First Time Developer Finance
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Author: Gary Hemming CeMAP CeFA CeFA CSP
20+ years experience in development finance
Navigating the world of property development for the first time can feel like a daunting journey, but fear not, we’re here to guide you every step of the way. This comprehensive guide will shine a light on the ins and outs of first time developer finance, providing you with the knowledge you need to confidently step into the finance market.
We’ll delve into what first time developer finance is, who qualifies as a first time developer, and how this type of finance works. So, let’s dive right in and start demystifying the world of development finance for first time developers.
What we cover in this article:
- What is First Time Developer Finance?
- How does First Time Development Finance work?
- Can First Time Developers Get Development Finance?
- How Much Cash Do You Have to Put Towards the Development?
- What are the advantages of this type of funding?
- What are the disadvantages?
- Is a Property Development Loan a Good Idea?
- Key considerations
- What are the Alternatives to Development Financing for Inexperienced Developers?
- FAQs for Development Finance
What is First Time Developer Finance?
First time developer finance is a type of specialist finance designed to help first time developers kickstart their journey into property development. Its primary purpose is to provide the necessary financial support to developers to cover the costs associated with construction and development projects.
This type of finance is typically a short-term loan, often used to fund the purchase of land and the subsequent construction costs. It’s a lifeline for first-time developers, allowing them to make their mark in the property development sector without the need for substantial personal capital.
What is a First Time Developer?
A first time developer is an individual or a company venturing into the realm of property development for the first time. They could be someone with a background in the construction industry, a property enthusiast with a vision, or an entrepreneur looking to diversify their investment portfolio.
The common thread among first-time developers is their shared ambition to transform a plot of land or an existing property into a profitable venture. Despite their enthusiasm and drive, first-time developers often face challenges in securing finance due to their lack of experience in the field. That’s where first time developer finance comes into play, providing the much-needed financial backing to bring their vision to life.
How does First Time Development Finance work?
Securing first time construction finance is a process that involves several key steps. Here’s a step-by-step breakdown of how it works:
- Application: The first step involves applying for the loan with a lender who offers development finance for first-time developers. This could be a bank, a specialist finance company, or a private lender.
- Assessment: The lender will assess your application, taking into account various factors such as the viability of your development project, your financial status, and your credit history. If you have bad credit, don’t worry, there are lenders who offer development finance to individuals with less-than-perfect credit scores.
- Approval: If your application is approved, the lender will provide you with a loan offer detailing the terms of the loan, including the interest rate, the loan term, and any additional fees.
- Funds Release: Once you accept the loan offer, the lender will release the funds. The funds are typically released in stages, aligning with different phases of the development project.
- Repayment: You’ll start repaying the loan as per the agreed terms. This is usually done in installments over the course of the loan term.
Remember, while first time developer finance can be a great way to kickstart your property development journey, it’s important to compare different finance options and seek professional advice to ensure you’re making the best financial decision for your circumstances.
Can First Time Developers Get Development Finance?
The short answer is, yes! First-time developers can indeed secure development finance. However, it’s important to note that lenders will typically assess a range of factors when considering your application. These include the feasibility of your development project, your financial status, and your credit history.
While having a solid credit history can certainly help when raising finance, don’t be disheartened if you have bad credit. There are lenders out there who are willing to provide construction loan to first-time developers with less-than-perfect credit scores.
In addition, some lenders may require a personal guarantee as part of the loan agreement. This is a legal commitment where you agree to personally repay the loan if your development project does not generate enough revenue to cover the repayments. This is fairly standard when raising developer finance, whether you’re experienced or not.
Can You Demonstrate Some Experience in Property Development?
While you might be a first-time developer, having some previous experience in property development or a related field can certainly work in your favour when applying for development finance. This could be experience in the construction industry, project management, or real estate investment.
If you don’t have direct experience in property development, don’t worry. You can demonstrate your competence in other ways. For instance, you could show that you have a strong team of experienced professionals supporting your project, such as architects, builders, and property lawyers.
