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Find out how to avoid 5 common development finance pitfalls. Covers: shopping around, due diligence, skill gaps, partners & planning for change.
With smart decision-making at the core of property development, there are few more important ones to make than choosing the right development loan. But, there are some common mistakes that even the most experienced developers can make, and there are numerous things to keep in mind when financing property development.
Here’s our top five pitfalls to avoid when it comes to securing development finance.
1. Failing to shop the market
If you speak to 10 lenders about the same deal, you’ll get 10 different answers. That’s 10 different loan amounts and 10 different pricing structures. Just by the law of averages, if you only speak to one or two, perhaps your ‘go-to’ High Street lenders, there’s almost zero chance that you’ll be offered the best available deal on the market.
By shopping around and speaking to non-bank lenders, you’ll have far more visibility of the best available deals. Putting down a large amount of equity as a 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 equity investors.
2. Falling short on 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 (Lendy, for example) 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 on the HOTs. 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. Brickflow only lists lenders we trust, so we do the due diligence for you.
3. Ignoring skill gaps or weaknesses
In our opinion, the three skills you need to get ahead in the property development game, 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 of each phase.
The most successful developers are the ones that take a realistic view on 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. Read more here, in our blog on how to become a (really good) property developer.
4. Choosing the wrong 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. 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 (PG) early on. This is the legal promise from all stakeholders to repay loans. If a partner doesn’t stand behind the PG it’s not necessarily game over, it just means that despite their experience, their value should be weighted slightly lower than another partner willing to commit to a PG. Read our full guide to Personal Guarantees.
5. Taking 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 actual completion of a scheme is a minimum of 18 months, but is usually somewhere between two and five years; potentially even more.
Think 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, news reports revealed 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.
If any of the above topics are relevant to you and you’d like to discuss further, please call us on 0203 488 1674 or email us at email@example.com