Applying for development finance is about giving a lender confidence in the project and the finance behind it.
Problems often start when an application relies on assumptions that haven’t really been tested or your application leaves too much for the lender to work out for themselves.
A development finance lender will consider whether your figures are realistic and how comfortably the project can absorb a change in plan. They will also want to know how their loan will ultimately be repaid.
Therefore, a bit of preparation can make the process much smoother and put you in a stronger position when applying for property development finance.
Here are some of the mistakes worth avoiding.
There is a difference between keeping a property development lean and budgeting so tightly that one unexpected cost causes a problem.
You may have priced the project months before applying for finance, or the specification may have changed along the way. It is, therefore, worth revisiting those original figures before you approach a lender rather than assuming they still stand.
Contingency is important here too. Developments have a habit of uncovering things that weren’t obvious at the beginning, particularly when you are working with an existing building. Having some room in the budget shows you have allowed for the reality of the work rather than just squeezing the numbers to make them fit.
When you apply for a property development loan, a lender will look closely at the cost of getting to a completed property development so, give them figures that reflect the project as it is now.
The finished value can be where optimism starts creeping into the numbers.
Perhaps a similar property nearby achieved an exceptional sale price, or you’re confident your finished development will command a premium. That may turn out to be true, but it’s risky to build the whole deal around it.
Your projected gross development value (GDV) is important because it affects how the lender views the project and how much headroom there is in the deal. A valuer will form their own opinion based on the finished property and relevant market evidence.
It makes sense to challenge your own figures before somebody else does. Would the project still work if the eventual valuation came in below your ideal figure? If the answer is no, that’s useful to know now rather than halfway through the application.
Most property developers know a build can run late but what can be overlooked is the knock-on effect that has on the finance.
Say the work takes an extra month. That might be manageable from a construction point of view, but what does it do to your loan term? And if your exit is a sale, have you allowed enough time to get that sale through after the project is finished?
A sensible property development finance term should reflect more than the build programme. It needs to give you enough time to get out of the facility without time becoming an unnecessary source of pressure.
Proposing a realistic timescale is far more useful to all parties involved.
It’s easy to see the exit as something to worry about later. The trouble with that is your exit plan is part of the loan decision from the beginning.
If the plan is to sell, the lender will want to understand how realistic that is. If you intend to keep the finished property, you may need longer-term finance to repay the development loan. For example, a developer retaining commercial premises might eventually refinance onto a commercial property mortgage.
It’s worth exploring whether that route looks achievable before relying on it as your exit later.
You can’t predict exactly what lending conditions will be when the project finishes, but you can check your repayment strategy looks realistic.
One of the more basic mistakes happens before the application has even started: assuming the obvious product is automatically the right one.
A property described as a “development” doesn’t necessarily need development finance. The nature of the work involved makes a difference to what product you need.
If you only need funding for light development works over a short period, a bridging loan may be enough. Bridging finance can cover heavier refurbishment, and some lenders will release the money for works in stages as the project moves forward.
But for larger schemes or ground-up developments, a dedicated development loan may be more appropriate.
This is where speaking to a broker early can save you time. You don’t need to arrive knowing the name of the product you want, just explain the project and let them look at the funding routes that could suit.
Of course, you are going to look at the rate, and you should. But don’t just stop there.
Two development finance offers can look similar at first glance but work very differently once you get into the detail. The amount a lender will advance affects how much cash you need to put into the deal yourself. How and when funds are released can matter just as much once work starts.
There may also be a trade-off between the cheapest rate and a loan that gives your project more room to move.
When comparing a property development loan, look at what the funding enables you to do, especially if your project requires a little flexibility. The best development finance is one that works throughout the project, not simply the one with the most attractive number in the headline.
There is a common misconception that you should only speak to a finance broker once everything is ready to submit. You shouldn’t.
An early conversation can help you understand how a lender is likely to look at your project. It can also uncover something you hadn’t considered while there is still time to deal with it.
That’s particularly useful if the project is unusual or you’re not sure which type of finance fits.
You can always refine the details afterwards. The point is to avoid spending weeks preparing an application based on assumptions that a five-minute conversation could have challenged.
Most of the mistakes above have something in common: they are easier to deal with early.
You don’t need perfect foresight, and lenders aren’t expecting it. What they do need is enough confidence in your project to lend against it.
Phoenix Commercial Finance works across the market and can help you explore your options before an application goes in. We will look at the project you are planning and consider the funding it needs, then we help you find a lender that fits.
Phoenix Commercial Finance works across the whole market (from traditional banks to specialist lenders) to find property development finance that fits your project and your plans.
If you would like a no-obligation conversation about what is available to you right now, chat with us on WhatsApp or fill in our no-obligation quick enquiry form and a member of the team will be in touch with you shortly.
