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  • Peer to Peer Lending

    Lending money to property developers?

    hi all,

    A relative is considering becoming an angel investor, having seen a property developers website and asked my opinion.

    I've so far funded my own BTL's, so don't know much about the nuts and bolts of how this works or the legalities and obligations of each party, so I'm hoping that some more experienced members may have been through this and can share their experience.

    The lure of a 10% return is tempting, for a very hands off strategy and I've been trying to find more information on how to become and angel and the pros and cons of this.  I've found plenty of feeds and videos on various sites on how to find angel investors but very little on how to safely become one.

    I'd be grateful for any information on this from those that may have experienced angel funding from either side.

    thanks

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    Hi Andrew,

    My heart sinks when I hear people being seduced by promises of high returns.

    What due diligence have you done on the property developer?  If you give their name, I might be able to help with that.

    Something to consider - why do you think someone would give away more of their profit (through higher lending costs), than borrow from a bank at a much lower cost and keep more of the profit?

    There are numerous stories on this forum where people have lost life-changing amounts of money to such alluring marketing and promises made to entice them to part with money.  Once someone has your money, if it goes pear-shaped, it can be virtually impossible to get it back and you should be prepared to pay a considerable sum in legal fees to stand any chance of that.

    In the current market conditions, margins are even slimmer, and there's no guarantee that a project will sell on completion, or that it will sell for enough to return the capital, let alone the interest.  What happens if the project doesn't sell?  The property will likely have to be rented out for a number of years, and your relative will not be able to get their hands on their cash for a long time.

    My advice to your relative would be don't lend anything unless you can afford to lose it.

    If your relative must go ahead, then they should read this thread to ensure that they safe-guard their money - How to stay safe lending money & property JVs 

    Hope that helps for starters?

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    Thanks for your prompt rsponse Vanessa.

    I won't be advising either way but hoping for a range of views from experienced users on this forum so that they can make an informed decision themselves, as they are already experienced investors in other areas although this is possibly a more high risk strategy than others that they invest in.

    The developer was offering a first change (Ch1) on the property and that any funds were to be handled solely by a solicitor, not them but with such a high return, It does seem a little like "if it sounds too good to be true..."  This seems to be an established method of funding people's property journeys as you see their posts on other property forums quite regularly but risky.

    Thanks again

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    Mate, just check out how much similar properties in the same area have sold for and work the figures from that. Taking into account the rental values if happens to go tits up

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    I am a human bean.

    Never to an individual developer - go via a platform and spread risk across a number of developments (even then there is still risk)

    e.g. https://www.thehousecrowd.com/

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    DISCLAIMER just my personal opinion - for legal advice consult a qualified professional grown-up.

    I’ve done it, via an intermediary, but the developer owned the site outright and was looking for the cash to do the works. I lent 50% of his purchase price at 1% a month, intermediary took 0.3% to cover legal costs and his cut. Legals were pretty expensive as it gave me a first charge on the property until the loan was redeemed. Site was local and known to me, i popped in from time to time to see that work was actually being done.

    It went well everyone was happy , I’d do it again on same basis.

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    I've done this before, with a private lender. Works really well, they get first charge and can move forward with the project.

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    Great ideal lend to property developers and then see it disappear.

    Wake up , the property games is over for now and many will be wiped out over the next couple of years. Probably 30% to 50% of those leveraged will end up with nothing and even those with large equity will see 30%+ wiped out. T

    hat results in lenders changing LTV amounts upon refinancing  when these fixed rates mature.

    Many have taken 2yr fixes which means they will be forced to refinance well into the recession entering depression and will be forced to sale at massive losses. This coming financial meltdown will be greater than 2007 , just many do not see it and don't believe it- just wait and see.

    Property already falling in price and sellers having to reduce prices.

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    As sponsor to this thread and a relative expert in the subject there are a few key facts to shine a light on. Is your investment a senior debt in the project with a first charge or mezzanine debt with second or even third charge (or worse).

    As Vanessa says it is unlikely a good developer will be paying 10% or more for senior debt and you have to take the platform margin off that before seeing your return - 7% is pretty fair and typical in investor returns for senior debt to developers.

    If its mezzanine second charge lending then yes 10%+ can be on offer but do you understand the risks? the lack of control versus the senior debt lender ? and the probability the mezzanine platform might be charging 15%-25% pa to the developer for your 10% money which perhaps better reflects the risk ?

    All I can suggest is keep it simple - stick to first charge unless you are highly sophisticated or have control in some real way (which is unlikely in most models) and don't get greedy and use platforms that are well established with lots of completed schemes that have returned investor cash and do transparent DD on the developers.

    Hope that helps.

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    Thanks Stuart.  Always so helpful to have your input here and I always learn something from your valued contributions.

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