Using a bridging loan for a property refurbishment
Buying a property, refurbishing it and then selling it on is one of the most common ways property developers make a living. Properties often in need of work are often purchased at an auction where prices can sometimes be lower and the developer can get a good deal.
Because of the nature of an auction, funding is often needed upfront and quickly and developers might not always have the full amount upfront. This is where a bridging loan comes in, a bridging loan is a short term loan which acts as a bridge between different types of funding. In this case where a developer is refurbishing a property, the bridging loan is needed to bridge the gap between the initial purchase at auction and the eventual sale of the property. The bridging loans give the developer the time to refurbish the property and then put the property on the market for sale.
A recent client who is a property developer planned to purchase a three-bed terrace at auction for £100k which they then planned to refurbish and sell.
In this case, a Bridging Loan was the best option for the developer to enable them to purchase the property quickly. With a clear exit strategy of selling the property and a refurbishment time of six months, the buyer was able to get a Bridging Loan of 70% LTV a total of £72k to fund the project.
Following the six months refurbishment, the developer was then able to sell the refurbished property for £160k and pay back the Bridging Loan through the sale.