Anyone provide finance for property development?
Discussion
Until about 2007 we used to finance property deals for others. We had first charge on the development. Upon sale all costs were deducted, including market rate for cost of money over the term, then the proceeds were split 50-50.
We may look at doing it again for some people we know. Is that model over or under ambitious in today's climate?
Louis Balfour said:
Until about 2007 we used to finance property deals for others. We had first charge on the development. Upon sale all costs were deducted, including market rate for cost of money over the term, then the proceeds were split 50-50.
We may look at doing it again for some people we know. Is that model over or under ambitious in today's climate?
JV? Not so greatWe may look at doing it again for some people we know. Is that model over or under ambitious in today's climate?
100% land and loan to cost, you could get more doing it yourself.
Depends on how much cash you’ve got to fund the burn, and your spread of risk.
Deesee said:
Louis Balfour said:
Until about 2007 we used to finance property deals for others. We had first charge on the development. Upon sale all costs were deducted, including market rate for cost of money over the term, then the proceeds were split 50-50.
We may look at doing it again for some people we know. Is that model over or under ambitious in today's climate?
JV? Not so greatWe may look at doing it again for some people we know. Is that model over or under ambitious in today's climate?
100% land and loan to cost, you could get more doing it yourself.
Depends on how much cash you’ve got to fund the burn, and your spread of risk.
A deal I was looking at today was a tired house in a good area for £800k. The builder said he would need £100k to complete the work. GDV £1.2m and it would likely take a year to complete and sell. We said no, because we thought he had potentially underestimated the complexity.
The stuff we used to do was typically a few hundred thousand "knobber uppers" that were fairly quick to turn around. We'd do one per month. I think we'd probably be happier doing that sort of thing again.
z4RRSchris said:
the developer partner, presume they don’t get a fee either.
I get why you do it, no risk, a coupon and half the profit!
What fee are you referring to?I get why you do it, no risk, a coupon and half the profit!
We obviously won't be lending to people who have a line of immediate credit with their bank. When we used to do this we partnered with people who wanted fast cash to secure a deal and who would have had weeks or months delay if they went to market. Sometimes they would borrow to take us out, or because they wanted to keep the development.
Louis Balfour said:
Deesee said:
Louis Balfour said:
Until about 2007 we used to finance property deals for others. We had first charge on the development. Upon sale all costs were deducted, including market rate for cost of money over the term, then the proceeds were split 50-50.
We may look at doing it again for some people we know. Is that model over or under ambitious in today's climate?
JV? Not so greatWe may look at doing it again for some people we know. Is that model over or under ambitious in today's climate?
100% land and loan to cost, you could get more doing it yourself.
Depends on how much cash you’ve got to fund the burn, and your spread of risk.
A deal I was looking at today was a tired house in a good area for £800k. The builder said he would need £100k to complete the work. GDV £1.2m and it would likely take a year to complete and sell. We said no, because we thought he had potentially underestimated the complexity.
The stuff we used to do was typically a few hundred thousand "knobber uppers" that were fairly quick to turn around. We'd do one per month. I think we'd probably be happier doing that sort of thing again.
1% a month upfront interest added to loan “repay early don’t use it, you get it back” (900k x 18 months) 12 months + 6 months marketing.
2% lenders fee
1% broker fee
Perhaps 1% exit fee..
I’ll run the numbers properly in the morning, but IMO, would not be a deal for a commercial lender (although my computer is inside and I’m in the garden, so actually could be!!!)
(Nb your spread of risk is your last paragraph), sounds like it worked well with the right group of builders.
@louisbalfour the most important thing is doing what you are comfortable doing. Wish you all the best DC.
Louis Balfour said:
I am not sure our spread of risk can dictate how we structure deals.
A deal I was looking at today was a tired house in a good area for £800k. The builder said he would need £100k to complete the work. GDV £1.2m and it would likely take a year to complete and sell. We said no, because we thought he had potentially underestimated the complexity.
