Helping the property development virgins

It is normally a sign of a buoyant housing market that more and more people try to make a quick buck by getting involved in property development.

This is the case at present, as we are seeing increasing numbers of enquiries in this field, many from first-time developers.

So what is needed to make a success of property development? It obviously helps if you have some experience in the sector, although this is not essential and we can raise funding for development virgins.

If a client doesn’t have any experience it can be sensible to start small, perhaps with a property that just needs refurbishment before selling at an enhanced value.

This requires less specialist knowledge, is likely to be a quicker project to undertake with less potential for cost overruns and will require substantially less capital to be invested than a more ambitious development.

But if a client wishes to undertake a new-build project a lender will usually insist on the involvement of an architect or project manager to oversee the development.

How much can typically be borrowed to fund a development? The rules are pretty much the same for all types of project from refurbishments through conversions up to new-builds.

A prime lender such as a high street bank will normally lend around 75% of the initial value of a property or site, depending on the details of the project and the experience of the client.

It will then lend a further 70% to 75% of the costs of the development, with funds being released in stages as work is completed, usually against an architect’s certificate.

So a client will need a deposit of at least 25% of the overall project cost plus a bit extra to fund the first phase of the development as the stage payments will only be released once work has been completed, to enhance the value of the lender’s security.

But it may be possible to borrow more if the client has other property which can be used as additional security. There are also a number of specialist development lenders which will usually lend only about 65% of the initial value, but then potentially 100% of the build costs.

What are the costs of arranging finance? Interest rates are higher than for long-term mortgage lending, and for a small project with a prime lender borrowers can expect to pay around 2.5% above base rate.

This may fall for large projects and for experienced developers but will be higher than mortgage rates as the lender is making a returns over what might only be a six-month term.

The client will also need to pay an arrangement fee of between 1% and 1.5%, and in some cases even an exit fee when the property is sold.

Rates from specialist lenders, which will often assist in cases where the main banks are reluctant to get involved, will be higher still.

There is no doubt that there are good returns to be made from property development but it all depends on getting your costings right and being able to sell the property quickly and at a decent profit once it is complete.

A buoyant housing market such as we are seeing encourages new entrants.