Presales - How do they work??

[grantc]

Hi All,

Assume below all finance is Lowdoc (or is nodoc possible?)
Just trying to understand how presales work and if they are a good way to do things with small projects - upto 4 townhouses on 1 title.
(Or are they only for big projects?)
Has anyone out there used presales on say 1, 2, 3 or 4 unit developments?

The usual way is 20% deposit on land - then 20% deposit on building costs = build the houses.

Can presales save me putting in the 20% deposits on the building costs?

Firstly why do lenders want presales. Is it because the presale deposit supplies the 20% deposit for construction? So with a duplex 2 presales at 10% deposit would be required. With 4 units, 4 presales with 5% deposit would be required? Or am I missing it. Because doesnt the deposit money just go into trust somehow - if they use a deposit bond then there isnt even physical money changing hands??

Thanks for any input
Grant

 

[Mark C]

Grant,

Presales can be done on any size complex. Generally the reason why you would get presales is to satisfy to the bank that the product will sell for the estimated value. Thus guaranteeing that the estimated GRV / Profit really exists.

The bank might ask for a quantity of presales to cover a % of the peak debt. eg 40% of peak debt. If your peak debt was to be $1mil then the bank would ask for presales to the value of $400K.

If however your profit margin is in excess of 20% and your valuation supports your development in regard to ability to sell in current market conditions then the bank may not ask for presales.

The amount of the deposit is generally 5% (in my case) and is put into a trust account. This deposit can not be used for any purpose.

But having this money in your account will give you some insurance should the buyer be unable to complete. You will have to resell the product again but will have the holding costs met by the forfeited deposit.

Deposit bonds don't have the credibility they once did and you will find some banks won't accept them as a deposit, ie not considered a presale. Bank Guarantees are however as good as a cash deposit.

There is an advantage and disadvantage to presales, it's harder to sell but gives you and the bank insurance on the deal. You will also have to prepare a disclosure document which can be quite expensive on some developments.

Presales are an industry on their own.

Mark

 

[fatboy4]

Great answer Mark

 

[grantc]

Hi Mark,

Thanks heaps for your in depth response, seems to be a area not a lot know about (even brokers).
Your talking about GR lending, is that still Lowdoc - or does GR lending mean fulldoc loans?
If enough % profit in deal does that mean I may not need to put in any deposit??
Any pointers on some lenders that are good for this type of lending?? - as I say typically small sites eg. triplex 1Mill GR value.

Thanks again
Grant

 

[Qlds007]

Lodoc or Lite Doc lending on a GR basis is accepted practice however the terms and interest rates may nto be that attractive.

The primary financier will be charging normal Commercial rates but the Mez financier will want to charge like a wounded bull.

Many of these deals are done by way of an Asset lend.

Think the largest we have financed was about $7M.

 

[Mark C]

Hi Mark,

Thanks heaps for your in depth response, seems to be a area not a lot know about (even brokers).
Your talking about GR lending, is that still Lowdoc - or does GR lending mean fulldoc loans?
If enough % profit in deal does that mean I may not need to put in any deposit??
Any pointers on some lenders that are good for this type of lending?? - as I say typically small sites eg. triplex 1Mill GR value.

Thanks again
Grant

Grant

The key point you have raised is "if enough % profit in the deal dose that mean I may not need to put in any deposit??"

You got it. You can do a $10mil project with no money down as a deposit. Wont be very easy but it's possible.

I'm using Bankwest for my project in WA, my contact is Andrew Caruthers in the Mandurah branch.

There are heaps of specialised lenders such as AAA finance, or Balmain Commercial, GPS the list is endless. You can put together just about anything that turns a profit. But it will cost, setup fees, profit share etc.

Mez lending is worth every penny if it means making you money, interest rate will be around 18% but if it's only for 20% of the loan it's not too big of an expense. The "Blended" rate (combination of first and second mortgage) might end up at 10% - 11%. A fair rate for not putting any cash into a deal, as long as you have a plan to pay it off quickly.

The financing is based on the profit in the deal not what you earn. Low Doc / No doc are more for residential type lending.

Try to use a bank for lending if the deals straight forward, if you have a hot deal with a bit of added risk then you would do better contacting a specialised lender.

Mark

 

[Jimmyjamjars]

Mark,
I have no yearning to go down the development path, but I felt compelled to say, your knowledge on this subject, and your replies to same are excellent. Congrats on your success and hope to see your continued posting on the forum.
Well done !!

Jim

 

[Mark C]

Thanks Jim for those kind words.

It's a passion of mine to be involved on all levels, I even man the display house on days when my salesman is away.

I've said it before, the property bit is easy. Sell for more than it costs to build and you will make a profit, I find deals that stack up every week.

It's the financing that can really take the time and effort to get right. In this game there are many out there waiting to rip you off.

