When the property market is running strong opportunists and entrepreneurs come from everywhere to get a slice of the action. It’s the notion of making large profits in a relatively short time frame that seduces many to try their hand at property development.
The truth is funders see many hundreds of applications each month and they have the opportunity to pick only the very crème of the crop. Many projects will not see the light of day, sot what makes a project appear successful on paper? – well the answer is – “it depends”.
It’s best to spend a moment in the funder’s shoes and think along the following lines.
• Will we get our money back from this project?
Sounds obvious enough, almost simple, but what are some of the key issues that the funders explore before agreeing to fund a project?
• The sponsor’s experience, track record and reputation.
• The sponsor’s financial position and ability to meet unforeseen costs.
• Will the project return an acceptable profit margin?
• Will the local market accept the product and pricing?
• How will the project be marketed?
Again the above points seem relatively straight forward almost obvious, but remember the funder has seen 10 other projects across his table this week where each developer thinks his project is a “must do” deal.
A friend of mine banked the late Alan Bond at the height of his career and once told me a story about their regular dealings. Alan would ring, “I need to see you urgently, I have a must do opportunity”. They would meet, Alan was convinced that this was his best deal ever, “sorry Allan we can’t help with that deal” my friend would reply. Immediately Alan would pull another deal from his brief case, “well this deal is even better”, “sorry Alan can’t do that either”. Not phased, Alan would whip out another deal “well wait I’ve saved the best deal for last”. Again my friend would reply “sorry Allan we can’t do that deal either”. The moral of this little anecdote is you need to cover the bases, forget about making deals sexy. Get back to basics and show the bank how they are going to get their money back and what your contingencies are. The funders not interested in the glossy photos, they are interested in the real substance you can bring to the table.
Let’s elaborate on the points listed above to enhance your application.
• Experience – you can’t create experience, but you can surround yourself with advisors who can add experience in areas you may lack. Instead of arguing to leave out consultants to save money, offer to bring them in to build credibility.
• Financial position is a numbers game, you need to be able to match the size of your projects and possible contingencies to the size of your wallet. Can you cover the unexpected? Don’t get ahead of yourself, success generally spurs developers onto bigger deals and deal stacking. When the market turns or funding appetites change you don’t want to be left with land at various stages of approval. Your profits will quickly disappear.
• Will the property return a satisfactory return on equity and is it really worth the risk of starting? Do your homework and seek feedback. If the deal is getting knocked back, maybe there is a good reason.
• Look to the local market to test the product and your pricing. Local buyers are deemed to be the best informed and will give the project credibility.
• Alternatively, the lure of selling to overseas buyers brings risks. Overseas buyers are difficult to pursue if they do not complete the transaction and for this reason most funders will limit the percentage of allowable pre-sales to foreigners to mitigate this risk.
• Presales are commonly required to cover approximately 80% -120% of the debt before the funder will commence a project. As tough as this seems, this goes a long way to giving your funder comfort that their money will be returned without hassle. The old adage of “people won’t buy off the plan, they want to see the property first” won’t go down well with funders.
• Marketing of the project is critical given the presale requirements. Be sure to check the credentials of your chosen marketers and their ability to perform.
The GFC was only a few years ago and is still fresh in funder’s minds. The tide turns quickly and in recent times funding has started to tighten up. Private funders might be the answer as they have a more generous attitude to lending, however remember this comes at a risk. They will charge you more for this risk and just because they agree to fund a deal does not mean it will succeed.
Before approaching a funder ask yourself have you done your homework? I would encourage you to consult with your advisors, think of it as a dress rehearsal. It’s better to have a few dry runs to perfect your flaws before facing the funder. Remember, everyone thinks their project should be done, but ask yourself will the funder get their money back with no hassle and allow you to move into the next project?
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.