Property developers of all shapes and sizes can suddenly find themselves in need of a rapid cash injection for a number of reasons. But the fact that more than half of SME house builders cite ‘lack of finance’ as one of their biggest obstacles suggests that traditional lenders are falling short in meeting their needs. For brokers, this opens up a valuable opportunity: to educate your clients about alternative means of short-term funding — and to help them identify the best ways to keep their projects on track.
Here, we’ll take a look at how and when to introduce short term finance as a possible funding option to brokers.
Anticipating need: what are your clients looking for?
When it comes to finance, levels of market knowledge can vary widely between property professionals. A novice Buy-to-Let landlord, for example, might be approaching this area for the very first time, and so they may not know their second charges from their bridging loans. For this group, extra care would be needed in explaining the more basic concepts. And even with more seasoned developers and investors, it’s safer not to assume that they are fully up to speed on all the options available to them.
Here are some considerations worth bearing in mind as you approach this subject.
Their projects may have already been adversely affected by finance issues
Last autumn, the FMB reported that 45% of its survey respondents had been involved in projects that had stalled due to financial problems — up from 35% a year earlier. Property professionals are increasingly seeing the effects of funding shortfalls, first hand. It’s reasonable to assume that they will be keener than ever to ensure that they can access the right solutions if and when they need them.
They are looking at alternative finance in ever greater numbers
Recent data from the Association of Short Term Lenders shows that £386.1m of development finance was arranged in the first quarter of 2018. Of this, approximately two-thirds consisted of development finance — up 22% on the previous quarter.
Locked out of mainstream channels, it seems that property professionals are amenable to the alternatives, and especially bridging loans. Alternative finance offers a smart way to solve practical problems, and as such, this is where brokers can really add value: by flagging up the specific funding solutions to meet the individual circumstances of clients.
Spotting the needs of property professionals
When trying to match short term finance options to the needs of property professionals, the starting point involves finding out more about the development project. This is a valuable opportunity to demonstrate your sector-specific knowledge, set out your stall as a safe pair of hands in this area, and flag up the type of solutions your client may require as the project progresses. Here are some project examples you might encounter, and what short term option is best for them.
Cosmetic, ‘light’ works
Buy-to-let landlords are frequently involved in this type of project. For instance, a client may need funding for essential works to make a property suitable for the rental market. However, because they are already heavily leveraged, extending the mortgage loan with their current, traditional lender isn’t a practical option. The goal is to get the work completed as swiftly as possible (e.g. within 1-3 months).
A bridging loan can be an ideal arrangement here. Quick to arrange and flexible, it can supply your client with the funds they need to get their property on the rental market — with a view to repayment once the property starts generating rental income.
Suppose you learn that your client’s investment is focused on a dilapidated property. The exit plan involves total refurbishment for mixed commercial use, followed by resale. But your client is faced with a problem: no mortgage lender will issue a loan on it unless the property meets institutionally-determined minimum spec levels.
In this situation, bridging finance can work especially well: it is designed to fund the initial purchase and to put your client in sufficient funds to make fundamental improvements. Once this work is done, your client can then switch to a commercial mortgage.
In other situations involving significant refurbishment, remember that many smaller-scale investors may not have considered the possibility of dedicated development finance. For instance, are they aware that this can be put to work not just in ground-up developments, but in conversions and refurbishments, too? Do they know that ‘part-time’ developers can also qualify? It is useful to explore these possibilities right from the outset of your client relationship and to review the options available regularly.
When planning to start work on a multi-unit, ground-up development site, your client’s primary concern may be to secure development finance. But don’t overlook the additional funding-based concerns they may have. Typically, these can include the following:
- If there are complications or delays around planning, how will this affect the provisional offer of funding?
- Can interest be rolled up and deferred to avoid strains on cash flow?
- Contingency planning: in the event of the unexpected (e.g. Brexit-linked labour shortfalls), is there a possibility of accessing additional short-term injections of cash to fix the problem?
In each of these situations, an element of bridging finance may be needed to get your client back on track.
An early conversation is always essential
As a broker, if your service offering comprises a combination of specialist mortgages, development funding, and short term finance, you are in a strong position to set clients’ minds at ease — right from the outset of the relationship.
From enabling your client to enter a mortgage bid through to essential refurbishment and executing the exit plan, it enables you to frame your service offering as a ‘one stop shop’; whereby even if snags and other issues hit the project, there’s a very strong likelihood that you will be able to equip them to get through it.