Moving quickly and adapting to changing situations is key for anyone looking to make a profit, and bridging loans can help enable purchases at discount prices. While there are many other types of loan available on the market, none can boast the incredible versatility of bridging loans. Because bridging loans can fulfil a wide variety of needs they are an ideal solution for many different problems, and they can be used by property developers to complete discounted purchases in a short time frame.
In this article we’ll discuss the needs of discount purchases and the ways in which bridging loans can meet these requirements. We’ll look at what sets bridging finance apart from other forms of loan, and why it can be such a valuable addition to a developer’s toolbox. Before beginning, it’s important to note that bridging finance can be expensive if it’s not handled properly (as can any other form of borrowing), and as a secured loan the borrower also stands to lose their assets if they fail to repay. It’s vital to seek financial advice before committing to any form of borrowing, so be sure to consult a specialist before pursuing bridging finance as an option.
Turning a profit on a property requires more than just good connections and the ability to refurbish or renovate; you also need to find excellent opportunities for making a profit, which means finding property at bargain prices. While it may not be too difficult to source a cheap property, it can be easier said than done to complete the purchase using mainstream finance. This is because banks are very wary of lending when there’s any disparity between the valuation and the purchase price; the fact that you’re obtaining a property for less than they think it’s worth can set alarm bells ringing. This can make it tricky to obtain finance from a mainstream lender at all, and there are plenty of other disadvantages that borrowers are subject to when applying for mainstream loans.
In many situations a property is offered at a discounted price because it needs to be sold off quickly. Sellers can be motivated for any number of reasons, but they might have projects of their own which require them to free up capital from their existing property quickly. Likewise, the property might be unmortgageable or reaching the end of its lease, and the seller wants to complete the sale as quickly as possible, accepting a rock-bottom price in exchange for a fast transaction. However, as anyone who’s bought property before knows, mortgage providers do not act quickly; in fact, they can take many months just to decide they’re not going to give you a loan, putting you right back to square one (and missing the opportunity to purchase the property, too). A fast, flexible alternative is required, which is where bridging loans come in.
Completing a purchase quickly and smoothly requires a secure source of funding that can be obtained at short notice, and without jumping through too many hoops. Bridging finance fits the bill perfectly; it can be arranged in an exceptionally short space of time (in many cases in under a week), and can be used to finance almost any purchase. Crucially, bridging loans can also be obtained for large purchases, and can finance a large proportion of a property’s purchase price. This is because bridging loans are secured against the property itself, so the lender has the option to reclaim their loan through the sale of the property if the borrower should fail to repay. This is by no means a desirable outcome for the lender, and bridging lenders will always prefer to complete the loan normally rather than through repossession; this simply enables them to offer large amounts of finance quickly.
Because bridging finance can be put in place in such a short timeframe it enables buyers to complete a discounted purchase at the seller’s schedule. This means that they can seize opportunities which would otherwise be out of their reach: even if the seller needs to complete by the end of the week, buyers can still put in an offer safe in the knowledge that bridging finance will be able to provide the necessary funds.
Bridging finance is designed to fulfil a short-term function while long-term finances are arranged. The two main methods for repaying a bridging loan are the sale of the property or the acquisition of a mortgage, and these two “exit strategies” are very common in the property development sector. Because of the cost of maintaining a bridging loan, most developers will attempt to complete repayment as quickly as possible. This means that borrowers are under pressure to complete the deal as quickly as possible and seek either a refinance option or to sell the property on.
Bridging lenders will carefully examine the exit strategies of their borrowers, since this is how they will expect to be repaid. If a borrower’s exit strategy is weak or overly optimistic the lender may decide to increase their prices or reject the loan altogether. However, bridging lenders are very flexible and can usually work with their clients to design a loan package that suits their needs and circumstances.
Thanks to the speed with which bridging lenders work and their ability to adapt their lending criteria to the needs of the clients, bridging finance can be an exceptionally suitable method for enabling discount purchases without relying on mainstream lenders. Because of the combination of high levels of finance with a flexible approach and high-speed service, bridging finance presents an attractive solution for property developers who want to complete a purchase as quickly as possible, but it’s important to carefully consider the costs of bridging before proceeding - this form of finance is well-suited to short term funding, but should not be relied upon as a long-term solution.
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