As a property investor, you may have your eyes on a great property finance deal, but for someone with little or no experience in undertaking similar projects, you may wonder how to make a start. Getting involved in a development project can be both intimidating and exciting, especially if it is your first time. If you are considering taking development finance, you may already know that some lenders are reluctant to grant the loan due to a lack of experience.
Development Finance for First Time Developers
However, with the right guidance and support from a financial advisor, you can still secure development finance despite limited experience.
Why Do Many Lenders Hesitant to Lend to Inexperienced and First-time Developers?
A developer with good trade and property development background may also make big profits even if they don’t have a great success record. However, many lenders are hesitant to provide financing to borrowers who are just starting in the property development industry. The problem is, as always, what if the project fails or they don’t repay the loan?
Lenders would never finance a high-risk project, especially when the risk is about not being repaid. They will carefully evaluate every project for which they are asked to fund a development loan and hire a consultant to assess the application, the property and the developer. A developer with twenty years or more experience in completing projects means much less risk than someone who is undertaking their first or second project.
The size of the project is also an important consideration here. Of course, a small refurbishment project presents a lesser risk than developing a building from the ground up. Not only they will charge a higher interest rate for a high-risk project, but they can also resist lending at all if the risk seems to be too high.
Getting your development finance approved as a first-time developer
Development finance lenders always assess each application on its own merits and examine all aspects of the application before making any decision. There is no fixed set of rules to follow, but the developer needs to prove that they have a realistic and clear plan for their development.
Detailed understanding of the development plan and costing costing
A detailed understanding of the cost and the market you are planning to work in is of the utmost importance. Lenders will immediately find out any flaws in your figures and they may become more reluctant to accept your application if the figures don’t match the current market status. For instance, luxury apartments in the not-so-happening area may be easy to create, but difficult to sell.
New developers tend to take things over-optimistically. It is difficult for them to estimate the overall cost because they are not well aware of contingencies that could drastically affect the cost. Lenders would want to know that the developers truly understand the cost involved and they are competent enough to control the cost throughout the project lifecycle.
New developers can provide this information with a schedule of work. This includes a detailed breakdown of the work schedule and development costs involved in the project along with the timeframe. Make sure the budget you give is realistic and the timeframe is achievable.
Present a solid exit strategy
Another key factor that lenders take into account is the strong exit strategy. How do you plan to pay back to the lender? Will you be selling all or some of the units or will you refinance the newly built property to repay the loan?
The lender will carefully assess the feasibility of your exit strategy. They will not only assess how much the finished property will sell for but also how rapidly. They may also inquire about what similar properties have been sold for recently in the area.
Hence, provide strong evidence of what you plan to do with the property after the development is completed and how you plan to repay the loan. If your plan doesn’t seem realistic, they may be more sceptical about approving your application.
Showcase your knowledge and skills
The lenders will also take a close look at you. Although you don’t possess any substantial experience in property development, they will still want to know how much knowledgeable and well-versed you are. Whether you are fully aware of different aspects of property development and how it works.
The lender will closely observe you and judge your potential based on your knowledge and skills. They will ask as many questions as possible regarding the project’s feasibility. Be prepared to answer all the questions outright.
You can also collaborate with experienced consultants and professionals, such as financial advisors, project managers, quantity surveyors, lawyers and brokers to support your application. Building an experienced team is your best bet if you are a first-time developer.
How Does Development Finance Lending Works for First-time Developers?
The lending for first-time developers works pretty much the same way as with experienced developers. It is just the terms and interest rates that could be less favourable. The lender may offer higher interest rates or limit the maximum LTV. That is because they need to counterbalance the risk that your project may fail, or run over budget or fall behind schedule because of the lack of experience.
Use the Help of a Development Finance Broker
If you are new to development finance, you should use the help of a specialist development finance broker.
Firstly, a broker will help you go through the application process, the choices of lenders, the interest rates and how can you pay it back. They will help you prepare your application with all the information they need, and present the application more understandably.
Secondly, financial companies and lenders usually prefer to offer development finance to those who come through a broker. Often lenders accept applications only that are assessed by the broker.
At Bridging Finance in London, we have built strong relationships with private lenders who provide flexible lending criteria and assess each situation on its own merits. They will also guide you throughout the process which will ultimately increase your chances of approval. Click to Blog