Development Finance

| 17th June 2016 | 0 Comments

Development Finance

 

Development finance

 

How to obtain Development finance is always a hot topic. I received an e-mail recently from Dan, one of my subscribers asking how to find Development Finance. His original message is below and my answer follows. I hope you find the information provided of interest. Dan certainly did and he very kindly wrote back to tell me:

 

Hello Ian,

I came across your website whilst searching for information about barn conversions. Its the first time in 5 years I’ve been compelled to continue reading due to well writing and accurate articles. I have refurbished 4 properties over the past five years including extensions, rectifying structural issues and completing works started on a barn conversion. I have recently registered as a Ltd company hoping to take the steps towards becoming a professional developer but I am now finding it very difficult to source and finance any deals. I appreciate this is a very broad and general subject but any advice regarding financing projects would be greatly appreciated.

Kind regards,

Dan.
Dear Dan

Thanks for your comments regarding the site.

The barn is on the market and we have just received an asking price offer which is great.

As for your question, I have used two avenues for financing projects.

Friends/Aquaintances/family
Banks (There are many “development finance” companies out there in addition to banks)

Let’s start with the banks. The real estate departments will lend but you will need to jump through hoops especially as a ltd company with no history. They will want guarantees and debentures via solicitors which cost. You will need at least 30% of the purchase cost and 50% of the development cost. They will then charge a facility fee of about 1% plus a security fee plus any valuation charges. Then during the build either you will need to employ a surveyor/architect to issue stage payment certificates or they will appoint a surveyor who will require you to produce paperwork to support any inspection and release of funds.

I don’t like banks! But I do use them in the absence of friends….

My favourite is friends etc to act as banker only, no profit share. However it may be necessary, depending on who you are dealing with to offer a profit share as a further carrot.

You will know people who are well off; their money will be invested and may or may not be performing well. If they have a head on their shoulders they will listen to your proposal.

My last deal went like this:

– 1st charge on the property in favour of the Friends/Aquaintances/family

– 1% facility fee (eg loan agreed of £200,000 = £2000 facility fee)

– interest – 5% above Bank Base Rate on outstanding balance. Negotiate your own rate. The interest is not added to balance.

– if possible loan to be drawn down in stages as required. Best for you but not always possible. Depends on the friend.

– made a regular monthly payment of £1500 regardless of balance and kept clear records of receipts and daily interest.

– no excessive paperwork, no fees other than facility fee. No surveyors.

– the investment is safe as they have first charge.

There you go. Friends, family, banks, development finance companies, business Angels (the development finance companies use these)..etc etc.. In essence any institution or individual that can see that there is money to be made via a secure investment. The less secure the more paperwork/fees.

I hope this helps.

Best regards

Ian

 

Dear Ian,

That’s great news, I sincerely hope its a quick and easy sale.

Thank you, you’ve clarified a number things and told me more in one email than any bank, financial advisor or experienced developer I’ve spoken to in the past.

Thank you again. I’ll look forward to following you via your web page and news letter.

All the best,

Dan

 

Development Finance

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Category: Construction Phase, Finding a Property, Property Developing

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