Everyone asks me What is the quickest way to become successful in real estate development?
The answer is pretty simple, find yourself a Real Estate Mentor.
There is no need to re-write the rule book! You can still be innovative and creative with your developments and take control of the project, however there are still key skills and knowledge which are developed with years of experience before becoming a successful developer.
What I have found is that you can add years of experience and catapult you to success simply by allowing a mentor to lead the way. This advice can be applied to any industry you may wish to pursue, however lets apply this to people starting in real estate development.
A real estate mentor can find the right builder, warn you of potential risks to a development site, find the right property development finance package, or make sure you have the right property development partnership agreements in place. These points alone can save you hundreds of thousands of dollars on a project which the novice developer usually learns the hard way.
Example 1:
Mr & Mrs Reno - builder was ripping them off, 12 month time delays, and home extensions incomplete. They were quoted as saying: "I am losing sleep over this!"
If only they had consulted a real estate mentor BEFORE they started the project, they would have saved over $200,000 in costs, and got a lot more sleep!
Example 2:
Mr Townhouse - Had a property with potential to build extra dwellings. He thought 1 extra dwelling was possible.
If only he had appointed a real estate mentor, he could have found out the property could allow an extra 5 dwellings! Thats about $300,000 in extra returns he missed out on.
So make sure you get good advice, and more importantly seek out the professional guys in real estate, the ones who walk the walk and talk the talk. I personally have a real estate mentor whom I check in with all the time to make sure I am making the right moves in real estate development, and I must say, its one of the keys to my success.
Good luck, and happy mentor hunting.
22 December, 2009
12 December, 2009
Loan Industry Improving
Wow! what a year in lending. Two years after the first shakes of the finance industry, and we are now seeing signs of improvement in commercial finance and property development.
Whilst development finance has nearly dissappeared entirely, lenders are just starting to find some money to allocate to the high risk area of lending. Commercial lenders are still shy of any risk, however there are still a few cashed up lenders willing, although rates are high.
I have 3 mainstream lenders who have shown interest in a good deal, with a few fringe lenders asking for a crack at a project. The catch is, the deal has to be spotless, good margin, presales, good asset position and plenty of fat in it.
Watch this space, we will keep you informed in the coming months on new sources and the new processes of securing finance for your property project.
Whilst development finance has nearly dissappeared entirely, lenders are just starting to find some money to allocate to the high risk area of lending. Commercial lenders are still shy of any risk, however there are still a few cashed up lenders willing, although rates are high.
I have 3 mainstream lenders who have shown interest in a good deal, with a few fringe lenders asking for a crack at a project. The catch is, the deal has to be spotless, good margin, presales, good asset position and plenty of fat in it.
Watch this space, we will keep you informed in the coming months on new sources and the new processes of securing finance for your property project.
22 September, 2009
Low Doc Investors effected by latest bank changes
In the past, self employed borrowers and investors were able to declare their income using Low Documentation Home Loans. Proof of income was simple by signing a “Low Doc Declaration Form” replacing the need to provide any proof of income such as 2 years business and personal tax returns.
This week we have been notified that most of the Low Doc Home Loan lenders that supplied this product have joined the other major banks and now require copies of BAS Statements for 6 to 12 months as additional proof.
This will impact many self employed business owners and professional investors in the coming year who may have complex tax structures, or multiple source of income that aren’t recorded on BAS statements. It could stop quite a few investors with their next purchase, or anyone who has used this policy in the past.
It’s extremely important for any client considering a property purchase to talk to an exeprienced Loan Advisor BEFORE they exchange on a property as many changes have occurred throughout the finance world in the past twelve months.
To discover alternatives for your next purchase and strategies around this policy change, call 02 9449 2333 to speak to our team of experienced Plan Assist Loan Advisors.
21 September, 2009
Honeymoon Loan or is it Ball & Chain Loan?
Often introductory or honeymoon rates are a con, enticing you with a low rate in the first 6 to 12 months and then, after the honeymoon, mugging you with a high standard variable rate.
