Residential Development Finance – How To Know How Much To Ask For

Residential development finance covers anything from building or extending a house which you intend either to live in yourself or to sell, through to building a full residential estate. You wouldn’t normally look for residential development finance just for doing up a house in poor repair – this would be more likely to be covered by a refurbishment loan.

If you are approaching a finance company for a residential development mortgage, how much would you need to ask for? Well, at the very least, you would need to calculate the costs of

• Purchase of the land;
• Construction expenses;
• Infrastructure and services; and
• Professional fees – i.e. architect, surveyor etc.

In addition, if you are inexperienced, or if it’s a big project, you should seriously consider employing a project manager. This could pay for itself through greater efficiency and avoidance of mistakes.

So what do you need to consider when requesting your residential development finance?

Calculate the total costs of your project and decide whether a refurbishment loan would be more appropriate. As a rough guide, if the total is £150,000 or less, you might be better off applying for a refurbishment loan – this would be seen by the lender as less speculative and therefore less of a risk.
Generally speaking, you need to have planning permission before you even consider applying for residential development finance. However, in some circumstances, lenders will consider finance to purchase the land where planning permission does not yet exist. This would obviously depend on a survey of the site to check that no major obstacles would prevent the granting of planning permission. If you purchase your land under these conditions, it will probably be easier to obtain residential development finance from the lender to develop the land once planning permission is gained. Alternatively, you can then sell the land at a profit once planning permission is obtained, and repay the loan from the proceeds. Obviously this is a gamble – you have to consider how you would repay the loan if planning permission was refused.
Do as much research as you can to estimate the saleability of the housing development and the profit potential of the project, before applying for your finance. You have to consider the buoyancy of the market in the area, the level of demand, the type of buyer the properties are likely to appeal to, the proximity of schools, shops, transport, etc. At the end of the day, such a project is always speculative. The market could change during the building of the project because of economic factors over which you have no control, and the lender’s conditions will reflect this. Nevertheless, to stand any chance of obtaining your finance, you have to demonstrate that you have done some sound research and can put up a good case.

How easy it is to obtain residential development finance will always depend to some extent on market conditions and on the readiness of lenders to take risks. Some lenders are prepared to lend on speculative projects, because of the high reward potential. Your job is to do all you can to get the market right. If you misjudge the market, however attractive your housing development is it won’t sell – and you will have to depend on renting until the market picks up. Only you can decide whether you are ready to take that risk!

E Berry May 2008

Please note that the FSA do not regulate commercial loans or commercial mortgages

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