Call Now 020 3393 9277

How Does Development Finance Work?

How Does Development Finance Work

Development finance began to show a fair amount of potential as of late. Buying a property at a fairly low initial price and then developing it to be sold or lent at a higher price seems like a good investment for many people. It brings enough profit so that in the long run, you can recover the money you have invested in the initial purchase.

But still, do you understand exactly how this type of finance works? You may know a thing or two – but understanding the basics will make the difference between starting a successful business – and one that will leave you bankrupt.

What Does Development Finance Offer?

There are several types of finance options for development, each one targeting a certain kind of development. A smaller development, for instance, may involve a simple aesthetic renovation that has nothing to do with the structure of a property. This can be anything from a wall painting to a change in staircase rails, door knobs, and other similar items.

A lender, however, may also go for redevelopment finance – which is basically classic development finance that also handles the structure of a property. Those who want to apply for residential development are generally the ones who also need to dive into heavy work to the house structure.

In other words, if you are planning to extend the house or to rearrange the walls, you will have to apply for redevelopment finance. While this may be rather costly, it can also drastically increase the value of a property. On the long term, this may bring you a fair amount of profit.

Last but not least, property development finance will allow you to develop a building from scratch. Say that you have a piece of land, but you have nothing worthwhile on it. If you build an establishment there, then you’d be able to gain more profit by bringing in more tenants. In the long run, this will definitely prove to be a good investment.

However, bear in mind that a new project that is built from scratch can be quite costly – particularly if you don’t really know what to invest your money in.

It is recommended that you first contact a broker and ask for their advice before signing any contracts. In the long run, this might just save you pounds that reach the thousands.

Stratford Development Before Stratford Development After
 Stratford Development Before Stratford Development After

How to Apply for Property Development Finance

While development finance may seem like a classical loan for a mortgage, it is not exactly so. On mortgages, for example, you pay your part every month – and as long as you are on time with your payments, no one really cares what you do with your home and who stays in it.

However, property development finance involves business loans. The lender will assess the value of the property – and then will make you an offer for a loan based on your eligibility, ability to pay, and potential for the development to be a success. When providing finance, lenders will try to predict the final value of the project – and how much the developer will have to pay in order to get to that stage.

To apply for finance, you will have to turn in an application that specifically says how much property you have – including its development costs, building timescale, and professional fees. Once the papers have been turned in, the lender will give you a list of terms that you will have to agree to. Once this stage has been cleared and you have reached a mutual consensus, you’ll be ready to advance to the credit check.

Bear in mind that depending on the state of your credit, you may receive different financing amounts – if any. If you have a bad credit rating, there’s a high chance that your application will be rejected. Bad credit can have a serious effect, so make sure that you have checked it beforehand – and that you fixed any potential errors that you might have on your report.

Last but not least, the loan may have been approved – but the lender will still be monitoring the borrower throughout the entire process. Furthermore, since the interest rate is determined based on the “risk factor,” it’s hard to say from the very beginning how much you will have to pay in interest fees.

You can find top 10 tips to raising Development Finance

Building Development

The Paperwork Needed to Apply

When it comes to property development finance, the paperwork is a very important step that you need to take care of. Plus, you need to consider that the future value of this property is also taken into consideration – which is why you’ll have more paperwork to deal with than with the average mortgage.

Before talking with the lender, as a developer, you have to ensure that you have the following documentation at hand:

  • Evidence of the property’s value (if owned) or its purchase price (if not yet owned)
  • The predicted property value once development is over, along with evidence
  • Renovation and business costs
  • Time schedule for the development
  • A CV or portfolio that proves your experience and ability to finalize the project
  • Details of the personnel and individuals that are involved in the project
  • Data on the building regulations
  • Plan permissions (copy)
  • Copies of planning restriction that you may come across

 

Depending on the paperwork, the lender will decide whether the property is worthy of development finance or not. If you manage to prove that the property will have significant value by the end, then you will most likely receive the necessary financing.

Development Finance Paperwork

The Need for a Broker

When it comes to development financing, you don’t really need a broker – but still, it might not be a bad idea that you use one. When you are dealing with a lender, you might receive property development financing that is either too big or too small.

However, a broker will analyze your financing – and practically everything else – to ensure the lender acts in your best interest. This way, you won’t have the “nice” surprise of receiving an interest rate that is higher than your normal rates.

Plus, lenders have the tendency of sometimes hiding some things, or simply conveniently “forget” to mention them. A broker, however, will not only look for the best lender you can go for – but they will also provide you clarity regarding the costs of the loan.

They will basically explain to you what money goes where and why a certain fee is as high (or low) as it is. Brokers will also negotiate on your behalf so that you can get the best price – since they know the market and what to expect. Therefore, your finances will rise and you won’t have to overpay when it comes to fees. In the long run, this will prove to be a great investment.

So, as you can see, strictly speaking, a broker is not necessarily someone you’ll need when it comes to development finance. It is, however, someone who could help you get much better rates than you could by yourself.

Development Finance Broker

Property Development Finance FAQ

When it comes to financing for development, there will always be questions. Some have clear answers – others will depend on several different factors. Here are some common questions that might arise in this domain, along with their respective answers:

Q: What are the fees that I will be expected to pay?

A: Development finance associates itself with a fair assortment of fees, mostly depending on the lender and the documentation you bring to the table. Before signing any contracts, it’s always a good idea to sort them out so that you know exactly what to expect. In these cases, it’s always a good idea to consult with a broker, since they will give you a fairly clear picture.

Q: How much will I be able to borrow?

A: This will depend mostly on the expected development value associated with your project. If you have a smaller project, then you will be given enough finance to cover the costs. However, if the project is bigger, you may receive more financing – provided you meet your lender’s criteria.

Q: Can I get financing if I don’t have any experience in property development?

A: This will generally depend on the lender. Some of them have no problems with offering finance to someone with no previous experience. The only condition is to either conduct proper research or to have a team of professionals working with you.

However, most lenders prefer that you have a certain degree of experience. This way, you will be seen less as a risk factor and more as an investment. For this reason, you might want to conduct proper research before settling on a lender.

Final Thoughts

Property development finance may seem like something difficult to understand and receive – but as long as you learn the basics, you’ll find out that it’s not actually that difficult.

Lenders will look for promising investments that will get good rental income when the project is done. The more solid your plan is, the more finance options you will receive. Provided both parties (lender and borrower) make their terms clear, there should be no problems when you are applying for financing.

Find Out More – Property Finance Partners