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