The stuff we used to do was typically a few hundred thousand "knobber uppers" that were fairly quick to turn around. We'd do one per month. I think we'd probably be happier doing that sort of thing again.
Out of curiosity, what are/were the builders including in their £100k (irrespective of whether or not it was the right number)? A deal I was looking at today was a tired house in a good area for £800k. The builder said he would need £100k to complete the work. GDV £1.2m and it would likely take a year to complete and sell. We said no, because we thought he had potentially underestimated the complexity.
The stuff we used to do was typically a few hundred thousand "knobber uppers" that were fairly quick to turn around. We'd do one per month. I think we'd probably be happier doing that sort of thing again.
For example, appreciate the lads on site would need to get a wage, but was the main guy also wanting the same, with any extra value unlocked by the sale just being an added bonus (from his perspective)?
Deesee said:
Louis Balfour said:
Deesee said:
Louis Balfour said:
Until about 2007 we used to finance property deals for others. We had first charge on the development. Upon sale all costs were deducted, including market rate for cost of money over the term, then the proceeds were split 50-50.
We may look at doing it again for some people we know. Is that model over or under ambitious in today's climate?
JV? Not so greatWe may look at doing it again for some people we know. Is that model over or under ambitious in today's climate?
100% land and loan to cost, you could get more doing it yourself.
Depends on how much cash you’ve got to fund the burn, and your spread of risk.
A deal I was looking at today was a tired house in a good area for £800k. The builder said he would need £100k to complete the work. GDV £1.2m and it would likely take a year to complete and sell. We said no, because we thought he had potentially underestimated the complexity.
The stuff we used to do was typically a few hundred thousand "knobber uppers" that were fairly quick to turn around. We'd do one per month. I think we'd probably be happier doing that sort of thing again.
1% a month upfront interest added to loan “repay early don’t use it, you get it back” (900k x 18 months) 12 months + 6 months marketing.
2% lenders fee
1% broker fee
Perhaps 1% exit fee..
I’ll run the numbers properly in the morning, but IMO, would not be a deal for a commercial lender (although my computer is inside and I’m in the garden, so actually could be!!!)
(Nb your spread of risk is your last paragraph), sounds like it worked well with the right group of builders.
@louisbalfour the most important thing is doing what you are comfortable doing. Wish you all the best DC.
Hope the beer was good.
LooneyTunes said:
Louis Balfour said:
I am not sure our spread of risk can dictate how we structure deals.
A deal I was looking at today was a tired house in a good area for £800k. The builder said he would need £100k to complete the work. GDV £1.2m and it would likely take a year to complete and sell. We said no, because we thought he had potentially underestimated the complexity.
The stuff we used to do was typically a few hundred thousand "knobber uppers" that were fairly quick to turn around. We'd do one per month. I think we'd probably be happier doing that sort of thing again.
Out of curiosity, what are/were the builders including in their £100k (irrespective of whether or not it was the right number)? A deal I was looking at today was a tired house in a good area for £800k. The builder said he would need £100k to complete the work. GDV £1.2m and it would likely take a year to complete and sell. We said no, because we thought he had potentially underestimated the complexity.
The stuff we used to do was typically a few hundred thousand "knobber uppers" that were fairly quick to turn around. We'd do one per month. I think we'd probably be happier doing that sort of thing again.
For example, appreciate the lads on site would need to get a wage, but was the main guy also wanting the same, with any extra value unlocked by the sale just being an added bonus (from his perspective)?
The property is in an area where the usual MO is to knock down and rebuild. But the plot is smaller than neighbouring ones and the property is sideways on it. It has been extended several times, is on differing levels and has been rendered all round using a muck spreader.
I think that it will need rewiring, re-plumbing, re-plastering and re-rendering before anything else happens and it's a big property. By the time you've put in the sort of stuff the typical buyer will want I think the £100k budget is optimistic and it will have a dated looking roof of concrete tiles.
