06 Apr 2016

Custom build needs its own mortgage product, says Raymond Connor in the second of his features on finance

Raymond Connor
Custom build needs its own mortgage product, says Raymond Connor in the second of his features on finance Raymond Connor, CEO, BuildStore

Thanks to its long links with self build, BuildStore is at the forefront of the custom build finance market with its mortgage packaging and broking activity. “Of our mortgage business, 40% comes from brokers through our Build Loan packaging division,” says Raymond Connor, BuildStore’s CEO. “But it’s the fact that we deal both with brokers and directly to the consumer that enables us to present a united front to the lenders, which is so appealing to them. This gives them the continuity of expertise that comes with having in-depth experience in the market, so our packaged products have the same level of quality as our own dedicated products” he says.

However, Connor points out that, at the moment, the lenders who are able and willing to provide custom build mortgages can do so because they’re actually following a ‘custom build light’ model. What this means is that so far, the custom build mortgage market is yet to actually flow, at least as far as BuildStore is concerned.

Self build flexibility

Connor explains that in terms of finance there are fundamental differences between traditional self build and custom build. He likens the self builder to a kind of maverick working on his own, managing his own costings and work, and obtaining the value from inspections as he goes. And there is a degree of freedom in this route should the value attributed fail to balance with the expectation.

“If a self builder ends up short of cash due to unexpected problems, such as the expected value falling short at a set stage, he can balance his finances by economising elsewhere to compensate,” he says.

“But the big difference with custom build is that the customer can’t bear this cost were this to happen on his build. Here, the client has committed to pay contracts at a set price and at specific key stages. The custom builder has to have access to the money – or he’s in breach of contract. So he needs surety with regards to value at each stage, as he need the money coming from his lender to be guaranteed.”

“The significant issue for custom build,” says Connor, “is that we have to remove the element of chance that the value might not be there, should a valuer down-grade the work, and thus prevent a client making their payment to a custom build developer.”

Removing uncertainty

Connor points out that currently the sector is too reliant on individual inspections putting arbitrary values on work. “Rather, we should work towards a system where the stage payments should be agreed prior to the build. Then, provided the work is done properly, the value is awarded and payment is made,” he says.

Removing this level of uncertainty is key in securing the custom build market. “We need to engineer out the possibility of chance,” he adds. “Without it, we’re effectively saying to the customer that, ‘We’ll get you this custom build mortgage, but we can’t guarantee that the valuer will value each stage appropriately,’” says Connor.

For custom build to reach a wider, and less confident, market, the products need to come with some surety for the consumer that the money they’re borrowing will get them the home they want.

“This means that the market is ready for a dedicated new product,” says Connor. “We need a custom build mortgage that relates specifically to value, such as residual valuation, where the finished house has a fixed value from the start. This model is used elsewhere, for example, if you’re borrowing money on an office block and it’s reached a fixed point, then they take the end value, less the cost of actually completing it. This would be a new approach for the domestic house market that could transform custom build.

“Fundamentally, this would acknowledge that all parties have agreed on a value; the land is worth £X and the finished house will be worth £Y. This would enable each stage payment to be fairly straightforward. A custom build mortgage should come with an offer of stage payments guaranteed, provided that the work has been done properly. It’s key that it’s not subject to any doubts that the finished property has a fixed value – or the worst case scenario of the value not being present at the end of the process. So there would be an agreed principle that measure equals value, which equals payment. This would remove the uncertainty that’s threatening to stifle custom build,” he says.

Tailored approach

Currently, BuildStore is managing this process with a site-by-site approach, getting values for specific plots, designs and sites. To do this it creates dedicated lender brief documents that are tailored to each site, giving lenders an at-a-glance overview of the situation on each project. In addition, it also arranges pre-agreed meetings with surveyors, “but it’s a work on progress and by no means a universal,” he adds. “But to get custom build to fulfil its potential, we need a system that guarantees a panel of mortgage lenders with agreed values that are applicable on a wider basis,” says Connor.

And it’s not just the lenders that need this level of security behind custom build, as it’s true for customers as well. Conventional self builders come to the process with a degree of prior knowledge that you just can’t presume is there with the new wave of custom build customers. “These buyers need to be in a position where they have certainty in the product and process, and they’ll need stronger assurances if they’re to be persuaded that custom build offers a better choice than buying a spec build,” says Connor.

“With this comes the need to educate them, not only about the benefits of custom build, but also the realities, such as the need, in most cases, for an arrears stage mortgage product. This involves a whole new way of thinking, which can be quite daunting for them. “

The coming legislation will bolster the sector and do much to facilitate custom build and help it reach its next phase, as Connor explains. “The beauty of this is that it gives industry the opportunity to drive what comes next. Working together we can build the custom build sector with hard work and pushing,” he says.

“The local authorities can’t be relied on to be the drivers at the same time that Government is taking away all their funding, so we need to build an interface between private sector and local authorities. BuildStore is working to do this through its approach to finance and by managing the custom and self build registers of many authorities.

“We’re able to bring numerous parties together and have an open conversation that still respects the strict procurement parameters that they have to apply to. This empowers the councils, leaving them in the driving seat without any huge cost implications or obligations on their part. It’s about creating synergies across the whole custom build arena,” he adds.

Editor’s comment

Custom build needs to be as risk free as a conventional developer model if it’s to compete fairly, and part of this is the need for a mortgage product that identifies value at the start rather than awards it retrospectively. And this shouldn’t be the hurdle that it is as most homes that are custom or self built typically offer better value than a comparable home on the open market – as long as they’ve not been over specified. 

What we’re seeing in the market at the moment is innovation in action – with new methods and products being developed to address the needs of the custom build sector. This is much the same as the innovative new build routes being developed across the board by custom build enablers – the mark of a buoyant industry. 

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