I’ve been told I need pre-sales to qualify for a development loan, is this true and what are pre-sales?
Development loans are hard to put general rules on as they are heavily dependant on the loan amount, location of the development and type of development. However, generally speaking most locations will require some sort of pre-sales to qualify.
Pre-sales are units within the development that have been sold by a real estate agent as an off the plan purchase. Meaning the purchaser has signed a contract of sale prior to the commencement of the development. Lenders need to see these pre-sales as it often gages how successful the proposed development will be.
As development loans are repaid from the proceeds from the sale, having pre-sales helps the lender understand that the development is what the local community wants and the end product is desirable.
How much can I borrow with a development loan?
The criteria for developments differ greatly. However as a general guide, lenders could go up to 80% of total costs of the project. For example, if the land, construction and legal costs were $5,000,000, then you could be able to borrow up to $4,000,000. This would depend on your pre-sales and the value of the total project on completion.
What other criteria to bank’s look at for development loans?
As development loans carry a lot of risk for banks, your history in the industry is important. Typical things banks look at is your ability to deliver projects on time and budget as well as the overall profitability of your development company. Other criteria include:
- Location of the development (suburb)
- Size and type of the development (town houses, units, villas etc)
- Amount of money required to complete the development
If you have any other questions regarding development finance, please contact our staff.