But in terms of what would be included in terms of the builder's cost, that is a very pertinent question. What I think SHOULD happen is that the builder should be paid cost for the works and he takes his wage from the profit at the out. But there is obviously the risk that he will try to take a profit from the work and also a profit from JV profit split.
All makes sense, and £100k doesn’t get as much as people think these days. Also tricky as spec - which one/both need to decide - has influence on both cost and sales price.
Would agree with you around the economic split. What got me wondering was, on a conversion I’ve recently been out to tender with, seeing a couple of builders quoting “costs” and then including a separate line item for profit and thinking about the pros/cons/auditability of this.
I think it takes a certain type of builder to make this sort of thing work.
Would agree with you around the economic split. What got me wondering was, on a conversion I’ve recently been out to tender with, seeing a couple of builders quoting “costs” and then including a separate line item for profit and thinking about the pros/cons/auditability of this.
I think it takes a certain type of builder to make this sort of thing work.
LooneyTunes said:
I think it takes a certain type of builder to make this sort of thing work.
Agreed.I think about our main contractor and I am 100% confident that he would be submitting a bill for his wages, not only his subbies', every Friday and then he would still want his profit split.
I think we may be better insisting on doing some small tart-ups for a builder before moving onto longer projects.
It’s not just the wages I’d be watching for, but attitude around materials costs.
We worked with one chap a few years ago, sadly now out of the trade, and he was always trying to drive down material costs and was completely transparent on where they all came out. Others seemingly can’t be arsed and/or want to load them, which is perhaps OK if you’re doing a one off job/need to recover a bit for the time and effort, but certainly not if it’s another way of double dipping and reducing the profit pool for their benefit.
With refurbs we’ve found it more straightforward to buy them, sometimes do the strip out ourselves, and then pay commercial rates for work that needs doing. Surplus is then 100% ours. That’s worked for us but is a bit scale limiting so always keen to hear about alternative models.
We worked with one chap a few years ago, sadly now out of the trade, and he was always trying to drive down material costs and was completely transparent on where they all came out. Others seemingly can’t be arsed and/or want to load them, which is perhaps OK if you’re doing a one off job/need to recover a bit for the time and effort, but certainly not if it’s another way of double dipping and reducing the profit pool for their benefit.
With refurbs we’ve found it more straightforward to buy them, sometimes do the strip out ourselves, and then pay commercial rates for work that needs doing. Surplus is then 100% ours. That’s worked for us but is a bit scale limiting so always keen to hear about alternative models.
LooneyTunes said:
With refurbs we’ve found it more straightforward to buy them, sometimes do the strip out ourselves, and then pay commercial rates for work that needs doing. Surplus is then 100% ours. That’s worked for us but is a bit scale limiting so always keen to hear about alternative models.
We used to deal with flippers who'd got more deals than cash. In that situation we'd buy the property, they'd organise the works and we'd pay retail for that work. Upon sale, again, the profits were split. We had no contract with them, they trusted us to pay them.That however was in happier times and we knew that neither party could come unstuck, really. It was also a time when we could, if we needed to, refinance the property ourselves in a week or two, if we wanted the cash out for something else.
Louis Balfour said:
Until about 2007 we used to finance property deals for others. We had first charge on the development. Upon sale all costs were deducted, including market rate for cost of money over the term, then the proceeds were split 50-50.
We may look at doing it again for some people we know. Is that model over or under ambitious in today's climate?
For a slightly more balanced real world view, yes it is a very attractive offer for a developer. It's pretty much the structure I use.We may look at doing it again for some people we know. Is that model over or under ambitious in today's climate?
From the developer's side I don't have to mess about with separate senior and mez and I can invest the equity that would otherwise have gone into the scheme securing planning/opportunities elsewhere.
Simple, professional, easy business where we can do multiple schemes together, ultimately making a lot more money for both sides.
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