Debunking heavy vs light refurb

Refurbishment projects come in many shapes and sizes, each bringing their own complexities to the table. But why do they sometimes give property investors a headache?

Amy Baptiste Head of specialist finance at LDN Finance

One of the biggest misconceptions among property investors with regard to light refurbishment is understanding that, in the same way as it can for heavy, things may not always go to plan and there should always be a contingency. Being organised and planning everything in detail in advance will reduce the risk of things going wrong. It is key to portray a realistic timescale and research timings for these works to be done, as delivery of materials such as a kitchen or bathroom can be delayed. In terms of financing these projects, identifying the right loan term is important and can be determined only by considering the works to be done and supportive research. Typically, a light refurbishment loan would be for around six months but, with the current market, it is important to discuss all loan term options to account for any possible, yet unexpected issues that could arise. For heavy refurbs, it is imperative that the ROI isn’t overestimated, and that investors take a cautious approach that is realistic and researched. To make the refurbishment go as smoothly as possible, it is important to have a contingency built in to cover any unexpected delays and cost overruns, which can be highly pressurising, and to allow the developer time and room to address these issues. It is also paramount to go to lenders that have experience and understanding of heavy refurbishment loans and a strong appetite for them, as they will have better knowledge of these types of deals than a traditional bank and will have created products to suit this facility type.

Adam Butler Head of sales at Avamore Capital

The refurbishment space is a huge market, having grown within the past 18 months. Some clients think that their only option is to take a bridging loan to fund the works when, in fact, a specific product is available for these schemes—as a refurbishment specialist, we find it’s a common misconception that is particularly frustrating. Some can also be blindsided by larger headline LTV numbers when, in actuality, these are just further examples of bridging products as these do not fund the build cost. A suitable refurbishment product can offer the client the same net funds, but interest is only charged on build costs once drawn, meaning that it can end up being cheaper for the customer. Another mistaken belief we see is around what heavy refurbishment actually means. Most, if not all, lenders use similar terminology of

2light, medium and heavy, but the definition of heavy across all of these varies massively. For some finance providers, any form of internal reconfiguration is considered heavy, while others only dub any form of extension as the same. There are some that determine the build cost as an indicator of the level of refurbishment for a scheme, and others that class planning as the factor to push a project into heavy. This can often make it difficult to properly understand the best lender for a project. So many important factors are considered in a refurbishment application, one of which is a thorough review of any potential contractors intended to be employed and their previous experience— we’ve seen examples of many that are pricing extremely low in order to win the contract, but can’t deliver in the long run. The same due diligence also needs to be applied to the consideration of the solicitors that developers intend to use and their previous experience in reviewing refurbishment and development loans, as many who aren’t as familiar with these types of schemes often miss important enquiries or information needed by lenders. Finally, a full breakdown of the build costs—regardless of how light or heavy the build schedule is—absolutely needs to be factored in. The most common delay we see is when they have not properly reviewed their costs down to the penny, and the surveyor is not able to complete their report for the lender.

Anna Bennett Marketing and PR director at Catalyst Property Finance

With new developers working on a light refurb, there are three main areas in which we most often find misconceptions: GDV estimate, the predicted build time, and the cost of works. Usually, new developers aren’t miles off, but they can be less accurate than more seasoned developers who have run more and larger refurbishment schemes. An interesting point is that sometimes there is disparity between the borrower’s estimated cost of works— which factors in their own self-procurement—and the lender’s view on costs. As a finance provider, we must consider the worst-case scenario should we have to step in and finish the build if the developer is no longer able to. In this scenario, we would not have the benefit of the developer’s self-procurement—their ability to negotiate with local suppliers and trades. This is never a deal breaker, as we find a middle ground that works for all, but it is something an investor might like to consider when estimating their cost of works to apply for finance. For heavy refurbs, we see fewer misunderstandings, as the projects tend to be carried out by more experienced developers who have been through many financial cycles, and often with a number of different lenders. To ensure a smooth deal completion, give us the warts and all and be totally transparent and honest about the projects. Tell us everything upfront, not just the positive news; we want to know your scheme’s challenges, your concerns, and the potential pitfalls. The credit team will always look for reasons to lend and ways to overcome hurdles, but they prefer to have the full picture upfront.

Shaz Ahmed Director and founder of Elan Property Finance

When it comes to light refurbishments, there are many awareness gaps. Commonly, investors do not understand how the drawdown process works and that, while they may be able to get 100% funding for refurbishments, it is done in stages and in arrears, meaning they need a deposit and funds to start the work. Another issue I come across—and this is more because all lenders have different criteria—is distinguishing between a light versus a heavy refurbishment. Depending on the condition of the property, some investors think they can simply get a mortgage day one (ERC-free trackers usually), keep the property empty while refurbishing, and then refinance out to another term lender on the uplifted value. However, this is mortgage misuse, so education is needed—which is why working with a broker has its benefits. Meanwhile, for heavy refurbishments, I find investors need more guidance for projects that need prior approval, permitted development, or planning permission, as these things need to be agreed and in place before the lender will be able to agree funding for works. Of course, we can get assumptive Red Book GDV valuations based on different scenarios but, in terms of finance, it usually means they need an acquisition bridging facility, leading to a loan restructuring once the relevant agreements are in place and can be evidenced. For any refurb projects, a schedule of works—or, even better, a fixed-price contract—and having all the relevant permissions in place are essential. Without these, you will simply not have a swift application process or loan completion.

