The Untapped Abundance of Commercial Lending Facilities

Here's my experience: I approached several lenders of property development finance in 2011-12 for a proposed small block of flats, and I'm afraid I did find them extremely expensive: interest rates comparable with credit cards, a hefty fee even to look seriously at my application, and entry and exit fees based on a percentage of the sale price for no good reason (why not a fixed price if the fee genuinely reflects the set-up and close-down costs for the finance?). The amount of competition seemed minimal: they all wanted to charge about 1.5% per month, and sought to charge every conceivable cost to the client - travel fees, meeting fees, inspection fees and so on. They were very quick to itemise every charge to me, but refused to itemise and justify how they reached their own interest rates and setup or exit fees - it was all completely opaque.

I ended up building to sealed structure stage using cash, and then approached a largely-nationalised high street bank, who were willing to lend at much better rates: just £5000 application fee, no exit fees, and an interest rate of 5.5% on a 45% LTV loan, plus intermittent charges like £395 for a stage inspection.

Having turned a reasonable profit on my flats, I am currently building two new 4-bed houses for cash. This is still a struggle and will involve using credit cards for the last 8% of the build, but this is still preferable to the hours of time I felt I wasted with these specialist development lenders, who seemed to think they were doing me a favour in charging 1.5% a month on £330K of lending, plus their never-ending set of add-on fees. Perhaps, as Mark suggests in his article, I do have an unrealistic assessment of the appropriate risk/reward ratios for property development lenders, but frankly I'm certainly not achieving a 1.5% per month return on *my* capital and labour when I do these development projects. I'm therefore blowed if I'm going to offer that level of return to people who, yes, have available capital but do not do anything like the amount of work I do. All the risk and stress, plus 50-60% of the capital, is on my side, and very little on the lenders' side: all their costs are covered by the fees, they get an APR pushing 20% on their cash, and they get repaid first, so if I sell at a lower price than anticipated or overrun on my costs or timescale, they see no reduction in their profits - all the loss is on my side. If, however, I can secure long-term investment by friends, family or a business partner, their expectations for dividends and ultimate repayment of capital are much lower and there is a much more equitable balance of risks and rewards when compared with my investment of my own capital and time and effort.

Hats off to you for your fighting spirit. I was talking to another builder recently who has had a great year doing 'build to order' deals which are funded by the purchasers. It started with a speculative re-development of a bungalow which he' sale agreed' part way through. The purchasers were a wealthy family and asked the builder to buy the property next door to to do exactly the same thing for their sister. They funded the project entirely. On the back of referrals he's got three similar developments to do. Nice work if you get get it hey? The wealthy family are now offering to provide 70% development funding to this developer for 5% interest and first charge, NO FEES, apart from the developer paying for the legal costs, valuations and architects certificates! For the wealthy family it's a far better deal than they can earn on their savings in a bank.

I've written another blog about the potential from a completely different perspective this week. It's an example of how the fighting spirit can become self destructive. It's based on a true story which rattled my cage a bit. Please look out for it as I'd appreciate your views on that when it's published.

I Had a similar experience with a bridger recently-I was looking to raises around 85k on a cross charge bridge to fund a renovation project then remortgage away or sell at the end-the usual fair.. They offered 1.55%pm, usual in and out fee's, but when i broke their costings down i realised that they were also charging 1.55% interest on their fee's too but which were to be subtracted from initial release of funds. So in effect i was paying their fee's upfront from the initial advance, then when they did their final calcs at the end (interest was rolled) they were charging 1.55% on all of their costs/fee's as well even though they had already been paid at source! Maybe this is standard practice but it does seem rather opportunistic of them...Needless to say........!

Hi John

You need to shop around a bit more or find yourself a decent broker. As Jim Bowen used to say on Bulleye "Take a look at what of won!" >>> http://www.property118.com/index.php/bridging-loans/33130/