When looking at a property development project it is sensible to separate the different elements and address them separately and then collectively. We have listed the 10 top tips for developers which will make your life easier and allow you to remain focused at all times.
If you adopt the below top tips it makes you look more professional which will help position you when applying for funding. It shows that you know what you are talking about and that you have factored in every possibility.
Good planning for your project
As they say, fail to plan, plan to fail. When looking for property development finance do not just go through the motions because your bank says so, research your project in great detail and consider different scenarios as this may highlight potential issues going forward. Financial institutions can see straight through a project which has been under researched and this will seriously impact your chances of receiving finance.
Make sure your numbers are correct… especially on GDV
The gross development value (GDV) of your project is vital when looking to obtain finance because it gives an indication of the potential headroom between the cost of the project in its entirety and the gross value of the project when it is finished. Some property developers may be tempted to be a little ambitious with their figures when it actually pays to be more conservative. There will be some assumptions and some forecasts but if your figures suggest you would make half the profit you originally thought then you would prefer to know sooner rather than later. Strip out the emotion and let the figures do the talking.
Respect Murphy and his law
While “Murphy’s Law” is often the subject of great amusement it is something to bear in mind when looking to develop property. If you work on the scenario that what can go wrong with a development will go wrong then your plans should turn out to be extremely conservative. This should give you more than sufficient financial headroom for unexpected cost overruns.
Where possible you should always try to mitigate risk and pre-empt any potential problems going forward. For example, if you develop a property with the idea of selling upon completion why not put in place a rental backup plan in case of delay. This should ensure that you have more than enough income to cover your loan repayments until the property is sold. Working on a worst-case scenario may sound negative and downbeat but it can alleviate significant financial pressures in the long run.
GIA / NIA / NSA
When putting together your proposal it should be as detailed as possible including gross internal area, net internal area and net saleable area (similar to gross internal area). Areas such as staircases, circulation space, wall space and communal space should be taken into consideration or it could become an issue. The more detailed your proposal the less questions a potential lender needs to ask which backs up the impression that you have researched the project in great detail. Putting together an idea on a scrap of paper with estimates is no good because you need cold hard facts and figures to secure that much sought after finance.
Making the numbers work
Many property developers have fallen into the trap of looking to repay their project finance as soon as possible. While obviously it makes sense to pay back any debt as soon as possible, this should not be at the risk of impacting your cash flow. If you try to massage the numbers and cast a better light on the project this could come back to haunt you. Do not forget, it is likely that the financial institutions you are approaching for finance have seen it all before. If you are overambitious with your figures, trying to make the situation look better than it is they will see through this and it could impact your credibility and ability to raise finance. Be extremely specific with the levels of debt you require as well as the equity content and ensure that repayment terms are sensible and achievable.
Substantiate your build costs
Whether you use the services of a quantity surveyor (QS) or the Building Cost Information Service (BCIS) it is vital that your figures are reviewed/approved by an independent third party. As we touched on above, if anything you should err on the side of caution and where possible build in some financial headroom. Plucking figures out of thin air will not wash with a credible finance provider and in many cases first impressions last – so make it a good one!
On the flipside of the coin, your finances need to include all expenses as well as some financial headroom when factoring in potential problems. If you find yourself in need of additional funding at the last minute this may set alarm bells ringing with your finance provider. In a worst-case scenario you could be hit with higher charges for any additional funding or perhaps be forced to sell the development before it is finished. Whether you would receive the “fair value” in a fire sale of the project before it is finished is debatable because the vultures would be hovering. When estimating budgets, use accurate timelines for build and sales periods to avoid cost increase as this will cut into your profits.
Think outside the box
As with any business market there is always scope to “think outside of the box” and the property development market is no different. If you are offered existing properties where there is potential for redevelopment try to think differently from the norm, is there scope to extend the property, what about an additional floor or can it be broken down into small self-contained units? It is very easy to go with the flow, think of traditional ways to develop a property but if you can think of something different, where you can add value, it is certainly worth researching further.
When in doubt contact Shojin Property Partners
In the world of property development finance Shojin Property Partners has an extremely good reputation and an ability to be flexible when assisting developers. The company has access to bridge finance, mezzanine finance and senior lending which allows property developers to maximise their profits and structure their finances in the correct manner. Due diligence is also a major part of any property development and they can assist with this as well as offering a team of development and investment experts to guide you. In order to incentivise all parties to be successful they charge no direct fees but rather share in the profit as well as the risk with developers. Funding levels will vary from project to project but there is the potential to fund up to 90% of the equity for developers.
Local area demographics
When developing property you need to know the demographics of the region in which you are operating. Income levels, unemployment levels, infrastructure, other developments in the area and any preferences for a particular type of property are all vital. Many buy to let investors make the mistake of decorating property as if they were decorating for themselves and the same is true of property developers. Develop a property for the market and your potential customers as opposed to your own personal preferences. The better you know your market the more likely you are to conclude a sale or rental agreement in a relatively short space of time. Cash flow is key in the world of property development, always has been, always will be.
You can chat online to Shojin Property Partners on the forum here: www.propertyforum.com/forum/discussions/development.381/