How much cash do you need for a development? Financing a development

If the returns were guaranteed the banks would lend at a lower rate + a cut of profits. There is a reason they don't throw their money into projects and take equity. When the music stops its always them who ends up holding title anyway then selling it in a line to a cash rich investor who wants to pay under market value less 30% or worse. So if they have lent 80% they lose. Sending you to the wall doesn't change it.

They want to have a minimal stake for that outcome. They want security they can walk away from. A site with a 80% complete build isn't even worth the land value if it comes to a firesale. They don't want a 80% stake in a project that may or may not suffer delays, cost blow outs and difficulty selling. They are very happy to allow you to take that profit but they want out - fast. The bigger the project the more security they want.

I worked for a bank and when the economy tightens they have huge teams of asset management people whose job it is to close up loan books and if necessary sell asap. They don't care if you lose. They just don't want absolute exposure.
 
Very general statement... when < 4 site dev

Easiest way for finance is to pay all paper costs, sub division, demolition, engineer/drawings, contributions etc all from $$$ savings/equity

All borrow for the land+construction.
 
Very general statement... when < 4 site dev

Easiest way for finance is to pay all paper costs, sub division, demolition, engineer/drawings, contributions etc all from $$$ savings/equity

All borrow for the land+construction.

There is another way which will help cover these out of pocket expenses, but you will need a very good relationship with your builder and also know that the values will come in spot on or above.
 
Very general statement... when < 4 site dev

Easiest way for finance is to pay all paper costs, sub division, demolition, engineer/drawings, contributions etc all from $$$ savings/equity

All borrow for the land+construction.

Brady, this could be a stupid question but how does playing for these expenses first make it easier to finance?

Wouldn't the bank continue to value the land+construction loan based on an inline valuation?
 
Brady, this could be a stupid question but how does playing for these expenses first make it easier to finance?

Wouldn't the bank continue to value the land+construction loan based on an inline valuation?

You should be aiming for at least 20% profit anyways. So if you have paid for the hard costs as mentioned by Brady, inline valuation of construction and land should be sufficient for the construction.

Example.
Land = 450,000
3x3 Construction = 630,000.
Total for land and construction excluding hardcosts = 1,080,000

Value for each = 500,000 each.
Inline valuation (typically 15 to 20% less than strata) = $1,200,000 based on 20% less.

Therefore, borrowing all costs for land and construction works out to be about 89% LVR to inline valuation.
 
Can someone help me with this to confirm my understanding. I met with my MB to discuss funding strategies for a development I'm looking at.

I want to build 3 townhouses on a block I own. My MB indicated if I fund on resi terms i can only secure funding to 80% LVR on the land val plus construction cost (not including other costs such as DA, subdivision, holding, contingency).

I had originally thought that on resi terms you might be able to secure funding on future value on completion.

My MB said this wasn't the case, only under commercial lending can you lend on final value. (at a lower LVR of course)

Is this thread telling me that you can secure a resi loan with 80% LVR of final 'in-line' valuation (i.e normal final val less say 20%)?
 
Can someone help me with this to confirm my understanding. I met with my MB to discuss funding strategies for a development I'm looking at.

I want to build 3 townhouses on a block I own. My MB indicated if I fund on resi terms i can only secure funding to 80% LVR on the land val plus construction cost (not including other costs such as DA, subdivision, holding, contingency).

I had originally thought that on resi terms you might be able to secure funding on future value on completion.

My MB said this wasn't the case, only under commercial lending can you lend on final value. (at a lower LVR of course)

Is this thread telling me that you can secure a resi loan with 80% LVR of final 'in-line' valuation (i.e normal final val less say 20%)?

In the majority of cases, yes, but can be sourced for 75% LVR at end value.
 
Colin, thanks for the prompt response

Is it net 75% of 'subdivided' end value or 75% of in-line value?

it it limited to development in WA or available nationally (strange question but i'm sure it was noted earlier in the thread that it was for WA only)?

any examples of lenders that might offer this?
 
25% deposit on land and you pay costs such as stamp duty etc with a conditional approval pending DA and FPBC (fixed price building contracts) being provided so valuer can do an "as if complete" valuation which is what the lender will borrow against.

So 75% net of 'subdivided' end value once valuation attained.

Can be considered outside of WA if in a capital city or larger regional center (so valuer has comparables) in the lesser known states :D
 
in my case there is no stamp duty as I already hold. I owe 320k on it and the land component was recently valued at 400k (+ current house valued at 85k). So its a 80% LVR on the land component, and currently 66% LVR as-is.

I must confess I'm confused by what you said sorry.

generally i have enough skin in the game for what you said I think, based on the 75%?

and these are resi rates?

If is something typically available in the west its not surprising my MB isn't aware of it.
 
Yea sorry for the acronyms. Its a bi product of dealing with banks.

You would have to contribute another 20k to the land to be at 75% LVR.

Yes, resi rates and not surprised your MB does not know as many WA brokers here wouldn't either.
 
If everything goes to plan - you need a fair bit.
If things dont go to plan - you need more than you can imagine.

When I screwed up, I needed to be able to afford to fund holding costs until I could get out of it - one way or another. If I was purely relient on my own private capital it would have been good night nurse.

Any delays at the end of the project, are far harder to wear than at the begining. Think of your end debt. Say $1mil for a small development. If for some reason you use your capital, or there is a delay, or some other screw up happens.... how will you afford to pay the bank $4,000/month?

Hopefully it doesnt happen... but if it does... hopefully you have a "plan b"

Blacky
 
I worked for a bank and when the economy tightens they have huge teams of asset management people whose job it is to close up loan books and if necessary sell asap. They don't care if you lose. They just don't want absolute exposure.

oh yes, have felt the sharp end of that
 
If everything goes to plan - you need a fair bit.
If things dont go to plan - you need more than you can imagine.

Hopefully it doesnt happen... but if it does... hopefully you have a "plan b"

Blacky

Hope for the best but plan for the worst :eek:

I Always refer clients to "Grand Designs" as the projects just about always go over budget and push people to breaking point so don't be surprised if the same happens to you (if the parameters are tight).
 
Hope for the best but plan for the worst :eek:

I Always refer clients to "Grand Designs" as the projects just about always go over budget and push people to breaking point so don't be surprised if the same happens to you.

I remember my first serious development, builder was a complete incompetent... still recall lying awake at night, cold sweats, hoping like heck he would actually be at site the next day, after a no show of weeks (with a loan three quarters drawn), knowing that realistically it would be the same tumble weeds blowing around and if I was lucky perhaps the extortionate plumber that couldn't even place a floor waste within a meter of where it was suppose to be. ah the joys of it all, the mood changes from the stress, stressed friendship with my jv partner that contributed stuff all, whining neighbours, banks, bills, idiots... still love it tho.
 
the biggest challenge we have found with on completion subdivision is that valuers will project In One Line valuations for the build

These are typically 20 to 30 % below the end value of the project, and its this "little " stretch where deals mostly crash,

Seeing there is only one funder that will do 3 OOT build at 90 % ish > 1 mill there arent too many options.

ta
rolf
 
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