Property Development Loans – How Not To Get Turned Down
Property development has become very popular in recent years. An increasing
number of people are seeing it either as a way of earning extra money, or as a
means of escaping from the day job.
However, if you have already embarked on your first project, you will know that
it isn’t quite as easy as it is sometimes perceived to be. Property development
is full of traps and pitfalls - there are all sorts of things that can go wrong
at any stage of a project. It is certainly true that property development can be
extremely profitable. But the main drawback is that it costs a lot of money up
front. And this means that unless you are already very rich, you can’t get
started without a property development loan.
It is certainly true that there are more specialist lenders of
property
development loans than there were a few years ago. However, the fact that these
lenders have more knowledge of the property development world means that they
are more aware of the risks. So they are not going to lend money to you unless
they are reasonably satisfied that you have a sound project.
So what prevents people from
getting property development loans?
- One reason you could get a “No” is that you have not carefully costed your
project. If when you make your application you give the impression that you are
guessing about the amount you need, the lenders are not going to be impressed.
You must be very precise about the purchase price of the land, the construction
costs, the fees of any professionals you need to employ such as architects and
surveyors – and then add on at least 10% for contingencies. If you don’t know
how to cost your project accurately, employ an accountant or a project manager
to work through it with you, and add their costs to the total.
- An even more common reason for property development applications being turned down is that the
would-be borrower has not been clear in estimating the potential profitability
of the project. Of course, this is more difficult than calculating the costs –
but without knowing whether the project is likely to be profitable the lender
cannot decide how good a risk you are. You must research the market in the area
where the project is located and show clear evidence of buoyancy, supply and
demand, and existing interest in the properties. The more businesslike you can
be about this, the more impressed your lender is going to be.
- One factor which will almost certainly result in a “No” is failure to get
planning permission before you make your application. It’s no good telling the
lender that you are almost certain to get planning permission. It can be very
tempting to skip this step because the planning process is so tortuous and
lengthy. But very few lenders will agree a development loan without it.
- Another factor which can sometimes cause a new developer to be rejected by a
lender is lack of experience! This seems very hard because everyone has to start
some time, but obviously a lender will see a newbie as more of a risk. There is
not much you can do about this except look for another lender who is less risk
averse. Alternatively, if you can persuade an experienced developer to go in
with you for half of the profits, this would make you more attractive to a
lender – then next time you would have the experience to go it alone!
Most of the factors that could cause you to be rejected by a lender for your
property development loan
are actually within your control. Make sure you are businesslike, that your
project is carefully thought out and costed, and that you have taken good advice
on each section of the project. If the lenders are sufficiently impressed by
your presentation, they should lend to you even if you are a first-timer!
E Berry May 2008
Please note that the FSA do not regulate commercial loans or commercial mortgages
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