December 11, 2019
The Do’s and Don’ts When Applying for a Bridging Loan.
Property values are often far less when valued by an RICS surveyor for secured lending purposes, compared to the optimistic spin from a vendor or sales agent.
Be Realistic on the Valuation:
1. Property values are often far less when valued by an RICS surveyor for secured lending purposes, compared to the optimistic spin from a vendor or sales agent.
2. Many lenders offer loans based on the 180 days restricted sales value, which can often be 10-15% less the full open market value, especially while Applying for a Bridging Loan & dealing with commercial assets, land, or those properties that are quirky, niche, or in secondary locations.
3. You will need to pay for the valuation, which can be a lot more than a short form mortgage valuation report. Also, although you pay for it, it belongs to the bridging lender, so they may not release the report to you until you complete the loan with them, or they decline it.
4. You will need to buy buildings insurance based on the “insurance reinstatement value”. For some commercial properties, this can be substantially higher than the actual value of the property.
5. For commercial properties, especially assets such as hotels and care homes, the amount you can borrow are based on the “VP” vacant possession value, or bricks and mortar value; NOT the business valuation. This can be a shock to investors buying properties with high incomes but low asset value. Occasional exceptions are with assets such as offices in strong locations with good covenants on a long lease.
Be realistic on the timescale:
Many companies advertise completions in a matter of hours or days. This is just marketing spiel and is impossible except in very specific and unusual circumstances. The average time for applying is 4 weeks for a bridging loan. The reasons are
1. You have to book a valuation, and then wait for the report to be received. The market norm is 10 business days from inspection, although some surveyors can do 5 days or less for more straightforward residential properties in locations with good comparables. Some lenders offer a no valuation option for low LTV’s when secured against this type of property.
2. The lender needs time to review the report and discuss with their credit/risk/asset manager/director; then depending on the contents, they may require supplementary information from estate agents/solicitors/QS/specialists/council/planning officer etc before they give the green light.
3. The deal then gets passed to the legal team. Very few solicitors are motivated to force your deal through ahead of their other commitments. Invariably the client’s solicitor is the slowest, due to being the least motivated in the chain.
4. Searches can take a long time to come back. In some areas and boroughs, they do not have computerised records, so it can take 3 weeks for your solicitor to receive the search. NB: when doing a refinance, some lenders will accept search indemnity insurance instead.
5. Redemption statements: when redeeming an existing facility, or adding a second charge, getting the redemption statement can also take 1-2 weeks with certain lenders.
Choose Your Solicitor Very, Very Carefully:
The smooth running and efficiency of your transaction will be most heavily influenced by the experience, motivation, responsiveness and professionalism of your solicitor. The lender’s solicitor is motivated because they want to keep the regular business from their client. You are motivated because you want to do your deal. The bridging loan broker is motivated because he wants to get paid. However, your solicitor gets paid regardless, you are just one of many clients, and he or she probably doesn’t give a fig whether your deal completes or not, or whether it happens in 3 weeks or 3 months. You must choose wisely, or it can be a very painful process.
1. Before applying for a bridging loan, Ask your bridging broker for a recommendation. Someone he has worked with before and who he knows can perform efficiently and professionally.
2. Ask the lender for a recommendation.
3. The solicitor must specifically have experience of bridging loans. There are some unique aspects to bridging that need careful consideration, not least of which is the speed.
4. Don’t use a small one-man-band firm. Due to anti-money laundering regulations, most lenders require at least 3 “SRA Approved Managers” in the office. This can be found on the Law Society website.
5. If your solicitor takes 24+ hours to respond to every single email or is so busy they can only be contacted via their receptionist at limited points in the day, then they are not suited for bridging. They must be responsive, contactable on their mobiles, and able to reply on email within an hour or two (or quicker). No room for sleepy solicitors with comfy slippers on in bridging. Responsive, pro-active, energetic, thinking ahead for problems, anticipating the next steps; that’s what you need. 6. Whoever you choose, make sure they call for the searches and redemption statements as soon as possible.
Hide Things From the Lender During the Application:
Lenders have advanced systems to underwrite deals. They will find out all the foibles, warts and background to their prospective borrowers. When applying for a bridging loan you should:
1. Be honest about your credit past. There’s a lender for every credit profile out there. It just saves everyone time if you disclose your full background at the outset. Sure, you may pay slightly more, but at least you will get your loan as quickly as possible and will save on cost and disappointment later in the process.
2. The source of any cash deposit will be investigated thoroughly. You should be able to evidence the history of how the cash was generated. This is a critical point that should not be taken lightly. Lenders will decline a deal they cannot get complete surety on the source of the funds.
3. Any bad press in the past? Any disputes with business associates, court cases, criminal cases, being struck off? If it’s on the internet, anywhere, they will find it. Let your broker know upfront to save pain later.
Forget to Plan Your Exit:
As part of the loan application, you will be asked to explain how you are going to repay the loan. In most cases, the bridging lender will ask for some form of evidence. This can be.
1. Mortgage AIP/DIP to demonstrate the ability to refinance the bridge after the term.
2. Listing the property for sale prior to drawing down the loan, or within a certain time frame before the loan expires.
3. An LOI or exchange of contracts from an incumbent purchaser. 4. A development finance term sheet if buying land or a PD conversion etc.
Keep Your Lender in the Dark if You Encounter Problems or Delays
Most lenders have experienced property and finance professionals, often with entrepreneurial management teams behind them. They know business isn’t easy, and things can go wrong from time to time. If you think you’re not going to redeem the loan within the timeframe expected, you should do the following without delay:
1. Speak to your bridging finance broker. They may have a good relationship with the lender, so can guide you on the best course of action.
2. Let the lender know as soon as you know there could be a problem; the earlier the better. They will work with you to find a solution.
3. Plan for contingency. Ask your broker to look at alternative funding options, such as a refinance with another bridging lender.
4. Ask for an extension. Most lenders will allow an extension if they understand what happened, and it makes sense to do so.
5. Be prepared to pay some more fee’s. This is still cheaper than going on to penalty interest, which with some lenders, can be up to 5% per month. 6. Don’t keep it to yourself. For an informal and no-obligation chat on how best to structure your future project, please contact us on email@example.com or call 0207 965 7261 www.tigerfinancial.co.uk