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  • Stickies & Evergreen

    Golden rules for lending Developers Money

    I am constantly amazed by the naivety of some who choose to lend out their hard earned savings without having a clue of how to go about it.

    It is better to have your money locked up in a bank earning no money at all then to lose it through stupidity.

    I have (and still do) lend money to property developers, and I thought I would share some of my golden rules. There is good money to be made from lending out money, but as with everything in life, you need to know what you are doing.


    The main 'Golden Rule' is to first look at how your capital is going to be preserved and paid back. Only when you have answers to that should you start to consider the rate of return. (Warren Buffett came up with that one)


    1. Don't lend more than 65% of the 90 day firesale value of the property in its current condition, (i.e. NOT 65% of GDV or done up value, but firesale value of the property in its current condition)

    2. Take 1st and sole legal charge on a property which is owned by the person(s) you are lending money too. Remember a person is a separate entity to their Ltd company. Lend to the borrower personally, not to their company.(Don't take a charge on property not owned by the borrower. It gets too complicated)

    3. Check (by doing a land register search) that the borrower is a UK home owner. Look at how long ago they bought the property, how much they paid for it and do a Rightmove rough valuation to determine that they have some equity in their own home. (This gives a bit of extra comfort). Once again, avoid situations where the borrowers name is not on the title for their own home.

    4. Don't allow borrower to take another loan from someone else and put a 2nd charge on the property. (put a clause in your contract)

    5. If the borrower needs to exit from the deal in order to pay your interest, then take the interest up front. e.g. You lend £100k at 10% pa for a fixed 12 month term. You advance £90k having taken 1 years interest up front.

    6. Only take interest on a month by month basis if the borrower can demonstrate that they have positive cash-flow to service your interest payments from outside of the property deal you are financing

    7. Don't just look at the deal you are financing but the person you are lending too. What is their asset base? If you lend someone £100k and that is their first property and they live themselves in rented accommodation, then most of their financial footprint is in the deal yo are financing. Thats not good! If you lend £100k to someone who has a further £1m of property to their name, then they have a wide finical footprint beyond the deal you are financing and it would not be worth their while to declare bankruptcy over your deal.

    8. Always lend for a fixed term at an agreed rate. Have in the contract that if loan is not repaid by end of the contract then the rate payable increases. So you might lend 10% for 12 months, put if not repaid at month 12 then this will go up to 18%. Have in the contract that all legal fees will be charged and no warning letters will be issued. This means that if the borrower honours his side of the deal, he will get a good deal. But if he doesn't, you will get something back for all the hassle you will have to go through to get your money back. (with an upper loan limit of 65% of firesale value, their should be enough in there to get all you money back.)

    9. Be wary of people who claim they are very experienced, offering very high rates of return. The more experienced you are, the more assets and cash-flow you have, the less risky you are to lenders and the less return they have to offer you because they should have plenty of options at 8% pa or less. (Fact of life, the more you have, the cheaper your borrowing costs)


    There are more but just following these will keep you safe
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    Great post Sam.

    Can I add always use your own solicitor and never a firm that the other party has recommended and ensure that your solicitor understands property.

    Also ask them to show you their credit report so you can see if there are any warning signs.

    Remember how hard it is to get finance from a bank. The reason is that they ask questions and many applications fall by the way side because they don't get answers or don't like the response.

    Finally don't treat a friend or family any differently and prepare to lose your friendship if it goes wrong.
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    Regards Simon Searchlight Finance

    Fulfil Your Property Ambitions

    01565 654005

    Searchlight Finance Ltd is authorised and regulated by the Financial Conduct Authority reference 743220.

    HMO Finance I Complex BTL I Bridging Finance I Development Finance

    Buy to Let I Portfolio Finance I Commercial Mortgages


    Excellent post Sam. Thank you so much for writing it. It applies to lending large sums of money to anyone! It deserves to be an instant "Sticky". Angel

    I wrote back in August about a worrying trend I was seeing of gurus and developers asking their students/contacts to borrow large amounts of money & promising very high returns.

    I now know of three well known faces on the speaker circuit who have been asking to borrow money in excess of £100K per person for various "projects".

    My biggest concern here is that they have a ready supply of newbies in their network to pay off older creditors and keep the money flowing.

    I do find it strange that these allegedly wealthy people need to borrow money in the first place. I would have thought that they could offer a value add to their students by lending them money, or entering into JV's with the students to help them.