Look for a fully featured basic variable rate that offers a competitive rate for the life of your loan rather than just a honeymoon period.
It depends on the time frame of your deal too. Short term loans may have high exit fees, so read the fine print.
Better still see a mortgage broker and get them to compare the lenders for you.
At Plan Assist, we compare most lenders home loan rates and fees everyday, with the latest information and comparison available for you to make informed decisions. Call us on 02 9449 2333 for a no-obligation loan strategy session.
Look for a fully featured basic variable rate that offers a competitive rate for the life of your loan rather than just a honeymoon period.
It depends on the time frame of your deal too. Short term loans may have high exit fees, so read the fine print.
Better still see a mortgage broker and get them to compare the lenders for you.
At Plan Assist, we compare most lenders home loan rates and fees everyday, with the latest information and comparison available for you to make informed decisions. Call us on 02 9449 2333 for a no-obligation loan strategy session.
15 September, 2009
AUS Home Loan lending up 36% this year!
Lending Update
Sorry for the neglect in updates, however things have been quite busy with home loan lending up and. The unfortunate side of things for developers is that development loans is down around 54%! The breaks have been applied by the banks, and hardest hit is development loans - its their highest risk lending and they want to reduce their risk.
Developer Update
The gossip from one Development lender of a major bank: On average, developers are reducing their prices by around 22% to reduce their completed stock. Hopefully they have built in their margin to make sure its still profitable.
Large Developer Discounts On Offer - No Money Down!
This is reflected in the offers I am currently receiving form many industry sources. Some developers who have stock in remote locations such as beaches or far away from CBD areas are offering their units with 70% LVR from a bank, and 30% mezzanine finance, interest free for 5 years! In other words, no cash into the deal for 5 years. That shows a sign of desperation and they need to drop their stock in a hurry. It certainly got my attention, however we all know this is not a suitable investment for most people.
Let me know if you are interested in sourcing developer stock at a large discount, and I can pass on some details. This is not recommended for everyone, and I would strongly consider using a reputable Buyer's Agent to help you find a more suitable investment with lower risk.
Remember, No Money Down does not always mean Lower Risk.
Sorry for the neglect in updates, however things have been quite busy with home loan lending up and. The unfortunate side of things for developers is that development loans is down around 54%! The breaks have been applied by the banks, and hardest hit is development loans - its their highest risk lending and they want to reduce their risk.
Developer Update
The gossip from one Development lender of a major bank: On average, developers are reducing their prices by around 22% to reduce their completed stock. Hopefully they have built in their margin to make sure its still profitable.
Large Developer Discounts On Offer - No Money Down!
This is reflected in the offers I am currently receiving form many industry sources. Some developers who have stock in remote locations such as beaches or far away from CBD areas are offering their units with 70% LVR from a bank, and 30% mezzanine finance, interest free for 5 years! In other words, no cash into the deal for 5 years. That shows a sign of desperation and they need to drop their stock in a hurry. It certainly got my attention, however we all know this is not a suitable investment for most people.
Let me know if you are interested in sourcing developer stock at a large discount, and I can pass on some details. This is not recommended for everyone, and I would strongly consider using a reputable Buyer's Agent to help you find a more suitable investment with lower risk.
Remember, No Money Down does not always mean Lower Risk.
21 August, 2009
Compare Loans
I have just compared 21 lenders on rates and fees for a typical $300,000 Home Loan. Its quite interesting to see the difference, and can add up to $100,000 or more over 30 years.
If you are interested to see how your lender performed, visit our website at www.planassist.com.au
If you are interested to see how your lender performed, visit our website at www.planassist.com.au
03 July, 2009
Property Development Structure & Tax
Property Development Structures
A Hot topic that is commonly overlooked is the legal structure under which you develop property. Not only is this critical when commencing a development, its very important to review along the way.
