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Funding options for property renovations

June 30, 2016

UK citizens are aware the country is struggling with a housing shortage. Legislators, developers and builders are up against it and addressing the supply imbalance has seen buying and renting costs skyrocket.

Whether buying-to-let or planning to sell, property renovation can turn impressive profit if finances are handled correctly. Market research is imperative for property market success and thorough planning can help projects run seamlessly and minimise the potential for mishaps.

All is not grey, however. The housing market is slowly recovering, with an explosion in the buy-to-let sector going someway to stabilising rent, and the Help to Buy ISA enticing people into the market. Therefore, those individuals with property renovation plans will not suffer from a lack of interested parties and the guide below gives an overview of funding options available to help developments run smoothly.

Location

When considering a property to purchase for renovation, what must be decided initially is the target audience of the finished home, whether that’s families, young professionals, the elderly or students. It is natural for people to want to purchase the perfect house on the nicest street, but this will set investors back a lot of money and the profit may be substantially smaller. Having discussed the primary target of a home, the location and amenities must match up. For families, property should be located near schools and, in general, excellent public transport links and green areas can add value to the property.

Negotiating property prices

Once a property has been located and an individual would like to progress with the purchase, it must be bought for the right price. The higher the price paid, the less chance of securing a profit due to limiting margins.

The best bidding tactic often depends on the bidding process. With open negotiations the most common, the points below are ideal when reaching this stage:

  • start negotiations low, offering around 5% to 10% lower than the asking price
  • the agent will usually inform individuals of any bids that exceed theirs which fives the opportunity for second and third bids
  • stay polite and calm at all times; it can be stressful and alienating people is not beneficial
  • stay realistic
  • often, contacting the seller directly and negotiating in person and see a better price; however, this process can take longer as estate agents are looking to close deals in the shortest time possible.

Property Improvements

In essence, the principle of buying a property to renovate is to buy low and sell high. It can be tempting to pay extortionate amounts for properties that have potential, but it is financially sensible to buy as cheap as possible and put any remaining budget towards improvements. Seeking properties that will become extremely desirable after renovation is key.

Finance

Buying and renovating property all comes down to money and, with careful planning and research into the options available in terms of finance, a worthwhile investment could be established. There are a number of ways to fund property refurbishment, property conversions or purchasing buy-to-let premises.

Refurbishment mortgages

For some renovation work, there are lenders who offer ‘light refurb’ mortgages which operate on a part-retention basis. During the application, the lender will acquire a pre-renovation valuation and, before the work commences, a proportion of either the purchase price or the pre-work value will be put forward. Furthermore, lenders will also retain some of the funds to be released when the work is complete.

A benefit of this type of loan is that it is subject to lower LTV (loan to value) requirements that other buy-to-let mortgages and, on average, a lender will want to see at least a quarter of the purchase price up front.

However, this funding option is only suitable for properties than require minor refurbishments. When major restorative work is needed, planning permission and/or other terms of approval are necessary and a refurbishment loan would be more appropriate. This type of loan is more expensive and has a larger outlay of 25% to 30% on the initial purchase price.

Bridging loans

Bridging loans were once misunderstood due to their relative scarcity and high cost. Now, with improved understanding, they are essential for many investors and an expanding marketplace has resulted in competitive interest rates and flexible terms.

Bridging loans are so named for their use as a stop-gap between making a purchase and obtaining a main line of credit, such as a mortgage. Furthermore, they are only intended to be used for very short terms of up to 18 months. The majority of lenders will accept essentially any property or land as security, with only a handful of lenders having strict criteria.

As a general rule, bridging loans are aimed at landlords and amateur property developers, including those purchasing at auction where a mortgage is needed quickly. Furthermore, they are also an option for wealthy or asset-rich borrowers who require straightforward lending on residential properties.

Bridge-to-let loans

Bridge-to-let loans are offered by lenders willing to fund both the short and long-term stages’ where the objective is to recondition a property to make it suitable for the rental market. Alternatively, many lenders offer borrowers the opportunity to opt for short-term finance, initially and then move to a full mortgage.

This loan option has the advantage of having a clear exit strategy in place for the bridging portion of the loan, and having both products under one roof can make the transition stress-free and efficient. However, lenders will often charge a fee to borrowers when moving to the second stage of the loan.

Successful application

For borrowers who receive notification of a successful application, there is still more to do done to control finances. The majority of lenders will expect borrowers to put their finances into the project before they will hand over the money and many will only offer a percentage of the total cost of the building work, meaning that borrowers will need to fund the rest themselves.

Renovating a property can be a rewarding project that allows a lot of creative freedom and no two ways of renovating are the same. With detailed planning and appropriate financial support, dream properties can be produced and profit gleaned.