Case Study 1 – Property Development Finance
Simon and Enhanced Wealth have a five year business connection, starting with the arrangement of finance for a couple of long term hold buy to let property investments.
At the time that we first started dealing with Simon, he was an employed carpenter, who had just about had enough of seeing the fruits of his labour; make someone else very well off. Being a local Bristol chap, who had lived and worked in the same area all his life, Simon was well connected in the building industry and had all the necessary connections terms of skilled sub-contractors and other labour. He had spent time building up the local estate agents confidence, in terms of his reliability as a good buyer of probate properties, that needed refurbishing. A ready supply of such properties, requiring light re-furb work, soon became available.
Rather than take Simon down the full commercial mortgage route for funding, Enhanced Wealth used penalty free buy to let mortgage products that allowed for light re-furb work, within acceptable criteria. The refurbishments were funded from credit cards and Dad!
This situation worked just fine, until the Agents started to enjoy the quality and speed of a non dependant sale, in a hardening market. Meltdown was fast approaching, with too many properties being offered for him to cope with in terms of cash flow. In addition, some of the properties needed real improvement, and were not mortgageable on standard buy to let mortgage products.
This gave Simon a real dilemma; he could not afford to turn the agents down, however he could not afford the cost of acquisition and development. A potential lose-lose situation for all concerned! He needed to find a way to finance the extra properties so they could be developed and sold on.
He called us for help and we quickly came up with more of a win-win plan for his property development needs.
We explained that our property development finance partner would lend him up to 70% of a property purchase, 70% of development costs, which could include; Stamp Duty, professional costs, interest roll, and personal income drawings, providing the total did not exceed 65% of the end value, plus any other security offered. We went on to say that in fact, as there was ample security in his main residence in terms of equity, the whole lot, including the deposit could be secured against a suitable development by first charge, with a second charge on his main residence.
In addition, our commercial finance lender would, providing the numbers added up, have no objection to more than one property development on the go.
Simon could see that this type of property development loan would ease cash flow, and allow him access to properties that the professionals prefer, i.e. the ones where his skills could add real value, thus giving a great return. He asked about the merits of setting up a Limited company to trade the properties through, so we referred him to our accountant who agreed that now was a good time to set one up.
Well, since then, Simon and crew have not looked back. They have four decent size property developments under their belt; have delivered on time and on budget, and the Bank have got their money back.
In the Bank’s opinion, Simon’s stock could not be higher; they feel comfortable in his ability to deliver a quality product, on time and on budget. This “comfort”, has brought reward; the Bank is going to provide property development finance at 70% of purchase costs and 75% of build in future.
Please contact us if you want to discuss a property development finance project.
Case Study 2 – Auction Finance
Auction Property Finance and Auction Bridging
One of our Directors, Norman, had been using a father and son painting and decorating teams for years and had recently had them round to quote him for some external painting.
During the long and convoluted conversation that always ensued (usually involving paint zzzzzzzzzzz!), loe and behold something a little nearer to home came up.
Burt said that since the start of 2008, he and his son had been doing a lot of work for people who had purchased little two up, two down Victorian terraced properties at auction, given these a “tosh” over (as he so eloquently put it), and then completed on a sale within three months of purchase. As he and his son were on site for around 11 working days, during which time the carpets were laid; most of the three months was taking by the sale/sale process.
Burt went on to tell us that most of these people, apart from the odd blinkered individual that had been lured into overbidding; had made between £10,000 and £13,000 net, in just three months. As this required no real personal effort and all had other forms of employment, the money was just icing on the cake.
Now Burt had a theory, and he was determined to give it to us! He believed that due to the current economic situation, 2008 would see a growth in the number of properties passing through the auctions and that with demand being somewhat lack lustre, bargains may well be back on the menu. He thought that the type of properties that he was looking for, would not appeal to the property developer types as the margin was not great enough for them.
