Solutions When Sales Are Slow
There’s nothing worse than finishing a development project and your completed units aren't selling.
If you find yourself struggling to pay off a lender, due to slow sales, be assured.
There are 4 options you can take to avoid problems, as below:
1. It wasn't supposed to be this way...
Considering a property developer usually takes on a project roughly 2 years before completion, it’s impossible to know what the economic winds will be like come completion time.
Through no fault of your own, it is possible that the economy has turned and your exit period is not what you had hoped it would be.
2. What Happens With A Lender's Loan Facility?
If sales are slow, this can bring a number of financing issues to the fore.
As a result, you may go over the term of your facility and into potentially unchartered waters.
If you’ve not been in this position before, or wonder if it will be like the banks and 2008 all over again, it can be unnerving.
But it need not be.
So what actually happens when you near the end of your finance term, and it looks like you need more time?
3. Exceeded Your Loan Term?
Firstly, the lender will be in contact with you a few months before the term finishes, as it is likely they will know about the same issues.
Please note that in a slow economy, you will not be the only borrower that the lender works with who is in this position. Whilst that provides no real comfort, it is worth noting that the lender will jointly feel the pain of non-performing loans.
Given the lender is more of a JV partner than a traditional lender (with interest rolled up), they are just as keen to see the project complete, and preferably by you, not them.
In my 15 years experience, I find today's lenders will bend over backwards to keep the loan going, provided you doing what is expected contractually.
So lenders are likely to play ball, and that means either extending the facility on the same terms, or beginning a second separate loan for the extra amount. This second facility may be on the same terms with a new arrangement fee, or on slightly different terms.
4. What Happens If Slow Sales Persist?
If slow sales persist, the lender may require the borrower to service interest on a monthly basis.
This is usually terrible news, as funds to pay that debt are usually tied up in the project in question.
5. Your FOUR Options
If you’re facing this situation, there are 4 main ways to deal with this:
- Remain with the current lender and hope they don’t need servicing/or agree to service
- Re-finance a number of units onto Buy to Let Mortgages
- Sell units to a BMV Investment House (Below Market Value at c.20% discount)
- Re-finance with a short-term funder for 1-2 years until sales improve
Firstly, you always have the choice to remain with the current lender, as long as it is viable to do so, and they are not pestering you to get re-financed or to change your terms. Please see above for the usual process.
Secondly, if you can, take some of the units yourself and re-finance the development finance lender out via Buy to Let Mortgages. This depends enormously on the rental market in that area. However, it is a serious option to consider which can help you sit tight whilst the sales market improves.
Thirdly, you could consider selling some or all of the units to a Below Market Value (BMV) investment firm. You may have to take a 15-20% hit on the sales value, but it would mean you get out before any further damage is done.
Finally, there are some short-term re-finance packages available for up to as much as 2 years, which can re-finance you away from the lender that you have exceeded terms with.
This option can give you much needed breathing space whilst the market picks up. These funders can also fund prior to Practical Completion, such as Wind/Water Tight, and a few lenders can even fund now very early on in the build cycle.
6. For Further Help...
In summary, if you find yourself:
- in an economic downturn,
- or have slow sales or
- are struggling to pay off a lender
be assured that there are a number of options you can take to get out and keep those profits.
If you need further help, call 07515 288276 or click here to email us
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