I have faced financial ruin that was bought about by a lender, I was forced to fight for survival. It’s not something I wish anybody to have to go through.

What I do is not for everyone, but if someone is interested then I am happy to share what I have learned.

Mark

 

[TheAnalyst]

Thanks Jim for those kind words.

It's a passion of mine to be involved on all levels, I even man the display house on days when my salesman is away.

I've said it before, the property bit is easy. Sell for more than it costs to build and you will make a profit, I find deals that stack up every week.

It's the financing that can really take the time and effort to get right. In this game there are many out there waiting to rip you off.

I have faced financial ruin that was bought about by a lender, I was forced to fight for survival. It’s not something I wish anybody to have to go through.

What I do is not for everyone, but if someone is interested then I am happy to share what I have learned.

Mark

Thanks Mark. Can you please give some details about the bad lender? It certainly will help me when I deal with lenders in the future.

 

[Mark C]

Thanks Mark. Can you please give some details about the bad lender? It certainly will help me when I deal with lenders in the future.

It's not something I wish to follow up on.

Needless to say at the big end of town there are players who have been around for a long time, making their keep on the ignorance and good will of others.

A good dose of paranoia can be healthy at times.

That said, there are also those out there who want to back young developers starting out and who will give you the confidence, horsepower and cash to make your mark.

I've found both.

Finance is available from more places than just banks.

Mark

 

[hschmid]

Be careful that discounted or incentived pre sales don't establish a low valuation precedent for the rest of your project.

When we presell at 'incentive' prices we make sure that the 'public record' of those sales are at full value and that the incentive is an agreed rebate or after settlement refund.

 

[grantc]

Hi Mark,

So are you saying someone like Bankwest will lend say 80% based on profit in the project, so they wont require previous years tax returns etc.. (I LOE so have no income as such). And then use mez lending for the other 20%? Is Mez lending basically a second mortgage - what will be thier security? Does the Mez funder need full costings etc.. for the project as well?

Bankwest - is that the 'business' side I would need to deal with - rather than the resi side? But these are resi units Id be building?

Or does someone like the "AAA finance, or Balmain Commercial, GPS" etc.. fund the whole lot?

Thanks
Grant

 

[Mark C]

Hi Mark,

So are you saying someone like Bankwest will lend say 80% based on profit in the project, so they wont require previous years tax returns etc.. (I LOE so have no income as such). And then use mez lending for the other 20%? Is Mez lending basically a second mortgage - what will be thier security? Does the Mez funder need full costings etc.. for the project as well?

Bankwest - is that the 'business' side I would need to deal with - rather than the resi side? But these are resi units Id be building?

Or does someone like the "AAA finance, or Balmain Commercial, GPS" etc.. fund the whole lot?

Thanks
Grant

Grant,

It all depends on the deal, there is more to be considered than just the costs to construct. Market conditions, DA approvals, location, profit margin, how much equity you are supplying etc.

Bankwest will lend on a deal depending on these factors.

Your income may not be a requirement depending on how strong your project is.

The remaining 20% can be financed by a Mez lender, they will want to know all the indicators on the project. They will take out a second mortgage and will look for fixed and floating charge over your company and all your assets in relation to this project. Their security is the second mortgage which could mean they end up with nothing, thats why they charge 18%+.

The specialised lenders will put everything together for you, at a price.

My avatar is a picture of the mortgage docs I signed earlier this year, make sure you get a lawyer to read through the docs to ensure your not over exposed.

Mark

 

[grossreal]

hi all
The rule of thumb is a major will go to 60% of land and usually 100% of construct the mezz guys come in at the 60% to take it to 80% of land.
and you have to put up the other 20% of the land component and its this part that is where the fluid pens come into play.
with regards to a list of the brokers that have not done the right thing by me no problem send me an email and I will send you back whoa nd what they do.
Its not for a board nor is it some thiong that I would post here
as you would have read the post please be carefull.
bankwest will do 60+% land and 100% construct.
but so will alot of others
with regards to presales
there are no lenders now in the market that don't want presales from major lender when over 4 properties in the construction
alot of the mezz funders don't look at presales.
the rule of thumb is 30% of debt coverage so if the total loan to the bank is 1.2mil then they require 400k in presales after gst but they can ask for 50% debt coverage if you want a low interest rate.
and don't discount presales or it does discount the site for a lender.
don't try to present a deal yourself unless you know what you are doing as a lender will only accept a deal once for that client even if you st-ff up.
there are three ways to get presales.
cash deposit/deposit bonds and a buyer
renouncible notes.
insurance bonds/bank guarentees
from the name grossrealisation lending is my area and its the major part of what I organise.
thou I am moving into alot of different areas.
so ask away with regards to presales and lending