Getting Finance for a 6 Unit Development

I’ll just give you feedback on what to expect from the majors –

There were times banks paid a little more notice to end value however it is an area where a HUGE percentage of loans fall in to default / arrears. If you have problems during contruction e.g. Financial problems, problems with an exteral business, seperation etc. – the end value means nothing.

So banks generally look at total costs and end value (never end Val alone).

For example.

Total costs include: land purchase (or valuation if owned), construction cost, government fees, interest, architects and in some cases project management fees. Any other real costs can be included.

In some cases the banks will lend say; 80% of total costs; but not more that 60% of end value. They can go higher but doubtful without experience developing and plenty of assets.

Couple of points;

1. It’s also worth noting a fixed price contract for 6 units will be treated as a load of bollocks. No builder would commit to something this size without room to move. The bank would still allow a buffer… Will not rely on fixed price as actual cost …
2. Coatings are generally confirmed by a quantity surveyor picked on the banks panel – to ensure costs are accurate
3. Your money goes in before the banks – this way the bank knows there is money to complete (so you don’t spend some of your funds and fall short)
4. If you can’t service the entire debt; you will need some off the plan sales (pre-sales) before bank funding kicks in
5. Whether or not you’ve a background in development will be important to most banks – it’s not a market for first timers:- even very wealthy experienced developer are finding it tough – bankwest, suncorp and many others weren’t even accepting applications for a lengthy period.

In short – these are hard deals to place at the moment. The banks are still keen on development but is has to be a strong deal.

There are options outside of the banks; or combination of bank and investor funding. But given the numbers you mentioned – the return will start getting skinny compared to the risks if you involve other people.

I’ll let someone else cover other options…

Banker

Hi KindofNew,

The comments by Banker are true in terms of dealing with Banks. However, depending on the geographic location you may be able to do this outside of the banking sector. There are a number of mortgage funds around the country that specialise in smaller developments such as yours and will provide you with significantly more money and will almost definately have a lower presale requirement than any bank. As an example, if this is in Victoria you would almost definately get 70% of end value (there would be a % of costs limit also, but you would more likely be restricted by the end value figure) with 2 or 3 presales.

With regard to your query about the valuation. For a contruction loan the lender will ask their valuer for a "Project Related Site Valuation", this is worked out by starting with the end value, deducting the expected costs, interest and a development margin. If it is a good project, this will give you a figure that is substantially higher than your purchase price and you should be able to use this uplift as additional equity. On the numbers you have posted there wouldn't be a great increase, but as you have discounted your expected price by 10% there may be something there, do the numbers yourself using approx $100K as interest cap and a 17.5% margin, if your build costs don't include a contingency amount ad 7% to it.

I can tell you categorically that if this development is in Victoria you will be able to get a a very high level of finance . If it is elseewhere it will be harder, particulalry if it is not in a Capital city.