There are quite a few structures that are effective, however in the coming weeks I will share with you common answers on How to Set Up A Structure for your Property Development.
Tax Structure
The other major consideration before setting up a property development structure is TAX.
Tax laws change ferquently, particularly GST, Land Tax and Income tax laws.
Since GST was introduced on 1/7/00 in Australia, there have been many court challenges and in some instances, have still not fully tested the decade old tax laws which can greatly impact profitability of your property development.
Over the coming month, I will also be releasing the Top 10 Tips to consider for a property development tax structure, before you find a property.
Stay Tuned
LoanHero www.planassist.com.au
A Hot topic that is commonly overlooked is the legal structure under which you develop property. Not only is this critical when commencing a development, its very important to review along the way.
There are quite a few structures that are effective, however in the coming weeks I will share with you common answers on How to Set Up A Structure for your Property Development.
Tax Structure
The other major consideration before setting up a property development structure is TAX.
Tax laws change ferquently, particularly GST, Land Tax and Income tax laws.
Since GST was introduced on 1/7/00 in Australia, there have been many court challenges and in some instances, have still not fully tested the decade old tax laws which can greatly impact profitability of your property development.
Over the coming month, I will also be releasing the Top 10 Tips to consider for a property development tax structure, before you find a property.
Stay Tuned
LoanHero www.planassist.com.au
08 June, 2009
Tips to help you choose between Development Loan Lenders
Once you have decided to pursue a development, how do you decide which lender to go with?
You know that whomever you choose can greatly impact the flexibility available to you on how and when you get your money, so you don't want to make the wrong decision.
When making a choice, compare each lender offer with the following:
1) Interest Rates: Development loans are usually variable and offered as bank bills rolling every 30 days. Look at the all-up interest rate, that is, the Bank Bill rate + lender margin and compare apples with apples.
2) Fees:
Consider all fees such as:
Application Fee - % or a negotiated flat fee
Valuation Costs and requirements
Line Fee - charged quarterly or monthly
Undrawn Limit Fee - sometimes you can be charged a line fee for loans you dont use!
Bill Drawdown / Rollover Fees - Everytime a bill is renewed/rolled, you may be charged a processing fee
Renewal Application Fees - If the term expires and you need an extension on the term of the loan, you can be charged a new application fee.
Exit Fees - Discharge Fees, and other fees for leaving the bank
Bank Solicitor Fees - They pass on their legal costs when establishing your loan
3) Security required:
Most banks will require a 1st Mortgage over the property being developed. If your development is in a company or trust structure, further security may be required such as a Company Charge.
Personal Guarantees are usuall required from all stakeholders (people who control or will receive the profits)
4) Terms & Conditions:
Loan to Value Ratio (LVR)
The amount of pre-sales required before construction
Capitalised interest loan amount withheld
What happens to loans on completion
Annual review requirements
What financials are required
Charges over deposits of pre-sales
Quantity Surveyor appointed to monitor the cost estimates
Valuations and how many are required
Where funds go when properties are sold
In Summary:
Most lenders will offer similar terms for the same project, however there are usually descrapancies that can impact your development.
In my next posting, I will talk about the Top 10 things you need to ask when dealing with a Property Development Lender.
You know that whomever you choose can greatly impact the flexibility available to you on how and when you get your money, so you don't want to make the wrong decision.
When making a choice, compare each lender offer with the following:
1) Interest Rates: Development loans are usually variable and offered as bank bills rolling every 30 days. Look at the all-up interest rate, that is, the Bank Bill rate + lender margin and compare apples with apples.
2) Fees:
Consider all fees such as:
Application Fee - % or a negotiated flat fee
Valuation Costs and requirements
Line Fee - charged quarterly or monthly
Undrawn Limit Fee - sometimes you can be charged a line fee for loans you dont use!
Bill Drawdown / Rollover Fees - Everytime a bill is renewed/rolled, you may be charged a processing fee
Renewal Application Fees - If the term expires and you need an extension on the term of the loan, you can be charged a new application fee.
