IF YOU ARE funding a property development, financing is the most important aspect to consider. After all, without finance the project cannot proceed.
Below, I have summarised the three most important factors for getting bank funding for a project.
As a general rule, you will need to cover your debt with pre-sales. This means that the volume of sale prices for your pre-sale contracts should be equal or greater than the total loan limit.
It is also important to make sure that the pre-sales are classed by your bank as “qualifying pre-sales”. To be classed as a “qualifying pre-sale”, the contracts must have the following characteristics:
- Be sold through an agent and not to a family member.
- Have 10% deposit held.
- Have a “sunset clause”. The end date no earlier than 6 months from contracted construction completion or 50% of construction time, whichever is greater.
- Not be overly concentrated to a small number of buyers.
- Not be overly concentrated to overseas buyers.
It is a common mistake of developers to offer smaller deposits or shorter sunset clauses in order to entice buyers. This can, however, greatly hamper the developer’s ability to fund the project.
As a general rule of thumb, you should be able to borrow up to 80% of your costs or 65% of the end sale value of the project (excluding GST).
If you do not have the capacity to come up with 20% of your total project costs, it is possible to get your project off the ground. But you may need to raise funds from investors or look at mezzanine funding options.
In order to attract this sort of money, your project needs to be very strong in other areas (profit margin, location, builder, pre-sales etc).
Depending on the size of the project you are doing, you may need to employ an experienced manager.
For larger projects, the builder will also be scrutinised for their experience and financial strength.
For less experienced developers, we recommend you contract an experienced project manager. You should also strengthen the other aspects of the project (such as pre-sales and location) ?to maximise your chances of funding.
BOTTOM LINE: If the above requirements are in order, you are a long way to getting your project funded– on terms will let you make healthy profit on the project for you.
Ignoring these tips could kill your project or force you to use risky finance alternatives– that could end up taking up most of your profit margin.