Development Finance for First-Time Developers

Hello, and this time on the Bridging Finance podcast, we are talking all about development finance for first-time developers with Scott West from Propertyze. Welcome back, Scott. How are you? I'm very well, thank you very well. Oh, I'm glad to hear that. So let's dive straight into these questions that we've got here then. So first of all, what are the requirements for obtaining development finance for first-time developers in the UK? That's quite a mouthful, isn't it? Yeah, they are. So requirements for obtaining development finance, really, the applicants need to understand the process of building a property from the ground up. I'm largely going to refer to this as a ground up development throughout this kind of this podcast, but

there are some variances that I might kind of touch on. But the clients really need to understand what's involved with building a property from the ground up. It's not as simple as turning up and putting bricks down. There's foundations, there's infrastructure, utilities, there's lots of parts involved and having a wide understanding of how that process works. So usually developers will have some background. They may have worked on site, they may have family who do, they may have worked with developers previously as architects or designers or something. So people tend to have a fairly good idea anyway, but having a nice wide scope of knowledge on that can be very useful. But requirements for financial finance elements, having planning permission or a solid plan for what you're

applying for, an understanding of costs. So builder who's done a full schedule of works for even costings, and then a contingency as well. Having a contingency in place for at least 10, 15% of the total build cost to allow for any errors, mistakes, fluctuations in cost, very important part. Okay, so a few things to bear in mind there. So a good start. So following on from that then, can you explain the different types of development loans available for first time developers in the UK? Residential and commercial would be two largely different development finances and self explanatory really, but if we're building houses for residential use, typically that's one tranche of lenders. If you're building a unit for commercial

use, offices, hotels, warehousing, anything else that's not residential, it's commercial and typically that's a different set of lenders as well. The process follows applications are very similar, but the lending choice, the rates and costs are different. The other thing to consider as well is if it's a ground up development, ie, you're starting with a patch of grass and working from that, or whether there's an existing structure that's either going to be refurbished or knocked down. So if you're knocking it down entirely, but using the foundations or whatever that can change the costing for the process. There we go. And then I think with this next question, you probably touched on it a little bit in what you've already said there, but what are the key factors to

consider when comparing different development finance options for first time developers? Bit of a wide question in some respects, but what the key factors for considering really are understanding your project and the total breadth of that. You don't want to start with a project that's too big. You'll find that the cost things are too high and lenders are unlikely to lend you in the first instance. So picking a project, small manageable bite size effectively for the first few, give you a really good understanding, gives you a breadth of experience and lenders are much more likely to work with you going forward too. Okay, so again, some pointers there to take away from the episode. Now, how does the loan application and approval process work for first time developers

seeking development finance in the UK? Similar to standard mortgage process, in that we still have an underwriting process, evaluation process and an offer process. So first and foremost, it's correlating information provided by the client. It will for me to kind of submit the application, which will require the planning permission, drawings, designs, the building, architects images, builder details, costings, that was quite a lot of information required. But once that's packaged for the lender, it's still fairly similar to a normal mortgage. So we'll submit all that along with some narrative and explanation of the client experience. That's underwritten a value will attend the site to give the site a value for one and to give an estimate on the GDV, the

gross developed value of that site, which is an important part as well because the lenders will use that GDV figure as a cap, I guess, when we're explaining it for the lending for the lending amount, and for them to understand how the exit works, which is a vital part of the whole process. The lender needs to understand how you plan to repay their finance. It could be sale, could be refinance. Both of those need to be viable. So the lenders will look at how much they're going to lend you, what the build costs are, and what the gross developed value is. And there needs to be enough profit in there for one to make it viable project for you to do. And it needs to work on an exit strategy as well. So is the sale going to be enough to repay the loan?

Because every finance could be enough to repay that loan. Okay, well, a detailed breakdown there. So thank you for that. Moving on, then people would like to know what are the potential risks of taking out development finance as a first time developer and how can they be mitigated? The risks have, well, first of all, you can mitigate them is having a sufficient contingency pot in place. But the risks largely are overspending. People tend to get a bit excited halfway through and start thinking, all that shiny, I'll upgrade the bathroom, I'll upgrade the kitchen and I'll upgrade various parts of the project. So you know, their friends show them for their Instagram, and they think that these winners are better than

those ones. So find a budget, find a plan, stick to it. And don't change. That's a really big part for it. Okay, brilliant. So some good points is there. Yeah, people tend to see home, you know, grand designs and see these people increasing their budgets exponentially, which is fine if you plan to live in it and you can afford to do so. But most of the time we're talking here about investment purposes, you're not going to live in it. So don't get too excited about the fixings and things. Okay, so yeah, a good bit of advice there. I think somebody else wanted to speak in the background there. Yep, I've got a dog who's very excitable when the door goes off. Oh, there we go. Keeping guard. Okay, let's move on