Exit Fees - Discharge Fees, and other fees for leaving the bank
Bank Solicitor Fees - They pass on their legal costs when establishing your loan
3) Security required:
Most banks will require a 1st Mortgage over the property being developed. If your development is in a company or trust structure, further security may be required such as a Company Charge.
Personal Guarantees are usuall required from all stakeholders (people who control or will receive the profits)
4) Terms & Conditions:
Loan to Value Ratio (LVR)
The amount of pre-sales required before construction
Capitalised interest loan amount withheld
What happens to loans on completion
Annual review requirements
What financials are required
Charges over deposits of pre-sales
Quantity Surveyor appointed to monitor the cost estimates
Valuations and how many are required
Where funds go when properties are sold
In Summary:
Most lenders will offer similar terms for the same project, however there are usually descrapancies that can impact your development.
In my next posting, I will talk about the Top 10 things you need to ask when dealing with a Property Development Lender.
06 June, 2009
How does a real estate development team work?
Establishing and leading a real estate development team is vital for sucess.
It's a bit like an orchestra - YOU are the conductor and each player has their role to play.
Your orchestra members include:
You - The Developer - the conductor controlling the pace, driving the transaction
Mortgage Broker / Banker - finds the money
Accountant - Make sure you structure is correct, keeps the books in order
Project Manager - manages the project - crucial for driving the deal on time and on budget.
Architect, Surveryers & Engineers - plans & draws you a masterpiece
Town Planner - deals with Councils and local issues
Builder & subcontractors - turns a pile of bricks into a home
Solicitor - Conveyancing & any legal issues that my arise
Real Estate Agent & Project Marketers - for property sales
Buyers - generate pre-sales and have a group that are ready to buy
Investors - make them life long partners.
Wow! What a large real estate development team you have! And you get to lead the whole group into creating structures that provide shelter and inspire.
For assistance in creating a successful team in Australia, visit www.planassist.com.au.
It's a bit like an orchestra - YOU are the conductor and each player has their role to play.
Your orchestra members include:
You - The Developer - the conductor controlling the pace, driving the transaction
Mortgage Broker / Banker - finds the money
Accountant - Make sure you structure is correct, keeps the books in order
Project Manager - manages the project - crucial for driving the deal on time and on budget.
Architect, Surveryers & Engineers - plans & draws you a masterpiece
Town Planner - deals with Councils and local issues
Builder & subcontractors - turns a pile of bricks into a home
Solicitor - Conveyancing & any legal issues that my arise
Real Estate Agent & Project Marketers - for property sales
Buyers - generate pre-sales and have a group that are ready to buy
Investors - make them life long partners.
Wow! What a large real estate development team you have! And you get to lead the whole group into creating structures that provide shelter and inspire.
For assistance in creating a successful team in Australia, visit www.planassist.com.au.
31 May, 2009
How to be a Property Developer
As experienced developers, we sometimes forget to explain the basics and how you start. This article provides a good explanation of what it takes to be a developer, and some of the pitfalls during the process.
At the end of the day, there are so many ways to make money and invest. So much choice. The key is choosing the right one that has the money in it. Otherwise, what are you doing with your time? Read on....http://tr.im/mTyT
At the end of the day, there are so many ways to make money and invest. So much choice. The key is choosing the right one that has the money in it. Otherwise, what are you doing with your time? Read on....http://tr.im/mTyT
29 May, 2009
Experience is a must for Real Estate Development Loan Approval
With the current global credit squeeze, most lender have returned to the early 1990s when real estate development loans and construction finance was based on the experience of the developer and the borrower's track record.
With the increase in loose credit in the earlier part of this decade, many Mums & Dads tried their hand at development for the first time, and not all succeeded. Many banks funded unsuccessful projects where the borrowers lost money, and sometimes the banks also lost money recovering the debt.
