10 Things You Should Know About Investing In Our Peer to Peer Development Finance Loans
The property development formula is relatively simple, you buy, you build, you sell. But as always, the devil is in the details. The first thing property developers need to do is find development opportunities – that could be a piece of empty land, plot with a certain type of property that you could knock down and turn into more or maybe a building that needs converting. To make money developers need access to the right development opportunities.
Once they have a development opportunity, they may buy the land outright and rely on being able to obtain planning that will allow them to build a profitable development. Alternatively, they may be able to agree an option deal where they will purchase the land subject to them obtaining suitable planning. In any event, even if not buying the land at this stage fees and planning applications for even a small development will run into tens of thousands of pounds…at least. The developer will work with an architect to draw up plans and submit them to the council along with a planning application. That process will take a minimum of 6 months and often a lot longer.
Developers need to understand planning permissions and what councils housing objectives are. If they misjudge what the council will allow they stand a good chance of losing a lot of money. If permission is granted, to move forward they will need to finance their developments, control construction costs and sell for the forecast prices. There are a number of peer to peer platforms that raise finance for development projects but at the House Crowd we do things differently.
Here are 10 things you should know about The House Crowd peer to peer development loans.
1. We control our developments.
We had a terrible experience with a third-party developer back in 2016, and it led to a very lengthy, arduous battle to find a way to recover clients’ money. Thankfully, we managed to rectify the situation and clients did not lose any money, but it made us very wary of dealing with third-party developers who may not have the same ethics as us. So, whilst we now have very strict controls in place, and employ an employer’s agent and fund monitor (both of whom are highly experienced quantity surveyors) to check the contractors work, we are- for the time being at least- only funding developments under the House Crowd Development brand. That way we control the developments and can ensure investors’ money is looked after responsibly. Other peer to peer platforms offering development loans are raising money for many different third-party property developers, which can make it difficult to monitor what is happening on behalf of investors. The House Crowd is the only peer to peer platform with their own house team acting as the principal developers. This gives us complete control over the process from start to finish. The buck stops with us.
2. Investors are protected by a first legal charge
Traditional development finance generally involves quite a complex mix of debt and equity investment, with bank’s usually providing the lion’s share of money. They also have the first charge over all the assets and a mezzanine lender having a second charge. This leaves developers and their investors vulnerable as banks can implement various clauses and step in to take control of the development. If the banks do that, in many cases the equity investors can lose all their money as they are paid out last after the bank. The mezzanine financier will have taken everything owed to them.
We, on the other hand, do not use bank finance. This makes a major difference to how your investment is secured.
Our deals are crowdfunded – houses for the people funded by the people. Our investors receive the benefit of a first legal charge registered for their benefit at the land registry. This means the properties cannot be sold without investors being repaid and HCF which acts as Trustee agreeing. Investors are always paid out first. And as such, this model is significantly less risky than a traditional development finance deal.
- Cross collateralisation provides an additional level of protection
With the best will in the world, even if you are as diligent as you can be, unforeseen events happen, and things can go wrong. That is a risk you must appreciate if you are to invest in anything. We regularly review our employer’s agent and fund monitor’s reports and consider all matters that could affect the project’s profitability such as off-plan sales not fetching the forecast sale prices, any delays and extra expenses; for example, caused by a change in fire regulations (as happened after Grenfell Tower) or a general fall in the housing market.
Should House Crowd Finance’s CFO (Lewis Walters) come to believe at any time that investors’ capital is at risk in a project is at risk, he will forecast a provision fund that needs to be put in place to cover any losses. HCF will then place a suitable charge over the revenue that is being generated from other developments under the House Crowd Developments banner so that once investors in those other projects have been paid out, investors in the loss-making development will be paid any shortfall in their return of capital before the developer takes any profit. This ability to cross collateralise across different House Crowd Development deals provides an additional layer of security for investors.
- Due diligence and research
We do everything we possibly can to judge the feasibility of a development project before proceeding. This includes a RICS survey, an in-depth feasibility on the costs of construction by our employers agent (which is then reviewed by HCF’s fund monitor), talking in depth to local agents and, commissioning the best research reports available (click here to see an example) analysing sold prices, prices per square foot achieved on similar properties, market liquidity, demographics, economic forecasts and reports from highly experienced new homes sales and marketing consultants. All these things will not make it certain that a development will be a success but, rest assured, we do everything we can to ascertain that it is highly probable before we decide to proceed.
- Planning permission will already have been acquired.