then. What should first time developers look for in a mortgage advisor when seeking development finance? Someone who you can discuss openly, I guess the plans. I think I've referred to the Chug Test. Several times different parts anyway, you need you can this is quite an in depth process, you need to find a broker, an advisor that you can work with closely, that you're not going to read a phone call from or that you're going to read speaking to when you have to share information. So getting on well, and the test I tend to use is could I go for a beer with this person? Not necessarily need to go for a beer. Could you go for a beer and not a not want to strangle them or whatever, you know, get bored of the conversation. So if that generally applies, you

probably in a writer's place. And secondly, are they really asking enough questions? Are they interested enough? Are they that they seem knowledgeable enough? You know, if you if you come to them with a project, and they say, yes, thank you very much, I'll go ahead and do it. And I've not asked you any questions that probably not invested enough to do want to work with you on it. Okay, well, a good way of looking at it there. Really good way of looking at it. Okay, so let's move on then. Again, this is kind of touching on sort of the risk side, I suppose. But what are some common mistakes that first time developers may make when applying for or managing development finance? And how can they be avoided?

Common mistakes when applying for his people tend to over complicate the process. At some point, you're going to speak to the underwriter. And then the writer's gonna get an idea for who you are, what your interests are, why you've got your development, what your plans are for the future. She projects might have a plan, you know, projects where you are, you plan to do a couple of projects, do plans to

30 and bigger and bigger and bolder and bolder you go and end up doing whatever. And I just want to know, it's really an idea for who you are. A lot of clients overthink that process. And they start saying what they think the underwriter wants to hear, and not the truth. And more often, you'll tumble over yourself and get caught up in a web of tool tales, not necessarily lies, but tool tales. And it just confuses the underwriter because whole way through, we've been giving them a narrative about your experiences and who you are. And when it comes to the phone call, it doesn't tie up. So just be honest and truthful with those conversations. It makes things much simpler. That's probably the biggest one I've come up

against, the ones with you that being a mistake, most common. Okay, well, again, another great pointer there to take away from the episode. Now, can you provide any real world examples of a successful first time developers who have obtained development finance in the UK? Have you had any sort of recent case studies that you can share? Just putting you on the spot there? Put me on the spot. Nothing very recent in terms of first time developers, we've got a lot of repeat developers. We did a first time developer a couple years ago, he had to have a site at the end of his job, split the titles and develop two houses on that as a first time developer. And he worked in industry, he'd been a builder for most of his life.

So I had enough relevant experience. So the lender took him quite seriously. His numbers seemed logical. And he put together a very good business plan from the start. So and it was straightforward. We got a traditional lender, good rates, and the exit was a refinance, he kept them a two by two that. So he was showcase example of how it worked. And it was good. Yeah, great example there. That's a really good example. Now this is an interesting question. And just to confirm, we are recording this in October 2023, if I haven't said already. So how has the COVID-19 pandemic affected the availability of development finance for first time developers? And what steps can they take to secure funding in this

challenging environment? COVID-19 didn't really impact the availability of the finance. It impacted the availability of the builders and the cost of goods. That was probably the biggest impacts we had. The cost of timber went up dramatically, for example, which bumped everybody's costs up. So you were part way through development. And you had your costings done, had a contingency that the costs really, really jumped up for a lot of people and it made the products unviable, or pretty much located any profit. But that also meant people applying for new finance had bill quotes that were much higher than they expected. So that made some of the products nonstarters, in essence, because the GDV values

weren't really changing. But the bill costs were. And that reduced profit margins and lenders aren't going to land on a project where there's no profit. So COVID-19 didn't really impact the finance. It just impacted the ability of getting it through the cost of all the other items that built up to it, I guess. But that's dropping down now with timber costs came down, for example, other costings coming down. And labor is now mostly back to where it was, with COVID-19 being mostly over. It's a back of work, there's no restrictions in place. So that's really helped things along. Yeah, really good news. Okay, there we go. And then just lastly, what advice would you give to first time developers who are considering using

development finance to fund their projects? Try to be very practical and pragmatic with the process. Try and remove your emotional ties, which can be quite hard. I mentioned earlier on, people get too caught up in making it fancy in place they'd want to live. Try and stick objectively to keeping it as an investment project. That was, fits your initial brief. It's probably the first part. And secondly, realizing that development finance, cost wise, is different to your traditional mortgage. It's a different finance for a different purpose. So when you see rates of 789% per year, don't get worried about those figures. They were built into the costings. They were built to the profit margins. But people tend to see that and think

it's expensive versus their traditional mortgage, which historically would have been 3 or 4% and right now we're seeing them at 5, 6%. People get worried when they compare them. They compare two very different finance options. Yeah, just get a grip of what the finance really looks like and then be very pragmatic and sensible with your planning for the investment. Well, some good notes to end on there. So thank you for that. Again, as always, hopefully we've helped a few people out on the episode and I'm sure we'll speak to you again on the podcast soon, Scott. I look forward to it. Thank you very much.