Solutions When Sales Are Slow
There’s nothing worse than finishing a development project and for some reason beyond your control (usually the economy), your completed units are incredibly slow to shift.
Not only is utterly frustrating, but the knock on effects for cleaing your development finance obligations can be considerable.
If you find yourself in a downturn and are struggling to pay off a lender due to slow sales, be assured that there are a number of options you can take to avoid your profit margins being hit too hard.
Here we take a look at what the consequences might be, and more importantly what you can do about it should you end up in this position.
1. It wasn't supposed to be this way...
Considering a property developer usually takes on a project roughly 2 years before completion, if not longer when planning gains are involved, it’s impossible to know what the economic winds will be like come completion time. Oh but a developer’s lot…
Through no fault of your own, having worked diligently to get to this stage, the world 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, particularly if you haven’t sold anywhere near enough units to pay back the finance house and get them out of the picture.
As a result, you may go over the term of your facility and into potentially unchartered waters.
So if you’ve not been in this position before, or you’ve been in this position before and wonder if it will be like the banks and 2008 all over again, what actually happens when you near the end of your finance term, with it looking very likely that you will exceed the term of the loan agreement you signed up to?
3. Exceeded Your Loan Term?
First and foremost, the lender will be in contact with you a number of months before the term finishes, as it is likely they will sense the same issues as you do via their monthly QS reports from site.
If the economy has worsened, then it is likely that you are not 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, in property development finance, the finance payments are deferred and made from sales, both lender and developer rely on those sales to get paid. Therefore it is not in the lenders interest to be awkward, although typically lenders are funded themselves by another entity, for whom they also have to give back capital and interest.
So at least in the beginning, lenders are likely to play ball, and that means either rolling the facility on the same terms, or beginning a second separate loan for the extra amount over and above the original facility. 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?
At some point, if slow sales persist, the lender may require the borrower to service the loan. For most developers, this is terrible news, as funds to pay that debt are usually tied up in the project in question, or others that may be ongoing.
5. What To Do To Gain Peace of Mind
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
- Re-finance a number of units onto Buy to Let Mortgages
- Bulk sell units to a BMV Investment House
- 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 some of their usual processes when loan terms are exceeded.
Secondly, if you have the capability to do so, take some of the units yourself and re-finance the development finance lender out via Buy to Let Mortgages. This is not possible in all parts of the country and depends enormously on the rental market in that area. However, it is a serious option to consider which can help you sit tight if you can whilst the sales market improves.
Thirdly, you could consider selling some or all of the units to Below Market Value investment firm, possibly with overseas buyers. You may have to take a 5-10% hit on the final 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, and give you some much needed breathing space whilst the market hopefully picks up.
Whilst some funders require practical completion, it can be possible to get funding at wind/water tight stage too. As usual, much will depend on the leverage required.
6. There Are Options
So in summary, we live in boom and bust cycles, and unfortunately we can’t predict when downturns are going to happen.
However, if you find yourself in a downturn and are struggling to pay off a lender due to slow sales, be assured that there are a number of options you can take to avoid your profit margins being hit too hard.
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