As an investor you may have stumbled across an attractive development opportunity but as someone with zero experience managing a similar project you may wonder how to get the ball rolling, or if it was even feasible.
It may be both exciting and intimidating to get involved with a development project for the first time and raising finance can seem like a complex process. But, with the right advice and guidance from an experienced finance expert, your first-time development project can still be successful despite your limited experience.
Can first time developers get development finance?
We always take a can-do approach to helping first time developers. If we have a strong understanding of the developer’s situation there are usually various solutions we can explore to help secure funding.
We have helped many first-time developers obtain funding for their projects, by working with more flexible lenders who can look at each situation on its own merits. These are the lenders open to lending to inexperienced developers on the basis that you have a strong team of experienced contractors, architects, quantity surveyors and project managers that have a proven track record of managing similar projects.
The second element lenders will assess is the viability of the project. Will it be profitable?
Our job is to help ensure the perceived risks posed by an inexperienced developer can be offset by the clear planning and realistic opportunity the development offers.
Do be prepared for lenders to ask more questions than they might to a more experienced developer.
Can you demonstrate some experience in property development?
What experience you do have in terms of construction or property ownership? How many years have you been working in the construction industry? Are you involved in project management? Have you developed property in the past? Prepare an explanation or evidence of these areas
If you don’t have experience, do you have an experienced team?
Your best bet if you are a first time developer is to build an experienced team. Now you might be thinking ‘Where do I start’ and ‘What does a good team look like?’
Building a team
Well, firstly you need a PM. Are you going to project manage yourself or invest in bringing somebody onboard to head the project up? A good project manager is worth their weight in gold.
Having an experienced QS keep a close eye on material costs and project finances will give you the best shot at staying on budget and on time.
You’ll want to bring one onboard at the earliest possible stage as they will be able to advise on the feasibility of a site before the project gets underway and work out what you can build, how much it will cost and what you’ll need to get there.
Demonstrating that the project has been costed by an experienced quantity surveyor will go along way to giving property development finance lenders confidence that the project will complete on budget.
Make sure you’ve got a good lawyer in your pocket. Property development can present complexities that are difficult to navigate for even the most experienced developers. You’ll need legal support to help you navigate planning applications, construction regulations and any surprises that may pop up along the way
Development Finance Brokers
Building a relationship with a good, knowledgeable development finance broker is arguably one of the most important things you can do during your property development journey.
Being able to secure property development finance or not will be the difference to the project getting off the ground or falling at the first hurdle.
Getting the best possible rate and terms can make a huge difference to your bottom line, cash flow and ability to progress onto further projects quickly.
The development finance market has a reputation for being difficult to navigate and lacking in transparency, which can be off-putting for first time developers. For this reason, we’ve developed an intuitive comparison engine that lifts the lid on rates and costs of products across the market so you can get an idea of what a property development finance loan may cost you.
Once you’ve plugged in the details of your construction loan, one of our property finance experts will guide and support you through the remainder of the loan application process right up until release of funds.
How much cash do you have to put towards the development?
If you are using yours or other people’s cash to help fund the project then be prepared to demonstrate this by bank statements. The future sale of shares or property is naturally less appealing to a development finance lender than hard cash in bank.
Can you put together and show a breakdown of cost of works?
Consider producing a schedule of works that details all the expected costs, include within that a reasonable contingency and timescales for each element. The more detailed and realistic the schedule is the more sensibly the lender’s valuer will assess your application (and it will be a useful planning exercise for you anyway, this is in effect your business plan). Resist the temptation to be over-optimistic or lacking in detail, these are the biggest mistakes inexperienced developers make.
Can you supply a realistic exit strategy?
What is your exit strategy for the project, will you be selling some or all of the units? Or will you be refinancing the new property as a means of paying back the lender? The lender is going to assess not just how much the property will sell for but also how quickly each is likely to be completed in line with your timeline. Be sure to factor in estate agent costs, and a reasonable time for legal completion. Your prospective estate agents should be able to provide comparable evidence of what similar property has sold for, this evidence will help support your plan and your development loan application.
How does lending work when looking for development finance for first time developers?
The types of lending open to first timers are in essence no different to experienced investors and builders, it’s just the interest rates and terms which could be less favourable. The lender may limit the maximum loan-to-value, or offer a higher interest rate. This is because they need to offset the risk that your project may run over budget or behind schedule and fall apart due to your lack of experience.
As you will see from our development finance price comparison tool, there are three key numbers that influence the basic risk associated with a development finance deal:
- The loan to value (what percentage of the value of the land do you want to borrow)
- Total construction costs
- Loan vs Gross Development Value (LTGDV)
For experienced developers the typical maximums are as follows:
- 70% LTV against the land
- 100% of the construction costs
- 70% loan-to-GDV
If you are classed as inexperienced you are unlikely to achieve such favourable terms on a standard development finance loan, however there are finance alternatives to release cash from a project. For example, you may be able to raise bridging finance which is designed to be a short-term loan to help get your construction started. Having progressed the build then a lower cost development loan could be used to redeem the bridging loan and provide further funds to complete the project.
If you own other property with sufficient equity tied up, such as your residential home or a Buy to Let property portfolio then you may be able to leverage some of this equity to provide cash or greater security for the property development finance.
Unable to get development finance for first time developers? Consider a joint venture.
If your proposal has been rejected or you were unable to find the capital you needed to support the loan, one option is a joint venture with a more experienced developer: you pool your resources to access their know-how and secure the funding you need. This means you can benefit from their experience to get your first project under your belt as well as being able to pool your resources to put up the amount needed.
Think about who you are developing for
Are you looking to build £1m properties at the top end of the market or are you targeting the more accessible mid-range? Lenders prefer mid-range values that are relevant and accessible to your local market as they are more likely to sell quickly.