Funding a completed development
When you have built a new house there is a requirement to obtain a practical completion certificate. This is the point at which the house can be occupied by the buyer. It is also the trigger for council tax charges so property developers tend to keep back a simple task that prevents practical completion to avoid unnecessary charges until the house has been sold.
Practical completion stage is a very important milestone for funding. When you reach this stage it is possible to refinance the property based on the new market value. Bearing in mind that the lender is now basing its risk on a built property for sale and in some circumstances the properties may already have been reserved. Generally the developer can take 50%-75% of the market value which should not only pay off the existing development lender but also provide extra equity for the developer to use for their next project without waiting for the sales to complete.
The “Developer Exit” loan
This funding solution is called developer exit. As it is a lower risk proposition for the lender, the borrowing costs should be lower so refinancing has an immediate benefit in lowering finance costs. In addition the extra funds could help the developer secure the next scheme and allow the developer to redeploy existing workers/sub-contractors so that they are not lost to another developer.
The redemption of the developer exit loan is achieved on completing the house sales and most lenders will allow up to 24 months to do this, thereby providing valuable breathing space. If you are under pressure to complete sales to avoid finance penalties this can sometimes lead to discounting the sale price to incentivise quick sales.
You can offer “Part Exchange”
There is another way to incentivise quick sales – the offer of part exchange. This is a compelling proposition for a buyer. They want to buy your new build house but need to sell their house first. Helping to sell the customers house using assisted sale and such schemes has its benefits but the best solution, in my opinion, for the buyer is part exchange, because:
- There is no chain in a part exchange.
- No estate agents, viewings and all the hassles they involve.
- A simple single transaction between the developer and the buyer.
Due to the significant benefit the developer is providing the buyer it is possible to negotiate a discount on the buyers house as a consequence.
The developer can draw upon several key benefits from this situation:
- Buying a house under market value.
- Using capacity in labour and stock to renovate the house to add more value.
- The house may come with a land parcel that could obtain planning and be developed.
- The developer has more control of the process and speed of their new build sale.
- Increasing a schemes margin using the part exchange stock for extra profit.
Part Exchange is not just for the “Big Boys”
These proposition benefits appear overwhelming for the developer, but there is just one issue. Small to medium sized property developers can’t afford to buy a new house for every one they sell like Barratts or Redrow. Therefore we have developer part exchange funding. This lending solution funds the developer to buy the customers house in part exchange.
Developer part exchange provides up to 85% of the agreed purchase price in a short term loan. Of the maximum 85%, 75% is provided to fund the purchase and 10% is provided to fund the renovation. You have up to 2 years to repay the loan usually via the sale of the property, but once you have completed the renovation and added value you can refinance again essentially using developer exit.
Or you could refinance on a long term buy to let mortgage, pull all your money out and rent the property. Investors in the (BRRR) buy, refurbish, refinance, rent market would give their right arm for this opportunity.
There is one issue with developer part exchange which needs to be considered – the developer may want to use the equity from their sale to pay for the deposit on the purchase but the development lender has first call on any equity. In this case the developer would need to pay the deposit from cashflow.
At Specialist Property Finance we recognise the importance of funding at all stages of the scheme so if we are arranging the development finance for the project from the start we will talk through the exit plan with the developer and if part exchange funding is a likely requirement at the end we will negotiate terms with the lender to allow equity release for this solution if required. At the end of the day this solution accelerates the developers sales which ultimately pays the development lender so it is in their interests to support it.
In summary at the end of a development your product has crystallised and has more value / less risk. This opens up more funding options at lower costs and should be a key component of a property developers strategy.
If you are a developer and not using these funding solutions and would like to know more simply email firstname.lastname@example.org for an informal, no obligation discussion.