Banks finally wised in the past 2 years, and whether it was due to the global credit squeeze on money supply, or whether it was a case of "once bitten, twice shy", the development loan lenders all now require borrowers to have a certain level of experience.
Experience includes:
* previous project completions,
* profitable project history,
* quality builders with a good track record, and
* professionals such as marketing, and
* project managers to complete on time and on budget.
If you lack the personal experience in the industry or have gaps in your team, you should be consulting with project managers to complete your project, from concept to completion. Project managers like Plan Assist are a one-stop-shop for real estate developers with a team of loan specialists, property project managers and a list of builders anywhere in Australia. They can organise everything from feasibility analysis, town planning and surveying, all the way through to subdivision and conveyancing and completion.
Visit their website http://www.planassist.com.au/ for more information on how they can complete your needs for your next project.
With the increase in loose credit in the earlier part of this decade, many Mums & Dads tried their hand at development for the first time, and not all succeeded. Many banks funded unsuccessful projects where the borrowers lost money, and sometimes the banks also lost money recovering the debt.
Banks finally wised in the past 2 years, and whether it was due to the global credit squeeze on money supply, or whether it was a case of "once bitten, twice shy", the development loan lenders all now require borrowers to have a certain level of experience.
Experience includes:
* previous project completions,
* profitable project history,
* quality builders with a good track record, and
* professionals such as marketing, and
* project managers to complete on time and on budget.
If you lack the personal experience in the industry or have gaps in your team, you should be consulting with project managers to complete your project, from concept to completion. Project managers like Plan Assist are a one-stop-shop for real estate developers with a team of loan specialists, property project managers and a list of builders anywhere in Australia. They can organise everything from feasibility analysis, town planning and surveying, all the way through to subdivision and conveyancing and completion.
Visit their website http://www.planassist.com.au/ for more information on how they can complete your needs for your next project.
How to obtain presales for my development project?
Pre-sales are in most cases required by the lender to reduce risk for a property development. Presales are pre-sold off-the-plan dwellings which are exchanged prior to or during construction.
For some developers, it provides much needed certainty that they will sell their stock on completion.
For the lender, its essential to provide a repayment of the construction loan.
Presales can be achieved in many ways
* Find buyers yourself with direct marketing
* Local agents can market your real estate development
* Project Marketers in real estate who specialise in selling property off the plan
* Financial Planners providing real estate investments to their clients
* Builders may have marketing services for their product and achieve sales for you
All the above sources have different costs associated ranging from $5,000 per dwelling to $20,000 commission for a sale. It all depends on the price being sold and the ease at which the seller helps you sell your development stock.
To find out more about costings and how to achieve presales for your project, call the Project Management Team at Plan Assist on +612 9449 2333, or visit http://www.planassist.com.au/ for more information.
For some developers, it provides much needed certainty that they will sell their stock on completion.
For the lender, its essential to provide a repayment of the construction loan.
Presales can be achieved in many ways
* Find buyers yourself with direct marketing
* Local agents can market your real estate development
* Project Marketers in real estate who specialise in selling property off the plan
* Financial Planners providing real estate investments to their clients
* Builders may have marketing services for their product and achieve sales for you
All the above sources have different costs associated ranging from $5,000 per dwelling to $20,000 commission for a sale. It all depends on the price being sold and the ease at which the seller helps you sell your development stock.
To find out more about costings and how to achieve presales for your project, call the Project Management Team at Plan Assist on +612 9449 2333, or visit http://www.planassist.com.au/ for more information.
GRV vs Total Cost Ratio Part 2)
Following from last posting, we will now describe another way of construction loan finance for a property development.
Method 2) % of Total Cost Ratio
This method is the more traditional way of commercial lending. Typically development loans may be based on a 70% of Total Cost of the Property Development Project.
i.e.
Land $1m
Build Contract (ex GST) $1m
Other $300k
=
$2.3m Total Cost x 70% LVR = $1.61m Total finance available for the project.
