New Build Developers find it infuriating that after all their hard work and high quality workmanship they are exposed to the problems of people they have never met. This happens when a buyer of the new home is selling their house in a chain. If that chain breaks the developers house sale is also broken or at the very least delayed and the equity remains annoyingly tied up in the bricks.
Large house builders have been offering part exchange for years. They are in a position to do this using cashflow but most small and medium size developers cannot afford to buy their customers house. This is a problem if the small to medium size developer is competing with a large builder on nearby sites.
Customers buying new build houses like the fact that everything is done for them. They don’t have to worry about replacing anything and they have the comfort of warranties too. So it makes a lot of sense to them if they can do a deal to sell their home to the developer in part exchange for their dream home because its much less hassle – no chains, no changes to completion dates because of random other parties arrangements, and complete certainty. That’s a lot of benefits and that means value add. This is why the price the developer pays for the part exchange property is often less than the market value. The developer can add value to the whole deal by being in a position to offer part exchange and that value justifies the price the developer goes onto offer.
The benefit of part exchange for the developer is that they have an opportunity to make more margin as well as control on their new build sale. Having just built out a scheme and being experts in property development, it should be quite straightforward to appraise a property and assess what improvements can be made that add the most value and even leverage spare stock, fixtures and fittings to improve the property. In addition developers tend to have better buying ability than a person using a DIY store, and a team of construction people that can all add a little value individually to make a large combined improvement. Then the property can be sold at a significant profit. The developer is now making margin on the new build sale and the part exchange property.
We can now offer funding for part exchange deals to developers. The funding amount is up to 75% of the agreed purchase price and can include the costs for refurbishment. The funding product is designed to work on a short term basis and whilst most developers will want to sell and take the cash to the next project there is also the option to refinance with a buy to let mortgage based on a the new improved value which will pay off the part-ex loan product.
As we can fund up to 75% of the purchase price the developer will need to provide the remaining 25%. This can be done either via cashflow or by the equity being released from the sale of their newbuild property. In many cases the developer will be obliged to send all the equity of the first few house sales to the lender that has funded the development and only when the lender is fully or majority paid down in debt will they allow the developer to start receiving equity from the sales of the new builds.
If Specialist Property Finance is arranging your development loan for the new build scheme we will negotiate terms with the lender to allow as much as possible the ability to leverage part exchange finance during the sale process. This will reduce the sales period and lock in the sales more firmly so it is in the lenders interests to enable this to happen. Better for the lender, the developer, and the customer!
Developer Part Exchange Finance is a solution to a very real problem. Please contact us if you would like to know more.