Embarking on a property development project may seem like a way to surefire profit. However, it is no good looking at the idea through rose-coloured spectacles or assuming property development loans can be obtained without effort. The more realistic you are about the challenges and pitfalls, the more likely you are to succeed in the end.
So what are the main challenges you may come up against?
• The first challenge is likely to be finding a suitable site. In fact this can potentially be a nightmare. The reason is that suitable sites for developing are likely to be in high demand. If you see one for sale and then go and apply for your property development loan, you will be too late. Your best plan is to do your own prospecting rather than waiting till you see a “for sale” sign.
• If you apply for a property development loan as a novice, lenders will probably require a high deposit – probably up to 50% of both purchase costs and development costs. The best way to get round this is either to find an experienced partner to go in with you, or to put together a good team of experts – or both!
• To be able to predict the potential profitability of a project, you need a good knowledge of the area – transport, schools, medical provision etc. If you buy through an estate agent, you can find out this kind of information, but you are more likely to be buying your plot at auction where this information is not likely to be available. So you need to do your homework and carry out your own research. It is the kind of information lenders need when deciding on property development loans.
• Planning permission can be another major challenge. Before you even offer for a site you need to be aware of the potential limitations of the property. Check if it has been refused planning permission in the past and if so why. You will not be able to obtain a property development loan without at least outline planning permission for the development you have in mind.
• Environmental issues are becoming increasingly significant. Climate change means that more areas that had no experience of floods in the past may become liable to flood risk. Be sure you check with the Environment Agency about any problems that may become evident with your proposed site.
• Property development projects are notorious for going over time and/or over budget. Find out if there is any possibility of including a contingency fund as part of your property development loan. Having a realistic schedule for the timing is vitally important.
Property development can be exciting and it can certainly be profitable. Nobody wants to discourage you or put you off! But the people who ultimately do best are those who are realistic and who plan in advance for all possibilities. When you apply for a property development loan, the more thorough planning you can demonstrate, the more impressed your lender will be.
Please note that the FSA do not regulate commercial loans or commercial mortgages