites getting repossessed. It is very much like a divorce, a fallout will always be expensive, so choose your partners wisely.
When you do bring in others, make sure you discuss Personal Guarantees early on. This is the legal promise from all stakeholders to repay loans. If a partner doesn’t stand behind the personal guarantee, their value should be weighted slightly lower than another partner who is willing to commit to a personal guarantee.
Take a micro perspective
It’s easy to get weighed down by the complicated process of securing development finance, but it’s also essential to take a wider view of the economic and political climate. The time that elapses between site acquisition and/or planning applications and the actual completion of a scheme is a minimum of 18 months but is usually somewhere between two and five years; potentially even more.
Think about how much has happened in the UK in the last two to five years with Brexit, the cyclical economy, changes in legislation and our fluctuating currency. In January, London’s property market has ‘exploded’ since Boris Johnson’s election win, particularly at the higher end of the market. A developer’s ability, or lack of, to acknowledge and plan for changes that are outside of his or her control could be make-or-break for a property development scheme, and a developer’s future success.
Do you want to avoid development finance pitfalls?
Come and talk to us. If you have any questions on property or block management, please contact Pelin Martin to book a 30-minute complimentary property consultation on +0208 994 7327 – firstname.lastname@example.org