Unconventional property loan
Discussion
Quick question in case people have seen this sort of thing before.
A small-scale property developer who I've had past dealings with (short-term secured loans) has suggested I consider a new option. He has first-charge development finance from a commercial lender on a block of 20 flats which should be ready for occupation by the end of this year. Total GDV is c. £4.5m and he's already exchanged contracts with some 12 purchasers. He now wishes to accelerate his cashflow to allow him to purchase an additional site. So he's suggested that I exchange contracts to buy one of the remaining flats at a 50% discount to open market value, with the proviso that the deposit I pay now is the full (discounted) purchase price. He then has a contractual right to rescind my contract prior to long-stop completion date on repaying my deposit plus 10% interest. He will repay the commercial lender, myself and one other similar individual lender from the proceeds of the other sales and will then put 'my' flat back on the market.
My initial concern was that the commercial lender won't be too happy at this apparent reduction in their security but the developer (and his solicitor) have told me that this is not an issue as he will remain within the maximum LTV specified in his loan agreement.
The developer has been pretty open in terms of showing me his loan documentation, monthly progress reports from the project manager to the commercial lender etc. I'm just wondering in case there's some major pitfall I've overlooked. I've no great desire to end up owning a flat at 50% discount but that in itself should give the developer a very strong incentive to repay my deposit before completion!
Any thoughts welcomed.
A small-scale property developer who I've had past dealings with (short-term secured loans) has suggested I consider a new option. He has first-charge development finance from a commercial lender on a block of 20 flats which should be ready for occupation by the end of this year. Total GDV is c. £4.5m and he's already exchanged contracts with some 12 purchasers. He now wishes to accelerate his cashflow to allow him to purchase an additional site. So he's suggested that I exchange contracts to buy one of the remaining flats at a 50% discount to open market value, with the proviso that the deposit I pay now is the full (discounted) purchase price. He then has a contractual right to rescind my contract prior to long-stop completion date on repaying my deposit plus 10% interest. He will repay the commercial lender, myself and one other similar individual lender from the proceeds of the other sales and will then put 'my' flat back on the market.
My initial concern was that the commercial lender won't be too happy at this apparent reduction in their security but the developer (and his solicitor) have told me that this is not an issue as he will remain within the maximum LTV specified in his loan agreement.
The developer has been pretty open in terms of showing me his loan documentation, monthly progress reports from the project manager to the commercial lender etc. I'm just wondering in case there's some major pitfall I've overlooked. I've no great desire to end up owning a flat at 50% discount but that in itself should give the developer a very strong incentive to repay my deposit before completion!
Any thoughts welcomed.
Thanks coyft and cashmax. One flat on the same floor and same sq ft has exchanged at £214k. My 'purchase price' would be £100k with fixed £10k interest if contract is cancelled before 1 March 2019, which represents a reasonable return in my view if everything goes to plan. Developer said he hopes to start issuing 'notices to complete' to the standard buyers from early-October. Actually there are two separate blocks in the development - oddly the block with the most existing sales is the one that's about 6 weeks behind the other in terms of outstanding work.
What happens if the developer goes bust before you get out? You’ve exchanged so are committed and the lender may force your purchase.
Brain slightly frazzled but all seems a bit borderline fraudy on the developers part.
I’d imagine that he will have to report agreed sales etc to the funder, I’d expect alarm bells if they’re seeing property sales agreed at 50 % of expected sale price.
Why doesn’t he just borrow the extra on normal commercial terms?
Brain slightly frazzled but all seems a bit borderline fraudy on the developers part.
I’d imagine that he will have to report agreed sales etc to the funder, I’d expect alarm bells if they’re seeing property sales agreed at 50 % of expected sale price.
Why doesn’t he just borrow the extra on normal commercial terms?
hajaba123 said:
What happens if the developer goes bust before you get out? You’ve exchanged so are committed and the lender may force your purchase.
Then the OP will have bought a property at 50% of the Market Value. However, as pointed out above, if they have gone bust the units will probably not be complete and worth a fraction of their GDV.hajaba123 said:
I’d imagine that he will have to report agreed sales etc to the funder, I’d expect alarm bells if they’re seeing property sales agreed at 50 % of expected sale price.
This. I'd be shocked if there wasn't a term in the loan agreement that consent of the lender is required for any sales. They won't agree to sales at 50% of MV, such sales will negatively impact the value of the whole as they will form comparable evidence. So they're either not going to inform the lender of the sales, or there's going to be something in your contract that makes you liable for 100% of the Market Value.Sounds a very odd way of raising finance. At a bare minimum I'd want to see a letter from the lender providing consent to your purchase at 50%.
