Tips & Tricks For Developers: Overcoming Finance Challenges

Dean Parker:

Hi, I’m Dean Parker and welcome to our latest video blog for the PropertyInvesting.com community. On this update, we’re going to talk about financing projects. It’s a bit of a hot topic at the moment. The banks have definitely tightened up. I’m actually over in Adelaide right now catching up with a good mate of mine, Martin Ayles, and we’re going to talk about some of the deals he’s got on here and comparing that with what’s happening up in Brisbane.

Marty is probably a familiar face to most of you. We’re going to talk about financing deals and in particular, this one that Marty’s got on the go at the moment. Mate, welcome. How are you going?

Martin Ayles:

Good mate, good. Thank you for having me.

Dean Parker:

That’s good. What are you building on this site? It looks like you’re ready to pour slabs. What have you got going on here?

Martin Ayles:

Yeah, so this is a residential site. There are six two-story townhouses going on here. We’re about 12 Ks from the CBD and they’re all two story obviously, like I said. They’ve got one bathroom, two bedrooms upstairs and second toilet downstairs.

Dean Parker:

Okay, so from a financing point of view, I take it this was just a piece of land that had a house on it originally.

Martin Ayles:

Correct, yep.

Dean Parker:

When you financed that portion of it, did you get a standard home loan or did you get a commercial loan at that point?

Martin Ayles:

Basically I went to the bank with a proposal, a feasibility, a set of plans, concept plans, but didn’t have approval at that stage. They gave me pre-approval for the construction finance and they gave me the first draw of that construction loan, if you want to call it that, of the business facility. It was through Westpac, one of the top four, which I always try and deal with. They funded the purchase of the home and then once I got my approvals, my contracts in place, the valuations, then they basically increased the limit of that facility so I could undertake the construction.

Dean Parker:

Okay, so you’ve got one facility, one to settle the land and now that you’ve got all your permits and your building contracts in place, they’ve increased the facility to cover your construction component of it.

Martin Ayles:

Exactly right.

Dean Parker:

From a financing point of view, what interest rates are you paying for this sort of product?

Martin Ayles:

This here’s just over four and a half percent, so it’s at 4.64 at the moment.

Dean Parker:

That is a really good rate.

Martin Ayles:

Yeah.

Dean Parker:

Did the lender require you to get pre-sales?

Martin Ayles:

No pre-sales on this site, so fortunately I had a fairly strong application; having past experience obviously always helps. Traditionally on a site like this, the bank would ask for pre-sales, perhaps maybe two to try and clear a portion of the debt down but yeah, on this, given it’s a low value sort of site and it’s affordable housing, it wasn’t a huge risk for the bank.

Dean Parker:

Okay, but I guess you’ve probably tipped in a little bit more money and that your LVR’s a little bit lower on this site to avoid the pre-sales?

Martin Ayles:

Yeah, so obviously the more equity you tip in, the better the terms of the loan usually. In this case it’s been fairly split down the middle.

Dean Parker:

Okay, I guess to give a bit of an idea based on maybe a year ago, if this site was in Brisbane and we were doing a six townhouse site like this we probably would have needed maybe one or two pre-sales, if any. In today’s environment, if we wanted to go up to a maximum LVR and get as much as we could from the banks we’d probably need maybe two, three, possibly even four pre-sales. At the moment they need about 100 to 120 percent debt coverage, which we can explain.

Martin Ayles:

One of the things I always try and say to people whenever I’m helping them is that if you can look to clear your debt through your pre-sales, it’s always a great safety net for you as the developer or the builder. Secondly, most banks now as a rule of thumb, anything over four homes, or four individual townhouses or whatever, will generally ask for pre-sales. As a rule of thumb, ask your bank, “if I’m building more than three or four homes, what do you require?”

Dean Parker:

That is the main message, I guess. Financing is changing a lot at the moment. We’re in Adelaide, Marty’s doing six without any pre-sales, but he’s obviously putting a little bit more money in. Twelve months ago it was different than it is today, so it is changing a lot. You’ve got to make sure you’re keeping in touch with your financiers. There’s plenty of options out there because everything does move really on a day to day basis and there’s, I think, what I’m seeing at the moment is there’s sites coming up because people just can’t get the finance. It is very important to keep in touch with what’s going on in the finance world.

That’s been our update for this video blog. The three main points are, the finance is constantly changing at the moment, you’ve got to make sure you’ve got really good relationships with the financiers out there and make sure that you’re in constant contact with them because things are changing on a daily basis.