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How to fund a development if you don’t have a deposit

There are times when cashflow dictates that you don’t have any deposit available for your next development. This is common for developers, especially when they have multiple projects on the go, or are waiting to sell properties on a completed development.

Below are a variety of ways that developments can be funded when there is no deposit available.

100% Development Finance

Also known as Joint Venture Development Finance.

With 100% funding the lender provides all of the funds required to acquire the site and also complete the build. Once sold profits would then be shared between the lender and developer. 

This type of funding is usually only available to experienced developers, where planning permission has already been granted.

The scheme will need to have a high GDV, usually in excess of £1m and a good return on investment. Whether interest is payable will depend upon the lender. Some will allow interest to be rolled up whilst others may not charge interest and simply take their share of the profit as payment.

The lenders who provide this facility are looking to work with developers who have a good track record of delivering profitable developments. They may structure the facility so that interest is charged on the loan facility, which they will then receive once the development is sold, together with a split of the final profit.

Private Investors

If a scheme is particularly strong then a private investor may be interested in coming on board with you.  This would usually be by means of a SPV (Special Purpose Vehicle) which is a limited company set up to manage the project. 

Some investors will put in the money but leave the project management to you, whilst others will want to be more involved.  Agreeing up front how things will be managed is essential to avoid disagreements further down the line.

Finding a private investor can be difficult if you are new to the world of development. There is a risk that if you share the details of your proposed project with an investor, they could decide to take on the project for themselves, and buy the site / property, without your involvement. Therefore, looking into an investor’s track record is essential before you discuss details about your project.

A Private Investor combined with Senior Development Finance

This option involves working with a private investor and then jointly applying for development finance with them, for the main part of the investment required.

In simple terms, the private investor is supplying the deposit money that the developer does not have.

This can be advantageous to both parties. For the developer it means that it should be easier to find a private investor as they won’t need to put in so much capital under this option. For the private investor they will be potentially looking at a greater return for a smaller initial financial input into the project.

Equity release from your own home or other owned properties

If you have equity tied up in either your own home or other properties, you can release this via a re-mortgage, secured loan, or short-term finance such as a bridging loan, to provide the required deposit.

This is a relatively quick and easy route to take if you have no other way of raising a deposit, but of course it does mean that your development will be 100% debt funded.  It will also mean that you will be left with additional debt if your project doesn’t deliver as you had planned.

Provide additional security

If you own additional assets in the form of other properties, these can be used as additional security for the loan. This reduces the loan to value figure for the lender as the loan will be spread across the value of the development, together with the additional properties being offered as security.

Buy under value and refurb

Some lenders may consider lending 100% of the purchase price of a property if you are able to purchase it for less than its open market value. For example, if you were to pay a price that was 70% of the open market value then a lender might be prepared to fund this on the basis that there is additional value in the property.

However, care needs to be taken here. You may think that you have a really good deal, but you need to ask yourself why can you buy under value? Sellers don’t tend to want to throw money away, so will try and get the best price for their property. If your offer is the best price, then that is likely to be the real value.

Therefore, why would a surveyor value it more, he has to determine for the lender what the value of the property is, and surely this is the sale price, being it is the best genuine offer that the seller has received.

There are however circumstances when properties are purchased under value. For example:

  1. Buying from a relative who is making a gift and selling at a discounted price
  2. The buyer may have agreed a deal with the seller – for example a developer may have approached the owner of some land that does not have planning permission and agreed to buy it from them for a certain price. The buyer then does the work obtaining planning permission on the land. Once granted the value of the land will increase due to now having planning permission. The buyer can then arrange finance based on the increased value, although purchasing the land at the lower price that had previously been agreed.
  3. Similarly, a price could be agreed for a property, but before completing on the purchase the buyer undertakes improvement work to the property. This work raises the value of the property, meaning more finance can be secured against it, but the purchase price remains at the price previously agreed.

Short lease properties

The value of a leasehold property falls as the end of the lease term approaches. If the current lease holder can’t afford to extend the lease the property may come onto the market at a discounted price. By financing the lease extension at the time of purchase, you may be able to obtain a property with a considerable amount of equity in it. Therefore, the same principle applies as with buying properties under value, so it may be possible to obtain 100% funding. This is on the basis that the property at the time of completion of the purchase is actually worth considerably more than you have paid.

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