    It's akin to going to someone for professional advice and them asking you to give them professional advice, when you have paid for theirs!

    @Simon

    SO, SO, SO important to use an independent solicitor who will protect your interests and have some accountability to you.

    I would also add: Once they have your money, order a copy of the title deeds of the property the charge is secured on to ensure that your charge has been registered.

    Log all emails, conversations and correspondence so that you have a complete paper trail if things start to go pear shaped.

    If they are a deal sourcer, make sure they are registered with an Ombudsman Scheme.

    If they a pooling investors money, this becomes a "Collective Investment Scheme" and should be regulated by the FSA. Ask for a copy of their FSA regulation before lending any money.

    [Image: house.png]House Critter recommends the following related discussions:

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    As a lender, it goes without saying that the borrower will use your solicitor who is working for you. Your solicitor will register the charge and forward you a copy of the Land Registry title to show that the charge has been properly registered.

    There are two types of 'wealthy' people I come across. One type is the type who has acquired cash through whatever means and invests it in mainly safe investments because they lack either skill, time, contacts or inclination to do anything 'active with their money'. The other type is the 'hard working wealthy' who are always actively doing something with their money and supplementing their own funds with funds from other people to increase their working capital pot.

    There is nothing unusual about wealthy people needing to borrow money. Often, they are generating enough income from other sources to service interest payments and therefore taking on additional borrowing is a very efficient way of getting more done.

    It is quite easy to check people out and sift through the bull-shitters. Another golden rule, 'take whatever people say at face value, (but do check everything out thoroughly.) If something doesn't hold true, walk away.' (...and that's from someone who posts on here under an assumed name. Ironic don't you think?)
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    Sam,

    In the current case on Property Tribes, the person lending the money used a solicitor nominated and paid for by the person borrowing the money!

    With regards to "wealthy" people, I believe they would have their own wealthy contacts to borrow money from ... not students on their courses. #justsaying

    Your income is the average of the five people you associate with the most ... If that is true, then these gurus and developers should have wealthy contacts, otherwise their income is no greater than the people they are teaching to be wealthy imho.
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    Thank you starting this post Sam
    Dear all
    I am about to put an offer on a BTL property and wanting to buy this property with a close friend. I am happy for mortgage to be in one name ( either)
    I would be very grateful if you could advise me on best way to put this in a Deed/ Agreement/ second charge so it protects me and my friend ( or some other agreement which states our share in investment and share of income)

    Thank you

    Kind regards

    RAG
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    I just came across this thread whilst looking for something else, and re-read it.

    I think it's such a useful resource for anyone thinking of lending money that it deserves a bump.

    Remember, only one person or entity can have a first charge on a property. Very often it is a bank. Note that banks do not like multiple charges on a property.

    If a bank is not involved, you should ask the individual wanting to borrow the money why they are not using bank finance at lower rates. That is a completely legitimate question. Higher finance costs reduces the profit, so any savvy developer would be looking for the cheapest finance possible.

    If you have a second, third, or fourth charge, then you are way down the pecking order and may struggle to recover your money if the project fails.

    If your loan interest payments turn out to have been paid by loans from other people and not actual profit from the development/business, then this is classed as a Ponzi scheme and is likely to collapse eventually, as well as being illegal.

    If a Ponzi scheme is unwound, any interest you were paid could be recovered by the "Proceeds of Crime" Act.

    So you would lose your capital and the interest in this instance.

    If you are being paid interest from the start of the project, you would have to wonder where the interest payments are coming from, because the profit from the property would not be realised until completion/re-finance/sale.

    If the project is commercial to residential, you must ensure that Permitted Development rights are in place for the duration of the project, up until the completion and signing off of the conversion.

    Many banks are stalling from lending at the moment on longer term projects due to uncertainty over the continuation of PD rights.

    I have heard a decision will be announced this Thursday.

    Business relationships and trust should be built over a long period. If you are happy with your due diligence on someone, lend them a small amount of money to see how they get on with it - money that it would not hurt you to lose. Have an engagement before a marriage! Be patient. Your future self will thank you for it.

    Anything that is quick and seems too easy and promises too much should be approached with extreme caution imho.
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    Love this saying!

    An old Chinese proverb States " when a man with experience meets a man with money, soon after man with experience ends up with money, and man who had money ends up with experience..." . Smile
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    Hi Sam,
    great post, have referred to it repeatedly over the years. However, please could you advise how to search for property registered in the owner's name as land registry doesn't seem to offer this feature?

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