Careful costing of a property development is key to ensuring your project stays on time and on budget, but even the most experienced builders, property developers and landlords know that it takes just a few bumps in the road to throw these straight out the window.
That’s why, when arranging development finance its common that a lender will expect you to include an extra sum as contingency. It’s normally a significant figure in the region of 10%, and it is likely you will run through it. According to UK Construction Online less than one in three projects completes within 10% of its original budget.
If your budget ends up falling short, there’s no need to panic. There are usually additional development finance options a specialist can offer. If you need to discuss your funding options or just need some advice from, give us a call on 01489 346788.
The sooner you talk to us, the better your chances of getting the build back on track.
What can make a property development run out of funds?
You get blindsided by unexpected issues
You’ve brought in an experienced quantity surveyor to manage your materials and your project was carefully costed, so what could go wrong?
Even with a New Build, where the cost of constructing the property should be accurate down to the final roof tile you can run into problems before you even get started.
The groundwork can throw all sorts of spanners in the works. Before the work begins a full ground investigation must be carried out to identify any problems that could impact the finished development such as subsidence.
If something crops up, you could be in for months of delays and added costs already.
When it comes to conversions and renovations the chances of you running into issues is even higher.
For starters, you could discover any kind of structural deformity that wasn’t picked up in the survey that will quickly chew through your time and funds. Walls need underpinning, pipes need relaying, asbestos, dry rot, the previous owner papered over dodgy DIY… the list is endless.
You underestimate the costs
Estimating a new build accurately can make the difference between a profit and a loss. A good estimator is worth their weight in gold, so your best bet is to bring in a professional. There will be countless ‘little things’ that you forget to factor in if you have limited experience and those little things add up to push you well over budget.
The cost of materials and supplies can be difficult to predict given the fact their prices can fluctuate drastically between the time you make the estimate to when the project actually kicks off, especially in periods of high volatility.
Get your prices and quantities locked in with your suppliers to ensure they can fulfil your order on time. Your workers not being able to crack on with a new build because they’re waiting on orders will eat away at your profits.
What can you do if you go over budget?
Use alternative materials
This is particularly effective if you recognise early that you’re going over budget. You can easily trim down costs when it comes to aesthetics and a few luxuries – swap out the granite worktops for something cheaper and forget about the underfloor heating.
Reduce the project scope
Think about the elements of your build that you can’t live without. Then, cut back on the things that you can.
Secure additional finance
If you’ve decided that you can’t skimp anymore on the plans, talk to a bridging loan broker about securing additional funds. If you’ve already got a charge against the property, your best option may be a second charge bridging loan which will fund the completion of your development to be repaid when you sell or refinance.
If you’re only short by a few thousand, say £20k you could consider using a secured loan or a 0% interest credit card.
Build in phases
If you’re working on transforming your own home and you’ve blown your budget. Relax. Break the project down into more manageable chunks and build in phases.
It may mean you won’t have your extension by Christmas, but the alternative is settling for a rushed job and skimping on what you really wanted.
What to do when your property development runs out of money?
No money, no materials, no pay. Your workers aren’t going to work for free and your site will grind to a halt.
Ideally, you recognise being over budget early enough to trim back on costs and keep yourself going a little while longer while you source an additional source of finance before you down tools.
Arranging that bridging finance can be much quicker than you’d expect if you deal with an expert. We got funds into a clients account in 17 days after her development ground to a halt after running out of cash.
Before you get to this stage though, you should have enough of a handle on your budget and finances to recognise that your site is hurtling towards a shutdown.
If you’re unable to get your project back off the ground, eventually your lender will have to resort to seizing the abandoned development and taking control of the project, in addition to any property you may have put down as security.
Thankfully there’s a route you can go down to pull yourself out of this situation.
Secure additional funding: the trusty and versatile bridging loan
It’s likely that your best option will be to secure a second charge bridging loan to complete the works.
A first charge is the primary funding that you used to purchase the land and start the works. This is the loan that will be repaid first, even if your property is seized by the lenders.
It’s worth noting that the rate for a second charge bridging loan is usually higher to compensate for the higher risk a lender accepts when loaning you the money. But it’s better than losing the development, your security and reputation if the project crumbles without additional funding.
The second charge bridging loan will be in place for between 9-18 months to help you complete the works and you won’t usually have to make any monthly payments as the interest will be a part of the loan that is repaid in full when you exit.
Once you’ve sold or refinanced onto a longer term finance arrangement you will make the repayment in full.