You could also provide a detailed business plan that outlines your development project, including a timeline, a budget, and a marketing strategy. This can help to reassure lenders that you have a clear vision for your project and a solid plan to make it a success.
Remember, every lender is different, and they will each have their own criteria for assessing your application. It’s always a good idea to seek professional advice to ensure you’re well-prepared when applying for development finance.
While some lenders will only work with experienced developers, there are still lenders out there for developers who aren’t experienced. To increase your chances of approval, work with a broker who is experienced in this area and can guide you through the uk development finance market.
If You Don’t Have Experience, Do You Have an Experienced Team?
Stepping into the world of property development for the first time can feel like a daunting task. But remember, you don’t have to do it alone. Having an experienced team by your side can make a world of difference.
Your team can provide the expertise and guidance you need to navigate the complexities of the development process. This can be particularly beneficial when it comes to securing development finance for first-time developers. Lenders often look favorably upon applications that are backed by a team of experienced professionals.
Your team could include a range of professionals, such as architects, builders, property lawyers, and financial advisors. Each of these individuals can bring a wealth of knowledge and experience to your project, helping to increase its chances of success.
Building a Team
Building a strong team for your property development project is a crucial step. Here are some tips to help you assemble your dream team:
- Identify Your Needs: Start by identifying the skills and expertise you need for your project. This could include architectural design, construction, legal advice, and financial planning.
- Research and Network: Look for professionals with a proven track record in property development. Attend industry events, join online forums, and leverage your existing networks to find potential team members.
- Interview and Assess: Once you’ve identified potential team members, take the time to interview them. Ask about their experience, their approach to work, and their expectations for the project.
- Check References: Don’t forget to check references. This can give you valuable insights into a person’s work ethic, reliability, and suitability for your project.
Remember, building a team takes time and effort, but it’s an investment that can pay off in the long run.
How Much Cash Do You Have to Put Towards the Development?
When it comes to property development, cash is king. The amount of cash you have available can significantly impact your ability to secure development finance and get your project off the ground.
Most lenders will require you to contribute a certain percentage of the total project cost. This is often referred to as the ‘loan to value’ or LTV. The LTV ratio can vary from lender to lender, but it’s typically around 70-80% for development finance. This means you’ll need to have around 20-30% of the total project cost available in cash.
It’s also important to consider additional costs such as planning permission fees, legal fees, and contingency funds for unexpected costs. These costs can add up, so it’s crucial to have a clear financial plan in place before you start your project.
Remember, while having a substantial amount of cash can certainly help, there are lenders out there who are willing to provide development finance to first-time developers with less capital. It’s all about finding the right finance solution for your specific circumstances.
Can You Put Together and Show a Breakdown of Cost of Works?
When it comes to property development, having a detailed cost breakdown is not just a good idea, it’s a necessity. This is especially true when you’re seeking development finance for first-time developers. Lenders want to see that you’ve done your homework and that you have a clear understanding of the costs involved in your project.
A comprehensive cost breakdown should include all the expenses associated with your development project. This includes the cost of land acquisition, construction costs, professional fees (such as architects, surveyors, and legal fees), planning permission fees, and any other costs related to the project.
Having a detailed cost breakdown can help you in several ways. It can help you budget effectively, identify areas where you can save money, and avoid unexpected costs that could derail your project. It also shows lenders that you’re serious about your project and that you’ve taken the time to understand the financial implications.
Can You Supply a Realistic Exit Strategy?
An exit strategy is a plan for how you intend to sell or lease your development project once it’s completed. Having a realistic exit strategy is crucial when applying for development finance. Lenders want to see that you have a plan for repaying the loan, and a well-thought-out exit strategy can provide this assurance.
Your exit strategy should take into account various factors, including the current property market conditions, the demand for properties like yours, and the expected sale price or rental income. It’s also a good idea to have a contingency plan in case things don’t go as expected.
Remember, your exit strategy isn’t set in stone. It’s a plan that can (and should) be adjusted as market conditions change and your project progresses. However, having a realistic exit strategy from the outset can increase your chances of securing development finance and ensure you’re prepared for whatever comes your way.
