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refurbishment | Baya financial

refurbishment

How can you maximize your borrowing with Bridging Finance?

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It feels like forever since I’ve posted but here we are! With property prices starting to become more realistic, and interest rates on term mortgages falling, we are seeing plenty of purchases using bridging. So what are your options?

BORROWING FOR REFURB COSTS

This seems the obvious answer, why wouldn’t it be if the lender can fund the purchase and refurb? Well, it may not be for a couple of reasons…

The lender will always work back from your GDV and will lend 65-70% of this figure in total. So you need a profitable deal in its own right to achieve 70% on day one as well as funding all the refurb. This means that if planning is required (which you don’t yet have), or it’s an HMO conversion you could struggle.

Also, the costs are funded in arrears, so you need a working capital of around £25k (minimum) to start the works.

With valuers being cautious over a potential downturn in the market, the GDV you may achieve now before work has started may not reflect the value you would get at the end either. So bear that in mind when looking at your figures.

SO THE ALTERNATIVE – A HIGHER DAY-ONE LOAN

We’ve now got a number of options to maximize your day-one loan, rather than rely on funding for the works. The advantage of this type of loan is that you are less concerned with the GDV (although lenders do look at it), so you are more likely to achieve what you set out to.

We can lend up to 85% net day one for light refurbishments, and 80% for heavy refurbishments.

You would then need to fund the works, but with an additional 10-20% more than you would expect for a refurb loan (and bearing in mind the initial outlay to start the works), this may not be that much less in total.

The options available and most relevant will depend on your total costs, profit, and split between purchase and refurb costs so I’m happy to have a chat about how it would work for your deal!

Should I take out a variable rate mortgage?

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I feel like we need a daily update at the moment!

The latest from late yesterday was that swap rates are settling, and we can see this morning that more fixed rates are creeping back in today.

But… there is still talk of further base rate changes, and two specialist lenders have already stopped lending on existing cases that aren’t already offered. So there is still much uncertainty.

There are some variable rates around though, and they are much less likely to be pulled, so you have more certainty over completion – although not on the rate you will be completing on!!

Is it a good idea??

  • You’ve got to take a calculated risk. What could the rate go up to and does it still work on that basis?
  • Are you getting the property at a good price so the risk is worth taking?
  • What are the alternatives? If you need to redeem a bridge or complete something you’ve committed to then this may be the best of not very many options!

As always, give me a call if you want to chat anything through…

How do you value mixed use properties?

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Commercial Element is nearly always a vacant value. Unless you have a blue chip company on a long lease when we can sometimes achieve a market value.

Residential Element will be valued using similar comparable properties in the area. Remember properties above commercial are usually less desirable.

If you have an HMO as part of the residential part, you may be able to achieve an uplift on the bricks and mortar with a yield-based or hybrid valuation. This is where you can benefit!

You will either end up with an aggregate value (the sum of the individual parts) or a block value for the building, where around 10% is deducted from the aggregate value.

Which figure the lender uses will be up to the valuer and their comments. Can the property be broken up and sold individually? And would there be sufficient demand to do this in 12 months?

 

Is there an alternative to bridging finance?

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If you have a property that is mortgageable, but you need to do some work in order to let it out, do you need to use bridging?

We have another option!

It works well if you are looking at a smaller refurbishment where you don’t think you’ll get enough uplift to warrant paying for a bridge.

It is also an option if you are looking for a long-term project requiring planning for example if you are can wait to start bigger works.

It allows you to buy a property where you need to carry out a light refurbishment in order to let it out.

The valuer will see the schedule of works and can take this into account when looking at the value as well as the market rent figures. This is especially important when you need a higher rental figure to make the deal work.

This can work for residential as well as semi-commercial properties where they are tired and in need of a refurbishment before you can let them out.

You can use it for existing HMOs where there is a license in place but it needs some refurbishment to attract more rent or different tenants.

We can use a desktop valuation in the majority of cases, enabling a quick completion where required.

There is a 2-year fixed with a 2-year tie-in, allowing an opportunity to reassess what you are looking to do at that point. They also have a 5-year fixed with a 2-year tie-in, offering you some more flexibility.

There are some things to be aware of, as always:

  • The property does need to be habitable in its current condition.
  • No heavy refurbishment or planning.
  • You will need to show you’ve got 3 months’ mortgage payments in the bank to cover the refurbishment period.
  • They are lending based on their current condition and value, so there’s no room for uplift at this point.

Importance of Your Credit File

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The importance of looking after your credit file in the current market.

Lenders are being careful with who they lend, and are more cautious than normal given the situation. This is inevitable really, if there is a history of a client not paying a bill or mortgage, they are statistically far more likely to do it again, and with the current financial uncertainty, this could become something that is more likely.

Usually, we can speak to the specialist lenders we work with, and where there is a good explanation for poor credit they can look to lend. They understand that as property investors you have lots of tenants and utilities particularly can be an issue.

