Why use a finance broker? What are they actually good for?
Like all intermediaries, brokers are essentially middlemen. They send a few emails and make some introductions, then sit back and wait to collect their fee when a transaction completes.
Nothing to it. It would be so much easier to cut them out altogether and go directly to lenders yourself, right?
Wrong.
Reasons why you should use a finance broker
Finance brokers play an important role in getting development projects funded. Partly, this involves knowing the development finance market and having relationships with lots of lenders.
A good broker will ask you about your background and priorities. For example:
- Have you completed similar projects in the past?
- Do you want high leverage or a low interest rate?
- What are you able to provide by way of security?
Once they have that information, your broker should introduce you to a lender whose criteria you fulfil and who can meet your borrowing needs.
However, this is not where finance brokers’ true value lies. After all, if you had the time and were willing to put in the effort, you could carry out a reasonably broad survey of the market yourself and find the leverage or rate you need.
So, why use a finance broker?
Because a good broker will get your deal done.
Guiding deals through due diligence
Getting good terms from lenders is the beginning of the job for brokers, not the end. Between indicative terms being issued and a deal completing, a due diligence process takes place that’s full of potential pitfalls and obstacles.
Trying to navigate this process alone, without a finance broker fighting your corner, is a risky business that can result in the deal failing and your project falling through.
The following stages of a deal can all create problems:
- The valuation
- The QS report
- Legals
Let’s say you’re borrowing at 60% Loan-to-GDV for a development with a GDV of £2m, giving you a gross loan amount of £1.2m. If your lender’s red book valuation down-values your GDV to £1.9m, the amount you can borrow will fall to £1.14m.
This is where you need a broker who has a strong relationship with your lender and can persuade them to maintain a gross loan amount of £1.2m by raising their leverage to 63% LTGDV.
Similarly, a QS report that raises your build costs will decrease the amount of your loan available for your Day 1 land purchase and require you to put in more cash. Unless, that is, your broker can negotiate an increase in leverage to cover the extra costs.
Getting the deal done
As anyone working in the property industry can tell you, the legal process can often be a nightmare. Three sets of solicitors are usually involved (yours, the vendor’s, and the lender’s) and timeframes are often tight.
These parties usually communicate via email rather than by phone or in person, which can lead to errors and misunderstandings, and the vagaries of English property law often throw up unexpected issues and delays.
When you need to exchange by 5pm on a Friday and everyone’s waiting on a missing document or signature, you don’t want to be tearing your hair out because you’re the only one chasing things up.
What you need is someone to push things forward on your behalf and make the necessary phone calls. Someone who cares about your deal getting done just as much as you do.
Why use a finance broker? Because they could make the difference when it matters.
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