Last week we were contacted by a John H, a “regular” customer who over the years has successfully developed 3 residential properties. Funding was arranged by means of cash, provided by a re-mortgage of his main residence, organised through us. All properties were sold on for profit, and the funds applied to pay down John’s mortgage. Now having been through a messy divorce, John said that his finances were “somewhat stressed”.
“I want to change my MO”, said John!
He went on to say that now was the time in his life, to start building up some income producing pension assets, and as such he was now planning to develop some properties and hold on to them as long term buy to let investments.
John said that there was one potential development that he wished to discuss with us, but thought from what he had been told, that if may be a difficult case.
He said that he already owned a piece of land, with a derelict barn on it, which and been split off from the farm that he and his former wife had owned, as part of the divorce settlement.
At the time, the plot and barn had use as a Holiday Let only; however after the divorce he had approached the planners and on appeal had been granted full residential planning usage for a 4 bed house; which had uplifted the value from 80K, to 150K.
On completion, the end value of the house would be circa 430K, according to Johns architect. The architects had told John that he would need 178K to complete the built, which included 10% for contingency.
John said that the plot, with barn, was sitting there with value and no loan secured against it. However John said that, due to “circumstances”, he was unable to put any additional money into the deal.
We said to John that what he needed was a re-mortgage development bridging facility, that would release, 70% of the 150K value on day one, with further stage payments being made, subject to a re-inspection being carried out by the lenders nominated surveyor.
We told John that he would not have to service the debt, as retained interest would be added at outset. As he required a 12 month term to complete the build, at a cost of a little over 1% per month, around £23, 500 in retained interest (cost). Initially he thought that £23,500 in finance costs, seemed expensive, however on reflection the cost of not doing it would be the loss of £78,500 net profit, plus lost rental revenue and capital growth.
John said that he wanted to go ahead on the development bridging, however had some concerns. When asked what they were, he said that he had spoken to some buy to let lenders, as he did not know that we arranged this type of finance. They had told him that they would not refinance from bridging or commercial finance and that he was afraid that he might get stuck on the bridge, with no option but a distressed sale.
We reassured him, and said that the information that he had been given was true, to an extent; but there were options.
Moreover we said that one of the options involved using a lender that would convert the bridging finance facility, to a long term buy to let loan; guaranteed if the property came up to muster on completion, and the rent was enough to support the loan.
As John’s architect had put forward a market rent of £14,600 pa, we told him that this was more than enough to support the loan, based on the lenders rental cover to loan size calculation. Reassured John has moved forward with the deal, with the bridging finance having been drawn, and the buy to let loan agreed, and awaiting completion of the project.