What we are seeing at the moment though, is that this is not necessarily the case. We are seeing some lenders formally restrict their criteria to allow fewer credit issues, as well as others who usually take a more pragmatic approach and have a blanket rule on any blemishes.

So what can you do?

  1. First of all, you should all be checking your credit search each month anyway. You can use a free company such as Credit Karma, which emails you each month with your new report. they also notify you of any changes to it. This means that if there are any issues, for example, something has gone to an old address, or direct debit hasn’t been paid then you can rectify it immediately – this should stop any future defaults.
  2. Secondly, when you approach your broker for a mortgage make sure you know if there’s anything on the search and give us the exact details of it. This means that neither of us is wasting time applying to lenders who won’t be able to help. It also means you’re not worsening the issue by adding additional credit searches to your file.

How can you future-proof yourself?

Cash flow is always key in property development and investment. It’s vital to keep on top of this, and it does nip at your heels. Especially in today’s market, you need to be building in contingencies for time and cost to ensure that this doesn’t cause any credit problems down the line.

Being realistic with your costs, timescales, and end values is also key to ensuring that things run smoothly over the next 6-12 months. Getting this wrong could impact your cash flow and credit file.

We are happy to run through figures with you on your exit, and where we are looking at a bridge we will always ensure that it fits at a conservative estimate on that exit.

 

Maximizing Bridge Loan by Borrowing More Than 75%

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How can you maximize your bridging loan by borrowing more than 75%?

I’ve spoken about the benefits of using bridging, 

But how do you ensure you are borrowing the maxmum amount so you are putting in the least amount possible?

We can lend 85% of the purchase price on day one

This is the simplest way to give you some extra funds to purchase the property.

There are some caveats as usual!

  • The gross loan needs to be under 75% of the GDV
  • 10% of the loan needs to be for the works so there needs to be at least that much to spend.
  • Works need to be light, so no structural or change of use.

We can lend you all the costs for the work.

This is more complicated, particularly at the moment.

Lenders are moving the goal posts and increasing their minimum loan sizes so please check with me before you make any assumptions on figures.

As a general rule we can lend up to 65% of the GDV, with all works covered (in arrears) so whatever is left from the total loan is your day one loan (minus fees and interest)

We can lend 75% of the open market value on day one

This is seen as the unicorn product, as it all depends on your figures!

You need to be confident that you are purchasing a property under full market value, but we do see it quite often

We can lend up to 75% of the open market value, and up to 90% of the purchase price

This is a great way to maximize your loan with no additional costs.

Common Mortgage Mistakes

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Common Mortgage Mistakes: How to avoid them?

I am often asked to ‘fix’ issues that have come about from clients not using the right mortgage, and it is sometimes pretty tricky to do. So I thought I’d run through some examples of things you shouldn’t do as a property investor…

Use a Residential Mortgage for an Investment Property

This sounds like an obvious one, but you would be surprised how much it comes up!

Yes, there are some tax advantages to buying your home over an investment property – but that doesn’t mean you should do it!!

Once you have lived in a property (or your credit file looks like you have) it can be difficult to obtain a BTL mortgage on it, particularly if it’s an HMO.

So please don’t do it!!

Use a Standard Mortgage when You Intend to Refurbish or Convert the Property

This is probably the most common mistake I see made by investors.

You’re going against the terms of your loan. The lender won’t like it and may not want to work with you again.

If you are looking to refinance and you haven’t let your property out then the new lender will see this on your bank statements and it could present a problem.

Not Speaking to your Broker before Instructing Solicitors

There are many types of solicitors, each with their own specialism – and bridging/development is very different from residential mortgages!

Using the wrong solicitor can stop your mortgage from completing, so it’s really important you get the right person for the job.

Some lenders will allow you to use the same solicitors to act for them and you, saving you time and money so check if you can do this before deciding who to use.

Not Exploring all the Options before you Commit

We have had a few cases recently where the client has paid for a valuation or received an offer before realizing that the product they are looking at doesn’t work.

This may be because the rate is too high, it doesn’t release enough inquiries or the terms just don’t seem right.

It’s important to know that you are working with a broker who does that type of business and ask for examples of previous cases.

It’s expensive to swap halfway through!!

so please speak to us (or a broker who does lots of what you are looking to do) before you start.

and if it sounds not quite right, then it probably is!!

Precise have expanded their bridge to term product!

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How does it work?

  • You have one valuation carried out to give you a today figure and a GDV. 
  • You receive two mortgage offers – for the bridge and the term.
  • You have the offer for the term before you start.

For the bridge:

You can borrow 75% LTV to purchase the property

They allow a light refurbishment, including a change of use to an HMO

You have 6 months to move to the term mortgage

For the mortgage:

You can borrow 75% of the GDV figure.

The fees are reduced across both products.

There are very little legal fees to move from bridge to term and it is quick!

What are the benefits?

