Our Property Developer Clients judge our value to them by how much sleep they get.
When you’re at the end of a project and exit with profit that’s usually the time to take the family away on holiday. The constant worries of a scheme running into problems that could jeopardise the project can cause sleepless nights.
However, you can plot your project journey in parallel with the financial plans to ensure you have the time, space and money to do a great job and maximise the profits from your hard work.
Land and site purchase
Don’t be tempted to use all your own liquid funds to purchase the site just to make sure its bagged and at your disposal. Whilst no site = no project using cash flow for site purchase could be your first mistake which you could regret further down the line.
Commercial Finance for land purchase is typically available at 50% of purchase price. This is usually pre-planning. Then you need to design the site using architects and apply for planning permission for your scheme. We often advise our clients to buy the land ‘subject to’ planning. This means the developer isn’t stuck with the land if it cannot be developed.
Following a successful planning application its usual that the value of the site has increased as a result. This is important as the site will have a higher GDV – Gross Development Value. You can borrow funds based on the GDV so the higher it is the easier it will be to get the funding required.
You are ready to start and may have the budget and cash flow to give the green light and begin work. However, wouldn’t it be better if you had external funds to complete the project, you kept your cashflow funds in the case of unexpected costs or if you find another project which is too good to pass on. Potentially you may be able to reduce your costs by buying / doubling up on building products and materials (economies of scale).
This is where you can start to lose sleep worrying about your project completing within budget or worrying that you missed out on another project which could have made a big profit for your business.
At the Pre-Build stage we advise our clients to factor in a 10% contingency fund in case you hit an unexpected cost.
Here’s an example:
- Project – field land parcel planning for 2 houses estimated sales value £175k each
- Land cost – £100k
- Development Cost £120k Borrowed £140k (including 12 months interest roll-up)
- GDV £350k maximum loan to GDV – 65% £227.5k
At this point you are comfortably within a typical banks’ lending guidelines and could potentially borrow more funds if required. Your comfortable with the lending amounts and your cash flow and sleeping well.
If your project hits a snag during the build you might find you need more funds. You could encounter a ransom strip or unexpected increase in costs from requiring a different specification product at multiple times the original budget.
We add value by helping our clients in this situation to negotiate additional funds. Each circumstance is different so there is not a typical example, but we are willing to listen, understand and help find the best resolution. Its all part of our mission to help our clients sleep at night.
Congratulations you have finished the job and obtained a practical completion certificate (PCC).
Now you just have to wait for the properties to sell and you can pay off the loans and pocket the profit… or do you? The longer it takes – the more interest accrues and desperate you become to sell (possibly cheaper than you wanted to). Neither can you move onto your next project, so you start to lose sleep again.
At this point there is a further finance option called developer exit. Does what it says on the tin really. This allows you to refinance the properties up to 75% of the sale price at potentially a lower interest rate and for a new term up to 24 months. You are able to eliminate the current loans including any expensive short term debt and potentially release more funds to move to your next project. As long as the properties sell within 2 years – you are in good shape.
In the example of this case, two properties were marketed at £175k each which allowed the developer to borrow a total loan of £262.5k which paid off £190k of existing borrowing (£50k Land + £110k Dev loan) and made c.£62.5k available for another land purchase.
To complete the story let’s say the developer sold the properties in 3 months for £175k each. The remaining 9 months rolled-up interest was rebated back to the developer £16.8k and made an overall profit of £100k for a 2 house development project within 12 months.
The funding used allowed the developer to act decisively and quickly to a problem during the build and allowed the developer to focus on build quality and output. There is a cost for finance but the benefits are superior which are:
- Enables site purchase, development and exit.
- Helps to maximise build quality and therefore profit.
- Enables the developer to progress other schemes which they may have missed out on.
- Enables the developer to sleep at night.
In summary this is a win, win, win, win.
- The developer wins by delivering the best possible profitable project.
- The lender wins as they are actively seeking to lend to these projects.
- The developers suppliers and workforce win from supporting and benefiting from the project.
- The house buyers win from obtaining a beautiful new home.
Property Developers need to plan financially and operationally and it really helps to know what support is available at what points in the journey. This is where we can help and add real value to our property developer clients.