Currently banks are playing a little conservative and may bring this ratio down to 65% LVR, which means less funding available.
In comparison with GRV method of lending, the Total Cost Ratio LVR in most cases will be less than the Gross Realisation Method (GRV).
Where do I go for advice?
Its best to ask a specialised property development mortgage broker for advice on which is the best for your development project. For Australian development projects, we recommend www.planassist.com.au for any sized development loan advice.
Method 2) % of Total Cost Ratio
This method is the more traditional way of commercial lending. Typically development loans may be based on a 70% of Total Cost of the Property Development Project.
i.e.
Land $1m
Build Contract (ex GST) $1m
Other $300k
=
$2.3m Total Cost x 70% LVR = $1.61m Total finance available for the project.
Currently banks are playing a little conservative and may bring this ratio down to 65% LVR, which means less funding available.
In comparison with GRV method of lending, the Total Cost Ratio LVR in most cases will be less than the Gross Realisation Method (GRV).
Where do I go for advice?
Its best to ask a specialised property development mortgage broker for advice on which is the best for your development project. For Australian development projects, we recommend www.planassist.com.au for any sized development loan advice.
27 May, 2009
Gross Realisation Value vs Total Cost Ratio Part 1)
Here is a quick way you can work out the maximum available for Construction Finance:
Assume:
Land Cost $1m
Build Contract Price $1m + ($100k GST which you can claim)
Other Costs $300k (Interest, DA, s94, everything else)
Sale Prices $3.2m (inc.GST)
less $200k GST on sales
Healthy Gross Profit: $700k
Method 1) % LVR of Gross Realisation Value (GRV)
Pretty simple.
i) Valuer values the property, lets say $3.2m.
ii) Lender takes off GST = $200k GST assuming the margin scheme is applied - as you most likely will be registered for GST at this level. (Sale price - land cost = profit x 1/11)
iii) $3m ex GST GRV x 55% LVR = $1.650m maximum loan amount
$1.65m will be available to pay for the majority of development costs, including interest, $1m construction + other statutory costs. You still need to put in "hurt money" of approx. $700k of cash/equity from another property.
Method 2) LVR based on Total Cost of the Development will be explained in next blog.
Assume:
Land Cost $1m
Build Contract Price $1m + ($100k GST which you can claim)
Other Costs $300k (Interest, DA, s94, everything else)
Sale Prices $3.2m (inc.GST)
less $200k GST on sales
Healthy Gross Profit: $700k
Method 1) % LVR of Gross Realisation Value (GRV)
Pretty simple.
i) Valuer values the property, lets say $3.2m.
ii) Lender takes off GST = $200k GST assuming the margin scheme is applied - as you most likely will be registered for GST at this level. (Sale price - land cost = profit x 1/11)
iii) $3m ex GST GRV x 55% LVR = $1.650m maximum loan amount
$1.65m will be available to pay for the majority of development costs, including interest, $1m construction + other statutory costs. You still need to put in "hurt money" of approx. $700k of cash/equity from another property.
Method 2) LVR based on Total Cost of the Development will be explained in next blog.
What Interest Rate Margin is fair for my property project?
A Property Finance Lender will typically offer a variable interest rate based on the BBSY30 day rate. This rate is currently around 3.15%pa.
On top of this bank bill swap rate (BBSY30), they then add a lender margin for risks associated with the property development.
Factors that determine the margin include:
*LVR
* Pre-sales of dwellings before construction finance
* Location of development
* Profitability of the deal
* Strength of borrower's net asset position
* Is there a Plan B?
* Borrower experience
* Other income sources
* How easy it is to sell the completed property
* Market factors such as demand/supply
Weighing up all these factors, the lender decides on a lender margin of between 1.5% to 5%pa
Example:
Experienced borrower, $1m net asset position, has other business with good income, can hold the property if he wants, has 4 pre-sales. Development in a metro area in Victoria.
$2m construction loan to build 8 townhouses, LVR on "end value" is 60% LVR.