Can you not offer help on the new site he wants to purchase?
Thanks all - valuable comments and some food for thought!
Latest report from the chartered surveyors to support the developer's monthly drawdown says a December 2018 completion date for the project is achievable. They estimate £0.5m required to complete, out of a total build cost of £2.5m (fixed price build contract) which will leave a little headroom within his total facility of £2.7m. It's a reputable bank that has/is funding other projects of his - they've given him a total facility cap of £5m over all projects.
My sense is that the development is unlikely not to be completed at this late stage - if the developer went under then the bank would take control to finish it off, after some delay no doubt. There's significant equity in the project. There's no sign of distress at the prime contractor. His story to me is that he's simply seeking to accelerate cashflow - he said he doesn't need to do this but that without this his next project will be delayed. It's a plausible story but of course might not be the full story! The solicitor's statement that deposit proceeds need not be used to pay down his loan facility surprised me. I'm not sure whether all 'sales' have to be notified to the bank at exchange stage (the bank did ask for evidence of sufficient pre-sales prior to lending) or only at completion (if the latter he will simply say he's rescinding my contract in favour of a full open market sale). It's this aspect that makes me uneasy. It's also telling that no one has come across this sort of arrangement before.
Latest report from the chartered surveyors to support the developer's monthly drawdown says a December 2018 completion date for the project is achievable. They estimate £0.5m required to complete, out of a total build cost of £2.5m (fixed price build contract) which will leave a little headroom within his total facility of £2.7m. It's a reputable bank that has/is funding other projects of his - they've given him a total facility cap of £5m over all projects.
My sense is that the development is unlikely not to be completed at this late stage - if the developer went under then the bank would take control to finish it off, after some delay no doubt. There's significant equity in the project. There's no sign of distress at the prime contractor. His story to me is that he's simply seeking to accelerate cashflow - he said he doesn't need to do this but that without this his next project will be delayed. It's a plausible story but of course might not be the full story! The solicitor's statement that deposit proceeds need not be used to pay down his loan facility surprised me. I'm not sure whether all 'sales' have to be notified to the bank at exchange stage (the bank did ask for evidence of sufficient pre-sales prior to lending) or only at completion (if the latter he will simply say he's rescinding my contract in favour of a full open market sale). It's this aspect that makes me uneasy. It's also telling that no one has come across this sort of arrangement before.
millen said:
Thanks coyft and cashmax. One flat on the same floor and same sq ft has exchanged at £214k. My 'purchase price' would be £100k with fixed £10k interest if contract is cancelled before 1 March 2019, which represents a reasonable return in my view if everything goes to plan. Developer said he hopes to start issuing 'notices to complete' to the standard buyers from early-October. Actually there are two separate blocks in the development - oddly the block with the most existing sales is the one that's about 6 weeks behind the other in terms of outstanding work.
That is a very good return indeed. His finance / bank model is pretty much the same as most, little risk to you at 50%. Does he have anymore at that offer?I suspect not, cashmax. Initially he was talking of 3 individual lenders but when I spoke to him on Friday he said he could cover his funding requirements with just me and one other couple that he's previously borrowed from. But I'll let him know that you may be interested should the other couple back down.
I've made several loans to small-scale developers over the years. Few have been plain sailing, even when secured with a first charge, as developers tend not to foresee problems and delays. I know a guy who makes a nice living from loans that go into default with significant penalty interest then accruing, but to my mind that's something of a tightrope as at that stage there's enhanced risk of loss if it all goes pear-shaped. As an aside, I dabbled last year in making small secured loans through the Relendex crowd-funding platform. They claim to have had no defaults to date, but I'd estimate some 50% of the 12-month loans I've made have had their maturity date extended for various reasons. Over-optimism again!
I've made several loans to small-scale developers over the years. Few have been plain sailing, even when secured with a first charge, as developers tend not to foresee problems and delays. I know a guy who makes a nice living from loans that go into default with significant penalty interest then accruing, but to my mind that's something of a tightrope as at that stage there's enhanced risk of loss if it all goes pear-shaped. As an aside, I dabbled last year in making small secured loans through the Relendex crowd-funding platform. They claim to have had no defaults to date, but I'd estimate some 50% of the 12-month loans I've made have had their maturity date extended for various reasons. Over-optimism again!
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