10 Key Facts about our development finance loans
People generally assume that because development finance pays high returns it must be very risky. Whilst every investment carries an element of risk, we believe that our unique development finance product offers an excellent ratio of risk to reward.
Here are 10 facts you should know before you decide whether it’s the right investment for you.
1. We control our developments.
We had a terrible experience with a third party developer back in 2016 and it led to a very expensive legal battle 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 parties who may not have the same ethics as us. So, for the foreseeable future, we only fund developments that we control so we can ensure investors’ money is looked after responsibly.
That way, the buck stops with us.
2. Investors are protected by a first legal charge:
And as such our unique model is significantly less risky than a traditional development finance deal.
Traditional development finance generally involves quite a complex mix of debt and equity investment with a bank usually providing the lion’s share of money and having the first charge over all the assets. 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 has taken everything owed to them.
We, on the other hand, do not use bank finance. Our deals are crowdfunded – houses for the people funded by the people. Investors have the first legal charge meaning there is no risk of a bank seizing the development as they did to many developers back in 2008.
3. 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. Councils can be very awkward and, even permission is granted, it may be subject to appeals and other long delays. Having experienced a wide variety of problems 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.
4. Our contractors are on fixed term penalty contracts.
With our earlier projects we worked with good but 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 admittedly led to some long and very frustrating delays with earlier projects. We have learned from those experiences. And now with all our projects moving forward, although it is more expensive, and therefore less profitable, we work only with substantial reputable contractors 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. We believe this will lead to a 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) were unsuitable and had to be amended. Issues like that highlight why we prefer new builds over conversions!
5. Checks and balances.
We employ an employers’ agent – Edmond Shipway Ltd.- to do due diligence on our contractors and then supervise them to ensure (amongst other things) that health and safety measures are adhered to and that work is performed to a high standard.
Additionally, we employ a RICS qualified quantity surveyor as fund monitor – Ken Jones of Jones Melling. He is highly experienced and also acts for several banks as fund monitor. Ken supervises the employer’s agent on behalf of our lenders and provides an extra layer of checks and balances to ensure all work is done to the appropriate standard before monies are drawn down.
6. 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. We want 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.
7. When you will get paid?
The exit (i.e. the mechanism for paying investors their capital and returns) with development deals is dependent on selling the properties. We try and make off-plan sales as early as we can so the investment terms are as short as possible. We pay back investors in tranches as each batch of properties is completed and sold. This batched sales process can, with larger developments, take several months.
We always repay everyone’s capital in the order it was invested and before we pay out any interest, as to do otherwise would mean imposing a bigger risk on those who invested in the later phases of the project.
The developer only takes it profit when investors have been paid everything they are owed. The order of priority for payments, therefore, is always…
a. Investors capital in the order it was received
b. Investors interest in the same order
c. Developer profits
We choose developments in popular areas that fall in the mid-market £200-£400k region as they appeal to first time buyers, families and downsizers thus giving us the best chance of selling the properties quickly and paying you your returns as quickly as possible. We also have the governments Help To Buy on developments, wherever possible, which helps enormously with sales.
9. North West Specialists.
The success of a development is largely dependent on the end sale prices achievable. Estimating these accurately is crucial. We only deal with developments in the North West (basically within 45 minutes of our head office) as we know the markets well and there is less chance of getting something wrong. We always estimate values conservatively, thus mitigating the risks involved in achieving a decent profit.
To date all House Crowd Developments properties have sold for the estimated price or greater.
10. Considerate Developer Award.
Nobody likes the noise and disruption caused by building works and we feel it is our duty to make the process as painless as possible for local residents. We were recently awarded a considerate developer award for our Coppenhall development in Sandbach. We will be implementing the same standards across our other developments.
If you would like to learn about property development finance, we will be hosting a webinar in February where you will have the chance to ask me any questions you may have.