And banks and other lenders are only too happy to reject applications for finance that don’t meet a specific series of criteria. This is because there’s a fair amount of risk involved for the lenders themselves, especially for an oversaturated and oversubscribed market such as property. With that in mind, many developers are finding financing quite challenging to achieve.
The first thing to understand as an aspiring property developer is that, yes, banks are tightening their lending criteria, which is manifesting itself into a requirement for higher amounts of equity, profit margin, and pre-sales than they had previously. This reality means that, unless you’re going to look for financing from alternative sources – non-bank lenders or private lenders, then the reality is that some areas, where you might like to purchase property, are simply inaccessible to you, unless you are already an experienced developer. The first step should therefore be to do your own due diligence and determine whether you are going to be able to execute on your plan leveraging the resources and experience that you currently have.
It’s a good idea to speak to a finance specialist early on in the process too, but make sure you engage with a good one! As with all service professionals, the quality a finance specialists can vary wildly, so you do want to make sure that you’re asking the following questions of the finance specialist before you continue work with them:
- What level of experience have you had?
- Who are the last 10 clients that you’ve worked with, and on what projects?
- How many lenders do you have access to?
A finance specialist is going to be able to help smooth you through the process with lenders, and help you to identify where the best and/or most realistic opportunities lie.
Be prepared to spend a lot of time on the application for finance. One of the reasons that you want to engage with a finance specialist is that they will know what the full process is for making an application. They’ll have access to all the necessary documents, and can advise you on whether you need to undergo valuation and quantity surveyor reports. They can also help to hurry things through on the lender’s end once everything has been submitted. You are looking at a process that can take many months to complete, and it’s important to be thorough and precise in meeting the requirements to apply for the loan.
If you are an inexperienced property developer, it might be worth investing in recruitment to bring a highly experienced development project manager on board. To mitigate risk, lenders are adding significantly higher interest rates when dealing with inexperienced developers, and while there is not much you can do about that yourself (after all, you need to have experience to be able to cite experience, a pure catch-22 if ever there was one). But, with an experienced development manager on board, many lenders will feel more confident in the project, which will help you negotiate a better rate.
While we’re talking about recruitment, also make sure that your builder has a good reputation, because lenders – especially banks – can be spooked by a cheap and poor quality or unknown builder. This is good practice anyway, as a good, reputable builder is less likely to have construction issues leading to time blowouts, or quality of construction issues, but even at that financing level, having a good builder on board is a really good idea.
Another thing that most lenders will require is a comprehensive feasibility study that will demonstrate that the site can be developed to vision, and it will ultimately sell for profit. This feasibility study should be fully researched to provide accurate numbers – most banks and other lenders won’t let you get away with playing loose with the numbers.
Finally, secure a lot of pre-sales before you apply for the loan. Why is this important? Because lenders want to see that you’ve managed to cover at least 100% of your debts before they’ll lend money – especially to inexperienced developers. It makes good business sense anyway, as inventory at the end of the development is expensive to have sitting around, and it will give your prospective lenders confidence that you’ll be able to achieve what you’re claiming.
Remembering that in the current climate most lenders are looking for reasons to reject applications for finance, it is absolutely critical that you are able to complete all the mandatory reporting procedures to depth and be able to show that your development will be a successful one.