Phone enquiries tend to follow a similar pattern.
We make sure we are both good and clarify now is good to talk. I ask questions about the project, the person and what their longer term plans are. Normally I ask for the site purchase price, assuming a purchase is involved, then I go on to the build costs and the GDV, the end value, in other words.
Then is the question I already know the answer to, 99% (ish) of the time.
“How much are you looking to borrow?”
You might know the answer to this yourself. It’s not a percentage, it’s generally not even a number. It’s the line those of us on this side of the finance fence are waiting for –
“As much as possible”.
Where does this come from? I expect it’s that old saying ” use someone else’s money to make money with”, or something along those lines. Which is fine, it is a perfectly valid answer to the question.
Before you say it the next time, or if you are wanting it or looking for it, ask yourself why. Is there another way to go about it?
It might be you need to raise as much as possible to get in a project, so you need 50 or 60% of purchase price plus the build cost. If that’s the case, ask for it, I will go and hunt it down for you.
For a lot of people I talk to, they ask for it to either keep their capital back for other projects or they are trying to limit their exposure and therefore keep the risk down for themselves.
On the second one, taking the maximum “day 1” can lead to issues down the line. Most lenders (though not all) will give you draw downs based on the current value of a site. So, you spend your first chunk of money and go as far as you can.
To get that next chunk of money and to carry on with the build you are then relying on a valuer telling a lender the land has increased in value by enough to keep within their loan to value criteria.
You and I both know that you can spend money on a site but it does not necessarily push it up in value by a factor big enough to allow more money to be drawn down.
If that’s the case, where does that leave you? It could mean you’re in a position where you need to either put your own capital in anyway, or beg / borrow / steal it from someone else, which is never a good position to be in.
If you can’t get money else where, potentially your project is stuck. The lender won’t release you more money till you progress but you can’t progress without more money.
Keeping in mind that development loans have a finite and (in those circumstances) rapidly approaching dead line.
OK, if you have capital available you can put it in and the work carries on.
It also means that you have incurred interest on money that you needn’t have borrowed in the first place. Had you put that capital in day 1, you’d have borrowed less, given the project more “wiggle room” and paid less in interest.
The more interest you pay out, the less profit you make, obviously.
I understand a lot of developers have an eye out for the next project so they can go straight on to another job after this one.
Most lenders, though, will be happy to help you raise more money on a finished project to help you buy the next one. They know, or should, that looking after you and being accomodating will keep you happy and on their books.
You can have finished the current project and still have the flexibility of being able to get on the next site before this one sells. And, you’ve paid less interest than you might have done otherwise.
Win, win.
To talk about your next project give me a call on 01492 233 999 or drop me a line tim@volofs.co.uk . I loook forward to hearing from you and raising you the money you need for your next project.
