I always hated those introductions you make to a new group, perhaps at a networking do or on a course. One of the worst was ‘what do you know now that you wish you knew when you were 18?’. I won’t answer that as I once gave a wrongly measured answer to the wrong audience, a cause of some embarrassment to me and some discomfort to everyone else.
I mention that only because, as in life, there are misconceptions and things we would rather know at the outset.
These are the major misconceptions I see around property lending.
When What It’s Worth Isn’t What It’s Worth
I’m always surprised come football transfer deadline day when a club pays a fortune for a player of middling ability. Nobody else was going to pay that for the player, so does that mean the player is worth that much or not?
Property isn’t that much different. Just because you want to pay an amount for a property doesn’t mean it is worth that. Valuers value property differently depending on how the lender wants it valued. Confused? You should be. The most common ways to value a property are:
- Vacant Possession – What the property would be worth is marketed for sale with no tenant in situ
- Open Market Value – What the property is worth on the market today
- 180 Day – What the property would achieve if sale had to happen within 180 days
- 90 Day – The same as 180 day, just sale within 90 days
Many lenders will quote that they will lend to a specific loan to value. The question is, which loan to value? If buying you will likely be paying the open market value, whereas the lender may be using vacant possession or 180 day. Both are likely to be less than you are paying.
Be aware and clarify it upfront.
The focus of most borrowers is on the cost of finance, at the same time they look at the interest rate alone. Especially with short term finance (development, bridging, auction finance etc) then the interest rate can quickly become secondary.
Look at the fees. Lenders will charge an arrangement fee and often an exit fee or early repayment fee. As well as this they may have a minimum interest term.
My point is that you need to look at the whole picture. Often the best interest rate isn’t the best deal, plus the best interest rate often only applies to squeaky clean, uber vanilla deals, which there are very few of. It is why the borrower sees value and an opportunity, if it was wholly straightforward then anyone would do it.
Not Enough Time
Bar being an underrated INXS track, there is a misconception that property finance has to take ages. Sometimes it does, but it doesn’t have to.
If you are in a rush and need to get things done quickly then work with a lender that sees the world the same.
The key here is in understanding how the lender wants the legal process undertaken. There are two main approaches, to go through the process similar to when you would buy a property or to use indemnities and insurance. The latter is the quick way, often used for short term borrowing where speed is of the essence.
The important part is in matching your ambitions of time with those of the lender. Get it right and you can turn these things around in days, not months.
If anyone ever tells you it is harder to borrow for property as a limited company then you are talking to the wrong person. The challenge can come when there is a complex ownership structure in place, things like Beneficial Trusts, SIPPS, Overseas Ownership, Family Trusts etc, all these can be great tax vehicles but can make lending more protracted.
Don’t get protracted confused with can’t. You can, it is just getting the structure clarified, explained and borrowing with a lender that is happy to work with the structure.
It can be done, it just needs a little thought and know-how.
By Dave Farmer