How Does Lending Work When Looking for Development Finance for First Time Developers?
The lending process for development finance can vary from lender to lender, but there are some common steps that you can expect to encounter. Here’s a step-by-step guide to help you understand how it works:
- Initial Enquiry: The first step is to make an initial enquiry with a lender. This could be a bank, a specialist finance company, or a private lender. During this stage, you’ll provide some basic information about your project and your financial situation.
- Application: If the lender is interested in your project, they’ll ask you to submit a formal application. This will typically involve providing more detailed information about your project, including a business plan, a cost breakdown, and an exit strategy.
- Assessment: The lender will then assess your application. This will involve a detailed review of your project and your financial situation. They may also carry out a valuation of the property and a review of your credit history.
- Approval: If your application is approved, the lender will issue a formal loan offer. This will outline the terms of the loan, including the interest rate, the loan term, and any additional fees.
- Funds Release: Once you accept the loan offer, the lender will release the funds. These are typically released in stages, aligning with different phases of your development project.
- Repayment: The final step is to start repaying the loan. This is usually done in instalments over the course of the loan term.
Remember, while the lending process can seem complex, having a clear understanding of how it works can help you navigate it with confidence. And don’t forget, there are professionals out there who can help guide you through the process, making your journey into property development a little bit easier.
Think About Who You Are Developing For
As a first-time developer, it’s essential to have a clear understanding of who you’re developing for. This means identifying your target market and understanding their needs and preferences. Whether you’re developing a residential property for families, a commercial property for businesses, or a mixed-use development for a diverse range of tenants, having a clear picture of your target market can guide your development decisions and increase the chances of your project’s success.
Understanding your target market can also be beneficial when applying for development finance. Lenders want to see that your project has a high potential for success, and demonstrating a clear understanding of your target market can help to reassure them of this.
So, before you start your development project, take the time to research your target market. Understand their needs, their preferences, and the factors that influence their property decisions. This will not only help you design a development project that meets their needs but also increase your chances of securing development finance.
What are the advantages of this type of funding?
First time developer finance offers several advantages that can make it an attractive option for first-time developers. Here are a few:
Access to Capital
One of the biggest advantages is that it provides access to the capital needed to fund your development project. This can be particularly beneficial if you don’t have the personal funds to cover the full cost of the project.
Tailored Solutions
Development finance is often tailored to the specific needs of the project, making it a flexible financing solution. This means the loan terms, including the repayment schedule and interest rate, can be adjusted to suit the timeline and budget of your project.
Expert Support
Many lenders offer expert support and advice to first-time developers. This can be invaluable in helping you navigate the complexities of property development and finance.
What are the disadvantages?
While development finance offers many advantages, it’s also important to be aware of the potential disadvantages. Here are a few to consider:
Risk
Property development involves a certain level of risk, and if the project doesn’t go as planned, you could end up losing money. If you’re unable to repay the loan, the lender may take possession of the property.
Cost
Development finance can be more expensive than other types of loans. The interest rates are often higher, and there may be additional fees to consider. Costs are higher for developers who are tackling their first project, and many lenders will reduce funding levels and require a larger deposit.
Complexity
The process of securing development finance can be complex, particularly for first-time developers. It involves a lot of paperwork and can be time-consuming.
Remember, while this type of finance can be a great way to kickstart your property development journey, it’s important to weigh up the pros and cons and seek professional advice before making a decision as an inexperienced developer.
Is a Property Development Loan a Good Idea?
Deciding whether a property development loan is a good idea for you as a first-time developer largely depends on your individual circumstances, your project, and your financial situation.
On the plus side, a property development loan can provide the necessary funds to get your project off the ground. It can cover a range of costs, from land acquisition to construction, and it’s typically tailored to the specific needs of your project. This means the loan terms, including the repayment schedule and interest rate, can be adjusted to suit your project’s timeline and budget.
