Buying from a bankrupt developer

Early_Retire_Free

Long, long story but the short version is, we have are in the process of purchasing a new build barn conversion (one of 6 around a courtyard development).  The development has been beset by delays but progress has been made and I estimate the property is now 50% complete with a lot of the expensive stuff done.  Unfortunately, I think the developer is in financial difficulties and development has now stopped (again).  Aside from recovering our deposit (which is a big concern), we really like the house (we have not seen anything comparable), so we are considering some "nuclear" options.  Two we are considering are:
1. Offer to buy the site "as is" from the developer at a considerable discount and finish the work ourselves.  We might have to wait for the business to go into administration to do that.
2. Offer to provide limited funding such that our property can be completed (any funds provided would be as a deduction against the purchase price to be paid).  We would effectively project manage the build and only approve invoices directly related to our property.

Aside from "are you f**king crazy" and "hold my barge pole" what do people think of either plan.
I have a conversation with a lawyer tomorrow to put some shape on those discussions.

davidmcn

Handing over more money to a developer who (you think) is just about to go bankrupt seems crazy. I doubt you'll be able to secure it in any useful way as they've probably already got a bank with first call over the whole site.

Do you have enough cash to buy the site in its current state and then develop it? Or would you need a self-build mortgage?

And is your deposit really in the hands of the developer rather than being kept safe by the solicitors?

kiddy_guy

If it goes into receivership, you've no guarantee of getting the house. 

Doozergirl

Buy it as is.  

Would never send good money after potentially bad.  

AdrianC

Early_Retire_Free said:

Aside from recovering our deposit (which is a big concern)

So you've exchanged...?

1. Offer to buy the site "as is" from the developer at a considerable discount and finish the work ourselves.  We might have to wait for the business to go into administration to do that.

I can't see buying it on those terms from the administrator or the current management being very different, tbh. The question is would you be able to get funding? Do you need a mortgage? You'd be looking at a self-build mortgage rather than a normal mortgage on a finished property. If they've been in trouble for a while, and work has been stopping and starting, have corners been cut in the workmanship or materials to date?

2. Offer to provide limited funding such that our property can be completed (any funds provided would be as a deduction against the purchase price to be paid).  We would effectively project manage the build and only approve invoices directly related to our property.

That strikes me as the biggest risk of the lot. If their trade creditors are shying away from giving them more credit, because they don't think they're going to get paid within their terms, why are you willing to on a longer and more elastic payment schedule...?

thearchitect

You need to consider how you would achieve sufficient certification (by way of architect, surveyor, or warranty scheme) on those element alreay completed such as either your own mortgage provider or that of a future purchaser would be satisfied.  That is, I have to tell you, quite tricky. 

Early_Retire_Free

So ....a few more facts.
Yes, we have exchanged contracts with a long stop date expiring in July so at that point we could just walk away (assuming we could get our deposit back)
Obviously, first-things-first, I will be doing extensive diligence beforehand
The development is ringfenced into an SPV (the developer has other sites) and the SPV has funding attached to it.  At the moment I can't understand exactly what the cause of the funding issues are (but I suspect the developer has been 'robbing Peter to pay Paul') and clearly i would want to have full disclosure before considering anything.
Of the six properties under development, two are build complete (of which one sold and completed), one is around 90% build complete, our which is 50% complete and two further properties which are around 20-30% complete.  After that there is landscaping.
The site has a GDV of around £2.3 million for the plots yet to be completed and if I assume development costs for those plots of £1.7 million then the current WIP would be around £1.0 million (with around £0.7 to go).  Assuming lending at 60% then the NAV of the site would be around £400k. These estimates are very much Boafp.  We could afford the buy the site (at NAV) and probably fund half the total to finish and would need to finance the rest (with everything being repaid from sale proceeds)
I suspect the lender would look favourably on the sale of the site as a going concern under administration as a sale under receivership would likely achieve a significantly worse outcome for everyone.

AdrianC

Early_Retire_Free said:

Yes, we have exchanged contracts with a long stop date expiring in July so at that point we could just walk away (assuming we could get our deposit back)

You would be entitled to its return... but you would be an unsecured creditor.

The development is ringfenced into an SPV (the developer has other sites) and the SPV has funding attached to it.

So if the developer goes under, the SPV may well be unscathed.

Of the six properties under development, two are build complete (of which one sold and completed), one is around 90% build complete

OK, so the administrator would probably build that 90% one out, and sell both of those as completed...

...our which is 50% complete

Depending on the numbers, they may build that out and aim for completion.

...and two further properties which are around 20-30% complete.

And unsold? They may just go for selling those as projects.

The site has a GDV of around £2.3 million for the plots yet to be completed and if I assume development costs for those plots of £1.7 million then the current WIP would be around £1.0 million (with around £0.7 to go). Assuming lending at 60% then the NAV of the site would be around £400k. These estimates are very much Boafp.  We could afford the buy the site (at NAV) and probably fund half the total to finish and would need to finance the rest (with everything being repaid from sale proceeds) I suspect the lender would look favourably on the sale of the site as a going concern under administration as a sale under receivership would likely achieve a significantly worse outcome for everyone.

It's certainly one option... But I think I'd want a damn sight more detail on those numbers! And I think NAV of 17% of GDV is a bit optimistic, given 1 x 100%, 1 x 90%, 1 x 50%, 2 x 20% completed... As soon as the 100% completed was sold, you'd have broken even...

Early_Retire_Free

AdrianC said:

Early_Retire_Free said:

Yes, we have exchanged contracts with a long stop date expiring in July so at that point we could just walk away (assuming we could get our deposit back)

You would be entitled to its return... but you would be an unsecured creditor.

The development is ringfenced into an SPV (the developer has other sites) and the SPV has funding attached to it.

So if the developer goes under, the SPV may well be unscathed.

Of the six properties under development, two are build complete (of which one sold and completed), one is around 90% build complete

OK, so the administrator would probably build that 90% one out, and sell both of those as completed...

...our which is 50% complete

Depending on the numbers, they may build that out and aim for completion.

...and two further properties which are around 20-30% complete.

And unsold? They may just go for selling those as projects.

The site has a GDV of around £2.3 million for the plots yet to be completed and if I assume development costs for those plots of £1.7 million then the current WIP would be around £1.0 million (with around £0.7 to go). Assuming lending at 60% then the NAV of the site would be around £400k. These estimates are very much Boafp.  We could afford the buy the site (at NAV) and probably fund half the total to finish and would need to finance the rest (with everything being repaid from sale proceeds) I suspect the lender would look favourably on the sale of the site as a going concern under administration as a sale under receivership would likely achieve a significantly worse outcome for everyone.

It's certainly one option... But I think I'd want a damn sight more detail on those numbers! And I think NAV of 17% of GDV is a bit optimistic, given 1 x 100%, 1 x 90%, 1 x 50%, 2 x 20% completed... As soon as the 100% completed was sold, you'd have broken even... 

Thanks - a couple of points.

1. I am pretty certain we are a secured creditor
2. It would be difficult for the administrator to continue build as the developer does not have any 'own' staff.  The entire build is sub-contracted (and they have fallen out with their main contractor due to non-payment).
3. On the NAV - I was basing that calculation of cost rather than market value .....but yes, you're right, it would not take much to recoup the investment....but that's the risk of course.

silvercar

They could bite your hand off, your payment to buy your plot "as is" may give them enough money to finish and sell the second plot...which keeps them going on the next one.

davidmcn

Early_Retire_Free said:

1. I am pretty certain we are a secured creditor

I'm pretty sure you're not. What makes you think you are?