I regularly get contacted by desperate developers wanting to fund their project, frantic because they have committed their time, funds and or equity into a project only to find out that getting the funding is not easy.
Some of these developers are new to industry and it is rather expected that they may have trouble or perhaps have not yet learned the right way to approach funding a project. However, some are experienced developers that have been caught in the changing funding environment.
Below are some of the reasons why they run into trouble:
Bank appetite for funding developments has reduced
Banks have traditionally been the major source of property development funding. However, the appetite of the major banks is waning. Banks are tightening their lending criteria and requiring higher amounts of equity (lower loan to value ratios), profit margin and a larger amount of pre-sales, up to 100 per cent of debt cover, especially for inexperienced and new to bank developers. Some areas are now effectively off limits for bank development finance due to concerns of oversupply.
Furthermore, the major banks may impose further conditions/restrictions on developers above and beyond their stated criteria in order to further mitigate their risk. This can mean extra time is taken whilst the bank assesses and re-assesses the risk or all of the different aspects and this can cause delays for the developer who just want to get on with their developments and making money.
The tightening of bank requirements is pushing more developers who are sick of trying to jump through a seemingly never ending series of hoops from the banks to non-bank or ‘private lenders.’ These lenders have a more flexible approach to funding developments and allow developers to have much lower equity contribution (and higher loan to value ratios), many do not require pre-sales and are generally much faster than the banks at approving and releasing funds.
On the flip side, when you are using a non-bank or private lender, you can expect a higher cost to go with the greater flexibility and risk to them. For many developers, the extra cost of using a private lenders is not significant compared to their profit margin and when their equity is freed up…
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