However, it’s also important to consider the potential downsides. Property development loans can be more expensive than other types of loans, with higher interest rates and additional fees. There’s also a level of risk involved. If your project doesn’t go as planned and you’re unable to repay the loan, the lender may take possession of the property.
What are the Key Considerations When Taking Out Property Development Finance as a First-Time Developer?
When considering property development finance, there are several key factors that first-time developers should keep in mind:
- Cost: Understand the full cost of the loan, including the interest rate, fees, and any penalties for late or missed payments.
- Repayment Terms: Be clear on the repayment terms. How much will you need to repay each month, and when will the loan need to be repaid in full?
- Risk: Consider the risks involved. If the project doesn’t go as planned, will you be able to repay the loan?
- Exit Strategy: Have a clear exit strategy in place. This should outline how you plan to repay the loan, whether that’s through the sale of the property, rental income, or another source.
- Support: Look for a lender who offers support and advice to first-time developers. This can be invaluable in helping you navigate the process.
What are the Alternatives to Development Financing for Inexperienced Developers?
While development finance is a popular choice for many first-time developers, debt is not the only option. Here are a few alternatives:
- Personal Savings: If you have substantial personal savings, you may choose to fund your project this way. This can be a cost-effective option, as you won’t need to pay interest or fees on a loan.
- Investors: You could consider bringing on investors to fund your project. This could be individuals or companies who invest money in your project in return for a share of the profits. Your investor may require a share in your business, or an equity split – meaning you’ll have to share your profits.
- Bridging Loans: These are short-term loans that can be used to ‘bridge’ the gap between the purchase of a property and the availability of longer-term financing. A bridging loan may be effective for conversion or refurbishment schemes, but may not be acceptable for larger schemes. A bridging loan is short-term debt, usually for a maximum term of 18 months.
- Commercial Mortgages: If your development project involves a commercial property, a commercial mortgage could be an option. This will only usually be acceptable where the work on the property is light, or non-structural. Unlike a bridging loan, a commercial mortgage is long term debt and can be taken over many years, often 20-30 years.
Remember, each of these funding alternatives comes with its own set of pros and cons, and what works best will depend on your individual circumstances as a developer and the nature of your project. It’s always a good idea to seek professional advice before making a decision on your finance. Using a good broker service can make it far simpler when comparing products across the finance market.
Frequently Asked Questions
In this section, we’ll address some of the most frequently asked questions about development finance for first-time developers. We hope this will provide you with a clearer understanding and help you make informed decisions about finding the best funding for your property development journey.
The amount you can borrow with a property development loan can vary widely, depending on the lender, the nature of your project, and your financial situation. Typically, lenders will provide up to a certain percentage of the Gross Development Value (GDV) – the estimated value of your project once it’s completed. This can range from 50% to 70% or more.
It’s important to discuss this with potential lenders to understand how much you could potentially borrow. Raising a higher percentage of finance will reduce your required equity (deposit) meaning a higher ROCE (return on capital employed). This is an area that experienced developers tend to focus on.
Development finance is open to a wide range of applicants. This includes individuals, partnerships and limited companies.
The key is to have a viable project and a solid plan for repaying the loan. Remember, each lender may have their own specific criteria, so it’s worth discussing your situation with potential lenders to understand if you’re eligible.
Development finance is typically available in various areas. For instance, many lenders offer senior debt finance in:
- England
- Scotland
- Wales
It’s worth noting that some lenders may have specific geographical preferences or restrictions, so it’s always a good idea to check with potential lenders about their coverage. Equally some lenders will restrict borrowing based on the property type, with some happy to finance residential property in certain areas, but not commercial.
Yes, the funds from a development loan are typically released in stages. This is often aligned with different phases of your development project. For example, you might receive a portion of the funds for land acquisition, another portion for the construction phase, and the rest upon completion of the project.
This staged release of funds can be beneficial as it helps to manage cash flow throughout the project and ensures that funds are available when you need them. However, it’s important to understand the specific terms of your loan agreement, as the timing and conditions for these releases can vary between lenders.
Keep reading – Permitted development finance or Build to let development finance.
