Your exit strategy is one of the most important things a lender will look at when you apply for a property development finance. As bridging finance is a form of short-term funding, lenders need to know how the loan will be paid back at the end. In development projects, exits usually fall into two groups: sale or refinance. If you know how each one works and what the risks are, you will have a much better chance of getting the funding you need, on favourable terms.
Sale vs. Refinance
Selling the property is a common way to get out of a development bridging loan, and it’s a relatively simple approach, especially if the work adds value right away. Lenders are often happy to accept an exit plan based on selling the property, as long as the final market is clear and supported, and sales of similar properties back up the expected resale value. They also want to know that the loan term is long enough for the project to be finished.
Sale Exits Tend to Be Used For:
- Smaller projects
- Projects that change the use of the property
- Renovations for quick resale
But, the state of the market is important. A slower sales market can mean that a property stays on the market longer, and that there is a risk that the loan term will end before the sale is finished.
Another common way to get out of a development bridging loan is to refinance into a longer-term product, like a buy-to-let mortgage. Lenders usually look for a clear refinance product in principle, proof that the property will meet the requirements for refinancing, and proof that the property value will go up enough after the work is done.
Refinance Exits Are Common When:
If you opt for a refinance exit strategy, the property will stay an investment. After the development, rental income goes up, which helps to build value. As refinance exits depend on future value, lenders tend to look more closely at assumptions than they do with a sale exit. Some exit principles apply across short term lending, which are covered in more detail in our guide to bridging loan exit strategies.
Lenders look at a number of important timing factors, such as schedules for building and fixing things that make sense, what your plan is if you go over budget, and the time needed to finish marketing or refinancing.
Planning Risk and Exit Viability
Planning risk is a big part of deciding if an exit strategy is okay. For bridging loans for development, exits based on planning that hasn’t been approved or is just a guess are more risky. If planning isn’t in place, lenders may lower the LTV ratio, and others will want you to have planning permission before they give you the money.
If getting planning permission is necessary for the exit, lenders will usually ask what stage the application is in and if professional advice has been sought. If the planning side of things isn’t clear, lenders might want a backup exit strategy, like selling the property as it is.
The Process of Valuation
Every exit strategy is based on valuation and when valuers look at development bridging loans, they usually look at:
- The property value on the first day of the market
- Gross Development Value (GDV), if it applies
- Effects of getting permission to build and finishing the work
Valuers are usually cautious; they want proof of similar property values, the state of the market when the value was set, and assurance that planning and building will definitely be done on time.
When you use bridging finance for development, you need a good exit plan. Lenders need to know that the loan can be paid back on time and in full, no matter what your plan is to do with it.
Professional structuring at the beginning of your development bridging finance can make all the difference between a smooth exit and an expensive extension.