Norman, thought that he had a point and agreed that as the painting and decorating (including materials), which would normally be charged at around £3,000, would be completed by themselves it notionally increased the pre tax profit to £13,000 to £16,000 ish, the only opportunity cost might be the potential for alienating their existing customer base. However, they would only be on site for 10-11 days approx.
Anyway, Burt quoted Norman for the work and went on his merry way.
About six weeks later, Norman had a call from Burt (in a bit of a panic), asking if he could come and see him about some property auction finance. Turns out that he had been to an auction, bid on and bought, what he thought was a juicy little repossession property. As is usual at auctions, Burt had put his 10% deposit down, the balance payable in full within 28 days. The bad news that the auction had happened ten days previous and no valuation had yet been carried out!
Burt had been busy messing around with all manner of strange options like second personal loans etc trying to solve his cash flow problem.
Norman told him that we regularly arrange auction finance and that the most important thing here was speed. In short, he needed a bridge; short term cash funding, usually available for up to twelve months. Norman went on to explain that such property finance, up to 80% of the 90 day value could be secured on the purchased property, with the balance, 10% secured on the equity of his home for speed (valuation necessary). Our auction finance lender is quite happy to “roll up” the interest where there is enough security and a clear exit strategy i.e. sale.
Norman filled in a property auction finance application form there and then and faxed this off for a decision. Burt being confident of his credit history asked if the valuation could be carried out before a decision was issued. This was done immediately by phone to our dedicated Bridging Sales manager.
All went according to plan; funds were available in ten days at 1.49% over Bank of England base rate per month. No exit charge. This proved very inexpensive finance for Burt, which contributed to a pre tax return of £12,500 after Estate Agents and legal costs.
Please contact us if you would like to discuss auction property finance.
Case Study 3 – Bridging Finance
Late last year our specialist lending department were contacted by a lady who was worried to the point of being ill. June told us that she had taken out a mortgage 27 years ago and set it up on an interest only basis, originally intending to repay the loan by downsizing her London flat and “moving out a bit”.
A week before she called us, June had received a telephone call from her lender’s “End of Term Field Agent”, reminding her to ensure that arrangements to repay the loan were in place as there were only 5 months left to run on the loan. June asked the representative if she could extend the term and he told her that “policy” would not allow it.
Two days later a letter dropped on June’s door mat detailing what was discussed. At the bottom of the letter there was a warning that should she not repay the loan, the lender reserved the right to repossess June’s property.
This, June told us, made her think about taking some action because now she was older things had changed; she now wanted to remain near friends and family. She was in receipt of a great Civil Service Pension and thought that she could simply re-mortgage to a lender that did not have a problem with her being 69 years old; after all the loan would be perfectly affordable on a capital and interest basis over 20 years. June contacted a couple of lenders that would lend to her at age 69, over a 20 year term.
It was then that June realised that she was in trouble. The lease on her flat was down to 40 years unexpired and the value of her property was around half of what it would be with a 99 year lease.
June said that she had found one lender that would lend with an excess lease over the mortgage term of 30 years, but their policy on max age was 76 years at expiry, which would be little more than breathing room and far too expensive. Even a 10 year term would make it too expensive she told us and the lease problem would just get worse.
June had been caught out by time in two ways, a double whammy. Our advice to June was not to panic and deal with the lease situation first, then sort out a 20 year re mortgage.
We went on to say that one of our more creative finance partners had a special product that was a type of bridging loan, that would base the Loan to Value as it would be after a lease extension augmented the value and allow her to finance the extension of the lease. The completion of the “Bridge” loan would be simultaneous with the lease extension and provide enough funds to repay her existing lender plus the funds for her lease extension.
We would then simply arrange a standard mortgage over a 20 year period repay the bridge.
June was delighted and said that we had ”given back her retirement”. She duly went ahead and the case completed in 5 weeks.
Please contact us if you would like to discuss auction bridging loans or bridging options.
Please note that the Financial Conduct Authority do not regulate commercial loans or commercial mortgages