Lender Margin quoted at 3.5%pa above Bill Swap Rate = All up Interest Rate of 6.65%pa
Which lender is this? You will have to email me at loans@planassist.com.au
On top of this bank bill swap rate (BBSY30), they then add a lender margin for risks associated with the property development.
Factors that determine the margin include:
*LVR
* Pre-sales of dwellings before construction finance
* Location of development
* Profitability of the deal
* Strength of borrower's net asset position
* Is there a Plan B?
* Borrower experience
* Other income sources
* How easy it is to sell the completed property
* Market factors such as demand/supply
Weighing up all these factors, the lender decides on a lender margin of between 1.5% to 5%pa
Example:
Experienced borrower, $1m net asset position, has other business with good income, can hold the property if he wants, has 4 pre-sales. Development in a metro area in Victoria.
$2m construction loan to build 8 townhouses, LVR on "end value" is 60% LVR.
Lender Margin quoted at 3.5%pa above Bill Swap Rate = All up Interest Rate of 6.65%pa
Which lender is this? You will have to email me at loans@planassist.com.au
Another Lender drops out of development loans
Last month, Suncorp-Metway Ltd dropped out of the commercial and development lending sector.
Booooohoooooo...They were one of my favourite sources of funding development sites in the $2m to $10m range.
The decision was made as a result of funding pressures, including its reliance on wholesale funding which it said has made the business uneconomic.
With its lower rating than the other major banks like NAB, CBA, ANZ, Westpac,
Suncorp is finding it tough to buy the money and lend it out with a healthy margin.
Suncorp will now focus on its retail banking business (home loans etc) with intentions to source up to 60% to 70% of its funding requirements from its retail deposit base.
Source: Mortgage Business Issue 3.5
Booooohoooooo...They were one of my favourite sources of funding development sites in the $2m to $10m range.
The decision was made as a result of funding pressures, including its reliance on wholesale funding which it said has made the business uneconomic.
With its lower rating than the other major banks like NAB, CBA, ANZ, Westpac,
Suncorp is finding it tough to buy the money and lend it out with a healthy margin.
Suncorp will now focus on its retail banking business (home loans etc) with intentions to source up to 60% to 70% of its funding requirements from its retail deposit base.
Source: Mortgage Business Issue 3.5
26 May, 2009
When Banks say jump, you say how high?
Development Finance is becoming increasingly difficult during the current credit squeeze. Its not so much a financial crisis in Australia, its more a credit squeeze of the availability of money for higher risk projects, particularly property development.
Over the past 6 to 12 months, I have noticed more and more development finance lenders leaving the industry, or closing their doors to new business. In Australia we are now faced with a limited supply of money for new projects, and the remaining lenders have raised the bar.
How high is the bar set?
Today, the loan approval condition of "presales" is standard. Most ask for at least 50% presales, depending on the nature of the property deal, and the risk associated with repaying the loan.
Some are asking for 100% presales to basically take out any sales risk.
Also, most lenders require you to have experience in the property development industry. They are sick of seeing new entrants unsuccessfully develop property in Australia, and they now want runs on the board. An alternative is to buy the expertise i.e. hire project managers like Plan Assist http://www.planassist.com.au/)
Then there is the need to use a reputable and experienced builder. In the past 3 months, I personally know of 4 builders that have gone bust, some with 40 year reputations.
If you don't have the experience and you don't have pre-sales, you just won't see the banks finance your development project.
For those already in the industry, lets face it, if you are a developer out there finishing your project right now, you have experienced some delay or price reduction in your stock. At least the interest rates have dropped by 3% to 4% and are much lower than a year ago, and rental yields have been raised. In some cases, its worth keeping the property as a rental property rather than selling (although watch out with having to pay back GST input tax credits if you rent it out - make sure you see a good accountant for advice if you go down this path).
The emphasis for seeking expertise and good advice is so important right now.
