MY FAMILY owns two pieces of land near a university in
We have tried asking for bank loans but their deposit threshold is sky-high to say the least.
The plots are worth about Sh.1.5 million each according to current market rates. Please, shade some light on other possible avenues of financing which we can pursue in this endeavour. Thank you. — ZK., Thika
THE REAL estate industry has a lot of challenges but the main one is often that of financing owing to large capital requirements.
Large capital outlays coupled with the nature of such investments makes it highly risky.
It's against this background that banks will ordinarily be very cautious before advancing any loans for property development. This to a larger extent is probably why the banks have been asking for huge sums in deposits before accepting your loan request.
This notwithstanding, there are a number of other options that you could consider, although there is no guarantee that they will be cheaper or easier to access.
These options include construction loans, construction mortgage, or joint ventures with like-minded individuals. As is the case with any other business, in order to get a partner or a financier, the need for a sound business plan cannot be overemphasised and should therefore be at the core of your proposal; this is what would otherwise be known as the financial proposal.
This document should show the potential of the project, including expected returns and thus its economic viability.
A construction loan typically is like asking the bank to estimate the cost of construction then finance it. Such an arrangement can be very complex, considering the uncertainty and changing circumstances during the period of construction.
Normally, the bank does not advance construction loans but pays for construction items that have been used in the house completion thus making this more like a reimbursement agreement. This will require verification by the bank of the supplies and their relative costs.
You will be required to submit a monthly draw down request along with supporting documents proving that the building is in progress. The bank relies on a team of consultants for documents before approving a payment, but may also do their independent verification.
Most financial institutions, including banks, do not offer full financing and will require a commitment on the part of the developer to meet at least 30 per cent of the construction costs, including that of stamp duty and other fees and charges.
A construction mortgage on the other hand is basically a mode of financing where one gets a loan to fund building costs.
The success of an application will largely depend on how convincing the financial proposal is and whether or not you meet the requirements of application. Only interest is repayable during the period of construction and once the building is over, the principal amount starts being included in the monthly payments, at which point the construction mortgage becomes a normal mortgage.
Just like in the case of a construction loan, you will have to meet at least 30 per cent of the approved construction costs. In most cases, land owners lack the requisite capacity to finance the minimum 30 percent and may be unable to obtain funding for one reason or the other.
This situation may necessitate a developer to get into a joint venture with a financier with the aim of jointly developing the project. This arrangement will require that you agree on a profit or loss sharing ratio, and clearly state the obligations of each party in the arrangement.
As a rule, the banks or a joint partner will not accept a loss making venture.
These are some of the options for your consideration, others still exist but these are the most commonly used. Apart from banks, there are other financial institutions that could also be willing to offer funding. Seek counsel from real estate experts or consultants due to the fact that they have vast experience on such transactions and established networks, and are thus better placed to link you with potential partners.
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