Development Finance Pitfalls for the first timer.....

[Jtkumnick]

Hey Guys,

Looking at doing a development (5 acres into 9 house blocks, just north of brisbane) and was interested to hear any of the pitfalls or unseen problems that people with experience had doing something like this themselves?
This is my first time, we are subdividing the family block so I would like to get as much right as I can. Love to hear about some strategies or advice?

Looking to borrow the dev costs against the original block itself all up about $500,000 including the infrastructure charges.

To the experienced ones out there, would love to hear anything you think would benefit the development at all!

 

[Aaron_C]

Have you got the approval? What stage are you at?

 

[Jtkumnick]

Have you got the approval? What stage are you at?

Hi Aaron, no at the moment I'm doing the research part, trying to learn as much as I can about the whole process before I start incurring costs. Looking to gather the hindsight from the people who have done it before!!

 

[Peter_Tersteeg]

I would suggest you start small and grow into property development. There are lots of pitfalls, but most new developers go under simply because they under estimate costs and over estimate their ability to manage a complex project.

I'm not saying that this development is too big for you, I don't know your personal circumstances. But when working out the funding and exit strategies, leave yourself plenty of room to move. Don't push yourself or your resources to the limit.

 

[Jtkumnick]

I would suggest you start small and grow into property development. There are lots of pitfalls, but most new developers go under simply because they under estimate costs and over estimate their ability to manage a complex project.

I'm not saying that this development is too big for you, I don't know your personal circumstances. But when working out the funding and exit strategies, leave yourself plenty of room to move. Don't push yourself or your resources to the limit.

Thanks PT bear, I agree would be best to start small, but as I'm effectively getting the block for free, its either have a go or do nothing on this one!
How I fare on this one will determine if/how big the next one is....
I'll be doubling the costs and timeframe in when doing my costings due to my inexperience......

 

[Aaron_C]

Hi Aaron, no at the moment I'm doing the research part, trying to learn as much as I can about the whole process before I start incurring costs. Looking to gather the hindsight from the people who have done it before!!

Ok well it's actually not a difficult process. What you have to do is get the concept right. If your concept is wrong it doesn't matter how well you do everything else.

Plus a lot of the process is actually out of your hands, and it takes lots of time. If you are getting the block for free then getting finance shouldn't be an issue but we'd have to see the entire proposal to make a call on that one.

 

[Marty McDonald]

One small idea would be to get a line of credit in place before you lodge your DA. If it doesnt work out you have nothing to loose as you dont pay interest on the undrawn funds, if it does look like going ahead you don't have the complication of getting dev finance

 

[Wandering]

Marty, does that mean you can't get a line of credit once the DA is in place?

 

[Jtkumnick]

One small idea would be to get a line of credit in place before you lodge your DA. If it doesnt work out you have nothing to loose as you dont pay interest on the undrawn funds, if it does look like going ahead you don't have the complication of getting dev finance

great idea Marty, thanks, so a line of credit is a better option than actual developer finance? and with Wanderings question, surely a line of credit would be easier to get if a DA gets approved, being that the original block is worth more?

 

[Marty McDonald]

Marty, does that mean you can't get a line of credit once the DA is in place?

Not impossible but many valuers will note the DA approval and mention this is in their valuation report to the lender. Once the lender knows what you plan to do with the funds the purpose of the loan is then going to be deemed development finance and they will want will want to control the whole process and charge you for the privaledge.

Close to 10% pa with line fees on dev finance plus all the other fees and charges.

 

[Marty McDonald]

great idea Marty, thanks, so a line of credit is a better option than actual developer finance? and with Wanderings question, surely a line of credit would be easier to get if a DA gets approved, being that the original block is worth more?

If you have the equity "as is" do it now and save yourself the hassles. If you don't then yep you will have to do development finance.

Also you will have to choose which lender carefully as not all will be happy to "cash out" anything above a hundred to 2 hundred k.

 

[Aaron_C]

Marty's advice is very good. Try to avoid commercial aka development finance if you have sufficient equity as it imposes lots of conditions, is more expensive and you have less flexibility. With a LOC it's basically your money so you can do whatever you want with it.

 

[Jtkumnick]

Thanks for that guys the Line of Credit from what you have said looks the best, if they dont give out more than $200k for development finance, that would be an issue, unless of course the council would waive the infrastructure charges- hahahahahahahaha

 

[Marty McDonald]

You mean "personal investment purposes" I think

 

[Jtkumnick]

haha thats it!

 

[Aaron Sice]

one phrase that kills most deals when not structured correctly - "Joint And Severable Liability".

 

[Jtkumnick]

yeah thats a horrible phrase- nothing a good trust & a shotgun cant fix?

 

[Jtkumnick]

If you have the equity "as is" do it now and save yourself the hassles. If you don't then yep you will have to do development finance.

Also you will have to choose which lender carefully as not all will be happy to "cash out" anything above a hundred to 2 hundred k.

This might sound like a dumb question but if you do a line of credit over the property to fund the development, do you have to provide income details to service the LOC? Obviously ideally as a development, i would want to borrow money secured against the propertys equity, which i can pay for DA, works, council fees, etc, interest payments. Then pay down the loan with proceeds from the new block sales?

If i had to service the LOC during the time of development, its feasable, but would not be preferable. Am i making sense?

 

[Aaron_C]

To get a residential LOC you do need to show serviceability of course. That's why it's different from a commercial finance.

 

[Qlds007]

I must admit i would be concerned if you were applying for residential or commercial finance if you didnt have sufficient income to be able to service the loan.

Whilst Com Finance can be slightly more flexible if you have pre-sales, interest cover, potential rental etc you would still not want to be in position where you could not meet the committments in the event that you couldnt sell the properties.