A banker commented to me last week that most of their property development clients are experiencing around 20% reduction in sales prices. It makes you realise where we are in the property cycle in Australia, and what large effect the current credit squeeze has had on sales activity, developer profits and property prices.
Over the past 6 to 12 months, I have noticed more and more development finance lenders leaving the industry, or closing their doors to new business. In Australia we are now faced with a limited supply of money for new projects, and the remaining lenders have raised the bar.
How high is the bar set?
Today, the loan approval condition of "presales" is standard. Most ask for at least 50% presales, depending on the nature of the property deal, and the risk associated with repaying the loan.
Some are asking for 100% presales to basically take out any sales risk.
Also, most lenders require you to have experience in the property development industry. They are sick of seeing new entrants unsuccessfully develop property in Australia, and they now want runs on the board. An alternative is to buy the expertise i.e. hire project managers like Plan Assist http://www.planassist.com.au/)
Then there is the need to use a reputable and experienced builder. In the past 3 months, I personally know of 4 builders that have gone bust, some with 40 year reputations.
If you don't have the experience and you don't have pre-sales, you just won't see the banks finance your development project.
For those already in the industry, lets face it, if you are a developer out there finishing your project right now, you have experienced some delay or price reduction in your stock. At least the interest rates have dropped by 3% to 4% and are much lower than a year ago, and rental yields have been raised. In some cases, its worth keeping the property as a rental property rather than selling (although watch out with having to pay back GST input tax credits if you rent it out - make sure you see a good accountant for advice if you go down this path).
The emphasis for seeking expertise and good advice is so important right now.
A banker commented to me last week that most of their property development clients are experiencing around 20% reduction in sales prices. It makes you realise where we are in the property cycle in Australia, and what large effect the current credit squeeze has had on sales activity, developer profits and property prices.
25 May, 2009
Interest Rate Snapshot
Every few weeks I will comment on the latest Interest Rates in Australia.
Variable Rate is: BBSY30 of 3.15% + margin of 3.5% = 6.65%pa
What does this mean?
For property development finance, if you are borrowing more than $1m, you will usually receive a rate equivalent to the BBSY30 + a lender margin.
This rate is otherwise known as the 30 day Floating Bank Bill Rate. For Australia, BBSY30 is currently around 3.15%.pa at present and moves daily, sometimes by the minute.
What is the lender margin? Its a margin for risks associated with the loan to you..i.e. building risk, sales risk, experience, servicing. Typically anything from 2% to 5% is normal at present. (It was a lot lower last year when money was more available). More on this later....
Variable Rate is: BBSY30 of 3.15% + margin of 3.5% = 6.65%pa
What does this mean?
For property development finance, if you are borrowing more than $1m, you will usually receive a rate equivalent to the BBSY30 + a lender margin.
This rate is otherwise known as the 30 day Floating Bank Bill Rate. For Australia, BBSY30 is currently around 3.15%.pa at present and moves daily, sometimes by the minute.
What is the lender margin? Its a margin for risks associated with the loan to you..i.e. building risk, sales risk, experience, servicing. Typically anything from 2% to 5% is normal at present. (It was a lot lower last year when money was more available). More on this later....
Welcome to Development Finance Made Easy
Welcome.
In this blog, I will share with you the secrets of property development finance.
You will find useful and current development finance information for any person developing property across Australia.
You will discover techniques on how to deal with banks, how to negotiate the most suitable finance, and typical ways of ensuring you qualify and obtain loan finance for your next property development project.
I will always endeavour to answer any questions and posts and point to what's hot and what's not in the world of property development finance.
Happy reading....LoanHero
In this blog, I will share with you the secrets of property development finance.
You will find useful and current development finance information for any person developing property across Australia.
You will discover techniques on how to deal with banks, how to negotiate the most suitable finance, and typical ways of ensuring you qualify and obtain loan finance for your next property development project.
I will always endeavour to answer any questions and posts and point to what's hot and what's not in the world of property development finance.
Happy reading....LoanHero
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