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
31 May, 2009
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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