One of the biggest risks with development is taking the chance that planning permission you want will be granted. The planning permission process, as you may be aware, can be problematical. NIMBYism is rife – although we need more houses, nobody ever wants a development built near them. Councils can be very awkward and, even if permission is granted, it may have been subject to appeals and other long delays. They may also impose stringent conditions or require large financial contributions or affordable housing that make the project unfeasible. It can lead to a developer (and their investors) being substantially out of pocket. Having experienced a wide variety of problems and long delays with acquiring planning for our early projects, we now, wherever possible, only offer developments which have full planning permission in place. This, again, significantly reduces one of the major risks with developing.
- Our contractors are on fixed-term design and build contracts penalty contracts.
Anyone who has ever employed a builder will know that problems and delays can happen especially with smaller building companies. With our earlier projects, we worked with relatively small contractors. It was not feasible for those contractors to agree to a full design and build contract as they could not commit to paying the penalties if they went over schedule. This, unfortunately, led to some long and very frustrating delays, for both us and investors, with early projects and cost us a lot of extra interest payments.We have learned from those experiences.
And now, with all our projects moving forward, although we pay a significant premium, we work only with substantial reputable contractors with a strong balance sheet who will commit to a contract at a fixed price and fixed timeframe. If they go over that deadline they are obliged to pay significant penalties – thousands of pounds a week. This has led to us being able to provide a much more efficient, streamlined investment product with greater predictability as to return of your capital. In fact, since we adopted this approach only one development has fallen behind schedule and that was because once works started it was discovered that the architect’s plans (for the conversion of Frodsham old library to Library House) were unsuitable and had to be amended. That is one of those unforeseeable events that can cause delays. With a fixed price design and build contract in place, the only foreseeable delay is in the sale of the properties being slower than anticipated. We now have people and processes in place that have hugely improved our off-plan sales processes to minimise this risk.
- Belt and braces approach.
We employ a highly reputable employers’ agent – Edmond Shipway – with decades of experience to do due diligence on our contractors and then supervise them to ensure (amongst other things) that health and safety measures are adhered to, that work is performed to a high standard, and that the construction on the sites means the valuations are always higher than the amount released to the contractors. Additionally, HCF employs a RICS qualified quantity surveyor’s firm as a fund monitor Jones Melling and they review and sign off on the feasibility study and the employer’s agents work. They also are highly experienced and act for several banks as fund monitor. This provides an extra layer of checks and balances to ensure – a real belt and braces approach.
- Predictable returns.
We often get asked if people can invest in an equity basis in our developments. We have decided against this. The risk with equity investing is considerably greater as investors will get paid only after and loans/other debt-based investment. Equity returns are also more variable – they may be more or less than you were expecting.
Our ethos is to be able to provide consistent and predictable returns for our investors which is why we offer a fixed interest rate – usually 10% p.a. Not only is this a very attractive return but it means that if the houses take longer to sell than anticipated and you have to wait longer to be paid, you can at least take comfort in the fact that you will be earning a very good rate of interest whilst you await payment. The developer will take the first hit should the development not sell for the forecast prices.
9. Investors are always paid out as a priority
As properties in a project are sold and funds released, they are used as follows:
- All capital is repaid to investors in the order it was received
- Interest is paid to investors in the order investment was received
- Once investors have been fully paid the profits are distributed to the developer
We are sometimes asked why we don’t repay interest at the same time as capital.
We do not do that as our priority is always to protect investors’ money. We repay funds in this order as to do otherwise and repay interest out with return of capital would place a greater risk on investors who remain invested and we do not believe that is equitable.
- We specialise in the North West
We are based in Manchester and key members of the team have lived here most, if not all, of their lives. Between us we have many decades worth of experience in the North West property industry and know the different areas and markets very well.
And, as you would expect, we have built a valuable network of contacts over the years.
Personal relationships in the property development industry are the key to success. It’s not just what you know, but who you know.
Having strong working relationships with trusted and highly experienced architects, surveyors, planning consultants, contractors, estate agents means we have an extended team of experts we work with on a daily basis. We know them well and trust them to do a good job. Not only that, but through this network, we are frequently introduced to landowners and get access to off-market deals which enables us to supply you our investors with attractive investment opportunities that you would otherwise never have access to.
To view our flagship investment opportunity ‘The Downs, click here. Alternatively, if you want to find out more about this development opportunity and the surrounding area you can watch our recent webinar Introducing The Downs, Our Brand New Altrincham Property Development.