Development Finance - Catch 22

Sydney23

Hope this is the right forum.

We have a house with a 210k mortgage. The house has planning permission to extend and convert to flats. The building costs would be 150k, meaning total debt would be 360k - call it 400k including contingency, selling and finance costs. Gross developed value is currently (Oct 2009) valued at 640k, so we're looking at a final LTV of around 60%.

But I can't find any bank willing to lend 6-12 months of development finance - I am self-employed with no/poor accounts (I've been working on the house and latterly on others') and self certs don't exist any more, and I have been told I haven't done enough projects like this in the past to demonstrate a track record (even though a building firm would do the work, not me!)

I guess a private investor or cash-rich builder / development company might be my last option - I could try and sell one of the flats at a 40k discount off-plan - using that cash to get them all built. With savings rates at 3% a year, someone might be interested in 30% in 6 months? The cash could be in escrow and paid out at set build stages to limit the lender's risk - if it was a builder partner they could hardly be too worried about the build quality/problems?! And we could (I think) establish a freehold holding company and split the shares in advance if that helped them feel/be more secure?

I understand the banks have basically shut down to any risk at all while they rebuild their bonuses, sorry, I mean balance sheets, but there must be someone out there wanting to do low risk business for a generous profit? How do I find them?

Anyone got any good ideas (or rich uncles!)?

My first post - please be gentle

Fire_Fox

The market is flooded with flats that won't sell, and very short on FTBs, is it really the time to get into developing? Do you have experience of developing for profit or intimate knowledge of the property market in your area?

Gwhiz

Fire_Fox wrote: »

The market is flooded with flats that won't sell, and very short on FTBs, is it really the time to get into developing? Do you have experience of developing for profit or intimate knowledge of the property market in your area?

As firefox says! Even experience developers cannot get finance for flats in the current market.

theGrinch

private finance is the most likely channel. I have sent you a PM

chappers

Its not just the GDV that needs to be taken into account most development lenders would want first charge on your property too so would be looking to take over your mortgage too.

Most will only lend to first time developers at 50% of the GDV and 50% of the current value(made by their valuers).If you can find anyone with funds available.

So in your case you could only stand to borrow a total of £320K, your property would have to have a current value of £420K and even then subtracting the £210K which would be allocated to take over your mortgage, this would only leave you a development fund of £110K. they would almost certainly employ their own QS who would assess the likely costs and if there was a shortfall would want to know where the money to finish the project was coming from. They may accept your proposals of selling off plan but would probably want to see this tied up before advancing you the money.

I am in a similar situation to you with my second development and am very borderline with one lender but they want to charge me extortionate interest rates.

I have just started looking into some private finance myself.

(thegrich if you have any ideas of avenues I may try then a PM to me would also be appreciated)

Many thanks

Gareth

Sydney23

Flats seem to be selling and renting round here ok (Surrey), though I've heard the horror stories of the new-build boxes in London, Manchester etc that won't sell at 50% off the original (ludicrous) prices. There are now people taking money out of shares/banks and into BTL as they are worried about future inflation, spooked by share volatility, unimpressed by savings rates, etc.

Chappers, thanks for that info. It looks like I have to wait 5 years (planning perm time limit), hope SVR doesn't sky-rocket and do no more projects for the next few years.

Or I could get off my behind and make this happen without the banks (was never their greatest fan anyway). It might cost me more but at least I get to negotiate with real people/businessmen rather than box-ticking leeches.

I have a list of friends/contacts to run this by and other possible ideas - I simply have to go for it or give up. Would love to know how you get on Chappers.

It's very weird wondering what I might think re-reading this post in 2 or 5 years from now...

chappers

It is so annoying I have a property there which I am renting out and have been whilst fighting the planners for the last 3 years, which although covering the mortgage is not making me any money.

I know that there is easily £150k profit if I sell, even in the current climate, I know I can complete this project I did a similar development 2 years ago in budget and on time and as a builder have done several similar projects for clients.
It is just so frustating that most of the funding has dried up.

I can do this project it's just that I would have to either sell my other rental property or re-mortgage my own house upto the hilt and to be honest the Misses isn't too keen on that.

Things were ticking along quite nicely until the bankers got their fingers burned.

Gwhiz

chappers wrote: »

It is so annoying I have a property there which I am renting out and have been whilst fighting the planners for the last 3 years, which although covering the mortgage is not making me any money.

I know that there is easily £150k profit if I sell, even in the current climate, I know I can complete this project I did a similar development 2 years ago in budget and on time and as a builder have done several similar projects for clients.
It is just so frustating that most of the funding has dried up.

I can do this project it's just that I would have to either sell my other rental property or re-mortgage my own house upto the hilt and to be honest the Misses isn't too keen on that.

Things were ticking along quite nicely until the bankers got their fingers burned.

T'is life I'm afraid.

Fire_Fox

Sydney23 wrote: »

Flats seem to be selling and renting round here ok (Surrey), though I've heard the horror stories of the new-build boxes in London, Manchester etc that won't sell at 50% off the original (ludicrous) prices. There are now people taking money out of shares/banks and into BTL as they are worried about future inflation, spooked by share volatility, unimpressed by savings rates, etc.

The part in bold is a very wishy-washy statement, do you actually know the market? It's not just Manchester and London where apartments are unsaleable, anywhere in the south could problem as a 10% deposit for an FTB is a lot of money. Even here in Bradford the market is dead, you can buy a shoebox for £45K!

Sydney23

Not sure Bradford and Surrey are very comparable - people spending 45k on a shoebox round here are sorting out footwear to go with their 15k handbags! Lack of supply (and low interest) is helping prices here at the moment and FTB deposits often come from family help.

I can't predict 100% what the sale and rental prices might be in 6-8 months time, but if I need to forecast that accurately there is not enough profit to bother anyway. The figures satisfy me and I'll be passing them on to any investor, but obviously they will want to do their homework too.

Between useless banks, an incompetent planning department and the recession it's been a rough two year journey, but the rewards are still there because we did extensive research before purchase and have consistently refused to give up since.

chappers

Gwhiz wrote: »

T'is life I'm afraid.

Absolutely and I am not asking for sympathy or complaining, I know I am in a much more fortunate position then many people. It's just damn frustrating