  • It keeps the costs down of bridging – arrangement fees, legal fees, and valuation fees are reduced
  • It offers certainty over the exit.
  • The process to move from bridge to term is quick and simple.

Benefits of Bridging to Purchase Your Next Deal

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What are the benefits of using bridging over cash to purchase your next deal?

The Valuation

Your bridging lender will instruct a valuation and the surveyor will have your schedule of work, so you have a professional opinion on your now and after-works figures.

The surveyor will also pick up if there’s anything that the lender doesn’t like – for example its location, neighbors, or nearby commercial units.

 

The Legal Process

Although you will need your own solicitor to purchase property cash, they are not the lender’s solicitor and therefore won’t be able to get their take on any unusual legal issues. It is much more tricky to resolve lease issues for example after you have purchased a property. Using a bridge means we have access to a lender’s solicitor and know that the property is mortgageable.

 

It Frees Up Your Money

You can look to take on multiple projects if all your money isn’t tied up on one, which it may be if you are funding the deposit and refurbishment yourself.

You also have the option of borrowing your refurbishment costs, which on bigger projects can mean you are putting in as little as 30% of the purchase price and the purchase costs.

 

It Doesn’t Cost Twice As Much

The preconception is that bridging is expensive, but there are lots of ways we can reduce the overall cost if you need a bridge and an exit with the same lender.

Lenders can reduce arrangement fees, valuation costs, and legal fees if you use them for both, and Baya will only charge an admin fee for the refinance if we have arranged the bridge.

Care Provider leases on HMO properties

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Happy Friday everyone – I never thought I’d moan about the weather, but when everything is so busy and taking so long at the completions end, it is pushing a lot of us to our limits.

Today we are covering Care Provider leases on HMO properties.

Having got more investors wanting to get involved in this sector, I thought it good to cover this week.

As some of you know, I have been involved in this area for some time, starting some years ago with refinancing large HMOs for vulnerable women and their children. This was daily emergency housing, so the most difficult to place.  In recent years, lenders have shied away from the vulnerable areas, as they didn’t want the prospect of reputational risk.  Which really made me mad, as it is so important that they have options, which need funding.

Moving on, last July, I worked with one of our investors to get a supported living contract approved – which I did.  It wasn’t for the very vulnerable area, but a start.  Since then we have enabled funding for a number of HMOs on this is basis and this lender has now changed their policy regarding care providers.  This has enabled us to have much more certainty around what we can offer our clients.

So how do you get involved in this area…. 

The assumption is that you need lots of experience, but you actually only need to have had one buy to let (single let) for 12 months. You don’t need to have any previous HMO experience.  The refurbishment part is slightly different if it involves one, but if it is a light refurbishment then yo don’t need any previous refurbishment experience.

The important part is to check out is your potential care providers; a lot of them are not regulated as they cover areas that fall outside CQC etc.  Check their reviews, as the lenders will not tolerate those with poor reputations.  Doing your due diligence early on will save a lot of time and cost later on.

  •  Type of property – each care provider needs a specific type of property, whether it is the number of bedrooms, amount of communal space etc; and so on.  It’s a balance between making sure that it is not so bespoke you can’t do anything with it if this doesn’t work out without spending further money, if for any reason it doesn’t go through.
  • Area – again, this will be dictated by the type of tenants.  Location is so important to your care provider, so make sure you find this out before you start sourcing your property.  Distance to local amenities, transport links, particular things that need to be close (or not!) are vital to your provider.
  • The lease – ask for a copy of one of the care providers draft leases in advance.  Lenders will need to approve them, so it is important that you give us a copy of this to get it approved, in principal, before the transaction starts.  A recent case needed some amendments which the care provider agreed to, but this may not always be the case.  This is really important as the fund is dependent on it.

FYI – if a lease goes over 7 years, then it is registered at HM Land Registry and the care provider will pay SDLT on it.  Something to consider.

As a recent example, a client came to us who had bought a property cash to convert to an HMO.  He had bought it for £130,000 in January of this year.  As he started the refurbishment, he engaged a care provider early on to understand the requirements they had for the HMO.  They are a charity who help young adults leaving care, providing them with supported living as a stepping stone to living alone.  Their ethos is around helping their tenants not only with housing, but also with with their finances, employment and ensuring that they are supported at a time when so many are not.

The refurbishment cost £60,000 in total.

After looking carefully into comparables for the end value the clients estimated this would be around £200,000.  The surveyor inspected the property and lease and gave it a value of £210,000 – a great result, the lease created an uplift in value well as long term security.  The rental income is £2250 per month on a 3 year contract.

We were able to lend 75% of the new open market value, within 6 months of the purchase date. This is on an interest only mortgage too, which historically was an issue for this type of lease.

I genuinely believe that having commercial leases in place, with the current climate of uncertainty, can only be a good thing for both investors and lenders.  There are no void, referencing of new tenants and most of the contracts include the bills – so it is a much more profitable, both money and time for these type of contracts.

I hope that is of help, but were here for a call, as always.