I’m seeing so many people making mistakes when they are considering their property development finance options! And I wanted to share with you, the inside scoop so you (hopefully) don’t make the same mistakes!
Property development finance options
If you need to finance property developments, I hope you are excited about the project and the opportunity. Developing property is hugely satisfying and offers potential great returns.
However, when it comes to getting the development finance, it’s hard to know where to turn.
The Independent Mortgage Broker:
Some of you might not consider this, but an independent mortgage broker (like us) who have a wide spectrum of experience, are perfectly placed to help with the property development finance options. They will most likely have all the contacts or if they don’t they will know someone who does. However, this group tends to fall into two clear categories and it’s vital you know the difference:
The Packager model:
A packager is another brokerage firm in between the original mortgage broker and the lender. I know what you are thinking and you are wondering why would a mortgage broker use a packager to then approach a lender. Click To Tweet From the consumer perspective, it means there will be your mortgage broker, the packager and then the lender! Quite a few layers right?
To explain this to you; if you can imagine a GP (your doctor) they have a general medical overview. They are obviously highly trained and qualified, but they aren’t specialists in every area. They are generalists!
In much the same way, lots of independent mortgage advisers are highly skilled in the residential sector, they aren’t always experienced in property development finance. So when they have a client needing this specialism, they will often turn to specialist packagers to help.
The Pros of a Packager:
The clear benefit for the mortgage adviser is that they are able to utilise this experience if they do not have it themselves. It enables the adviser to still manage the process, look after their client and get paid, rather than turning the client away.
The problem is that virtually all packager’s say ‘yes’ to everything, which is a personal irritation of mine!
Not all, but lots have the philosophy of throwing as much to the wall as possible, in the hope some of it will stick! This isn’t great as it often lets the brokers down, who then let their clients down. But of course, the packager doesn’t have to deal with the repercussions of this!
The other big disadvantage is that there is another layer in the process. Click To Tweet This means more fees for clients, more layers of communication, more hurdles and more delays. The reality is that the more cogs are involved in the process, inevitably more things can go wrong.
For me, I am not a fan of using packages and as a firm, we just don’t because of these reasons. Fortunately, we also have the expertise, so we aren’t forced into this position. Whether it is us or anyone else, the main issue from a broker perspective is that you are not speaking directly to the lender and that’s a problem. In fact, it’s a HUGE problem, aside from not being in control of a deal, you also don’t really know if there are potential problems! And that fundamentally affects the outcomes for clients.
The Experienced Independent Mortgage Adviser
Let me put my flag to the mast and say the optimum solution is this…yes you might say I would say this, but let me explain:
An independent mortgage broker who has experience of residential, buy to let and property development finance is the optimum solution for property development finance options. Some might argue, you can’t be an expert in all. But I fundamentally disagree. Property is property, and as advisers, we should be trained and have experience in all aspects to serve our clients.
An example would be how an adviser would be able to fully help plan the strategic finance requirements of the lifespan of a property deal: From purchasing a derelict house to conversion, to re-finance for buy to let or sale.
The mortgage adviser should be able to match the clients aims from start to finish with the appropriate financial solution. The problem with advisers who only specialise in one field is that they will only be interested in their element of your overall plan. They also may try and squeeze your situation into a solution that suits them, rather than you…square peg, round hole springs to mind.
The Specialist Commercial Broker:
You might think that a good solution would be to go to a broker who only does development finance. However, I fundamentally disagree. Not necessarily because they don’t know what they are doing, you would expect that they do!
However, my issue is more about the regulatory framework they work within and from my time in the industry what I have seen of the types of people who operate in this space. Why does this matter to you?
Whenever an industry doesn’t have any or has minimal regulation, it tends to have more shady practices and characters.
Examples of this have happened many times in the financial services sector, from when IFA’s where basically salesmen with no or minimal qualifications and oversight selling bad products which were only designed to pay large commissions. To when residential mortgages introduced tighter regulation.
The problem is that this type of finance is often not regulated by the FCA and therefore the people who operate within it! This means there is no consumer protection and many who operate within it, don’t even have or need a qualification!
They might come across as specialists, but in actual fact are far less knowledgable about the financial services industry that a qualified independent mortgage adviser who advises on residential mortgages will be. I know you might find this strange to think, but the regulatory world for residential mortgages is very tough, and rightly so.
A quick caveat; there are some development finance mortgages which are regulated, and this is when the property will be used as your main home. However, if it’s for pure profit and business, then it won’t be.
The point is this; these ‘salesmen’ are highly unlikely to follow professional standards that you would expect from a regulated mortgage adviser. The reason is quite simple, they don’t know how! It means the industry is full of ‘yes’ men who are too quick to tell you what you want to hear, take your money and then not deliver. They are like the old salesmen back in the day! There are minimal consequences and no regulatory oversight.
As mentioned earlier, if someone only focusses on commercial finance, then some don’t care or worry about the next phase of a project. Too often we hear stories of people getting development finance but they weren’t advised whether they could get the ref-finance at a later date that they would need. This really matters and should not be underestimated.
Indeed if someone does need to re-finance later, who do they think is going to do it? The person who can’t? Do they then need to find someone else again? What happens, if they can’t? Seems to be a dysfunctional way to manage the project to me!
Going Direct to a lender:
Clearly, if you know who the best lender will be for your property development finance deal, then it makes sense to go direct to the lender. It will save you a broker fee that you would have to pay your adviser and it means you have direct accountability for your property development finance options.
The Problem with going direct:
In much the same way, you don’t know who you are getting into bed with if you pick a commercial broker who is unregulated, the lenders are often not too dissimilar! There are also lots and lots of development lenders springing up, some of which are privately funded and others backed by banks. And because it is often unregulated, they are also often too quick to say 'yes', or change the interest rate at a later date...yes they do that! Click To Tweet
The reality is that as a property developer, you don’t know who is good, bad or ugly. And even if you do know who is okay, you won’t know whether they have the best deal or if their internal processes have changed to make things more difficult for you. A lender might be the flavour of the month now, but trust me, this is not a consistent and lenders (particularly new ones to the market) often try and be innovative, better and different. But as time passes, they get bigger, they tend to develop problems or issues and aren’t what they once were!
Of course, you will never know this, you will just have heard the PR or a recommendation from someone who dealt with them last year! You won’t know what they are truly like now, and whether they are still the best! Only someone who is independent will know this because they are working in the industry day in and day out dealing with different lenders.
I guess that’s the power of using someone independent, but who also has a broad range of skills and experiences. They don’t’ care about who the lender is, they don’t have prejudices, they are professionals in the way they look after you, your data and have accountability. But most importantly for property developers, they don’t have a blinkered perspective and are able to provide a holistic approach to the whole project.