How to finance a property development project
Whether you are thinking about property development for the first time or you are an experienced developer looking for some new ideas, the financial basics are always the same. To make a profit the developer must:
1. Understand all the costs involved in both the acquisition and build phases,
2. Accurately assess the potential sales price and
3. Manage the finances to project completion.
Calculate and understand the total costs
It is essential for any development project that all the costs are clearly understood before purchase or embarking on the build phase if the site is already owned.
Land/building acquisition price
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Until all of the above costs are known and accounted for it is impossible to accurately define the profit potential from a development project.
Assess the profit potential
Property development is crucially about adding value to a site and either selling at a higher price level or completing the site and holding for longer term investment purposes. So how do developers assess the potential profit that can be made from a development site or project?
Estate agents can play a useful role in assisting the developer to assess the profit potential from a completed project. It is important to remember that the agent’s opinion will not count toward finance raising or when your propsective purchaser is deciding whether to part with his hard earned cash. However they can be extremely useful in making quick assessments of the potential of a site before deciding to part with fees for professional valuers and surveyors.
Do your own comparables
As well as working with the local estate agents it is important to do your own research so that you are very clear of your target market and the possible price your site could reach compared to similar property and location types.
Ultimately the finance that you are able to raise will depend upon the professional opinions of a valuer or surveyor. Lenders need to protect themselves from overinflated estimates and will rarely provide development finance until they have an up to date valuation of the current site and an analysis of the likely post development value.
Evaluate your financing options
Financing options range from total self financing where the site is already owned by the developer and the build costs are available without the need for finance to total 100% development finance involving GDV, 100%, Mezzanine or Equity Finance routes.
Some developers are either already living at the development site or plan to as their main residence. This is usually the lowest cost option but often the most...