Brian

West Head of sales and marketing at Saxon Trust

Perhaps the two biggest misconceptions among property investors and developers about light refurbishment projects are that they are relatively easy to do and potentially very cost-effective. Of course, this can sometimes be true but, in many cases, it’s easy to underestimate the time, effort and money required to successfully complete projects. Even light refurbishments need careful planning, a contingency pot for any unforeseen expenses and issues, skilled contractors to achieve the best results, and adequate funding. Whether the investors are relatively new or highly experienced developers, mistakes can still be made, so it’s vital to approach any light refurbishment having carried out full due diligence in advance. As for heavy refurbishments, they can be complex, time-consuming and very often more expensive than anticipated, as they usually involve significant alterations to a property’s fabric and structure with the removal of walls, the building of extensions and, in some cases, the addition of extra floors. By their very nature, these changes can introduce significant structural complexities and require the expertise of highly qualified surveyors, engineers and others. If additional expenses become excessive, this can lead to cost cutting elsewhere and, in a worst-case scenario, a failure to comply with legal requirements, costly fines, and even the removal or modification of already completed works. While it’s impossible to mitigate risk completely, with meticulous planning, detailed research, a full understanding of local planning regulations, full permissions in place before starting work, and strict adherence to regulations, it’s possible to minimise the risk of cost overruns and financial losses. A comprehensive build plan should ideally also include details on the developer including a CV, an A&L statement, estimates from contractors, details of the planning, any specialist reports already obtained, and any other supporting documentation.

Kim Parker

Sales team manager at Hope Capital

Many property investors are under the impression they can secure various types of loans to undertake heavy refurbishment projects. If the property is derelict and deemed unfit for human habitation, it may not initially be eligible for certain finance. While the majority of high-street banks and mortgage providers won’t offer mortgages in these circumstances, a bridging loan provides the ideal solution. Often, investors and developers opt for a refurbishment bridging loan to start the required works because of how quickly funds can be made available. Additionally, bridging loans are often used in cases where the investor or developer needs to refurbish the property to enable them to move on to a mortgage arrangement. Bridging finance therefore provides the borrower with a solution to complete the necessary works and get the property into a condition where they can either sell it or obtain a longer-term finance arrangement. There are a number of factors to include in an application if your client is looking to secure a refurbishment loan. First, accurate build costs—given the increase in materials and labour in the industry, it’s important to give a realistic figure to ensure there are no surprises at the valuation stage and the project is viable with a healthy contingency. Having a fully comprehensive schedule of works to hand for underwriters to assess at the application stage is also highly recommended, especially as it makes the process a lot quicker. In addition, it’s important to make sure that all permissions are in place for any potential schemes/works to be carried out at the time of requiring the loan—this will ensure that completion deadlines can be met and there are no delays in funding. Let’s not forget, it’s always beneficial to have the relevant skills and experience before embarking on the project. While this is not a necessity, renovating a house can be complex and prone to unforeseen issues and expenses, so being well prepared and having experience is key to a successful project.

Suparn Sapatnekar Head of bridging credit (residential lending team) at Octopus Real Estate

There isn’t necessarily a clear line that defines what is light or heavy refurbishment and what is development—often that is subject to a lender’s criteria. It’s not really the build budget that makes a scheme heavy, it’s more about what is physically happening to a property or site. Heavy/larger schemes can carry more risks, but these are generally mitigated by larger returns; well thought through projects with the correct asset being developed for the location and market are likely to perform well. It can also be a misconception that borrowing costs are higher for heavier schemes. In fact, it’s possible to find some products at very competitive rates, especially if there is an ESG aspect within the project—some lenders will have access to funds specifically to support this type of refurbishment. As well as presenting a well thought out and costed schedule of works, it is essential that borrowers employ an experienced legal team who have specific expertise in this area of lending and understand the importance of obtaining legal searches in good time. Regarding deposits, it’s not uncommon for funds to come from various sources. Therefore, full disclosure of this and evidence of funds should be provided as early as possible to avoid delays and the potential for eleventh-hour legal requests, such as deeds of subordination.

Daniel Hill

Senior key account manager at Roma Finance

There is a misapprehension that all refurbishment finance is the same, whereas the criteria varies significantly from lender to lender. For example, many base light refurb on a simple kitchen and bathroom refit, while other

Michelle Lowe Head of partnerships at Somo

The biggest false impression for light refurb is that the facility either doesn’t exist or won’t be available. This means that many investors are tying up funds to refurbish a property, where this could be used towards their next investment opportunity. For heavy refurbs, investors often think that if the bank declines your case, you can’t get funding. People also think that heavy refurb finance is too complex, interest rates are too high, and funds take too long to be released. While funding may take slightly longer than before, we generally see cases complete in around six weeks, which is probably a lot quicker than people assume. Interest rates for refurb loans are very similar to bridging rates and, generally, the lender and/or broker will hand hold these cases through to completion. For any refurbishment loan application, there are a few essential factors to include in the application: the property address, details of how the building stands on day one, purchase price/ value, cost of works, GDV, schedule of works, and client or contractor experience. These points will enable underwriters to review whether the case is viable before proceeding any further. finance providers, including Roma Finance, base it on how much the client is spending on the works compared to the current market value. It’s also worth remembering that light refurb is simply a version of bridging finance, and can be structured to suit the borrower’s needs. The parameters for lending criteria vary significantly across heavy refurbishment as well; some will consider anything structural to be heavy refurb, whereas others will base it on the cost of works. This type of project could fall into bridging or development finance depending on the lender and level of works, so more documentation will be required for heavy refurbishment, and the borrower’s experience and team will be paramount to financing a project. Whether a borrower is starting their first project or is an experienced investor, the single two most important things in a refurbishment finance deal are to communicate openly and to surround yourself with a good team—from the architects to the builders, lenders, and the building control.