Development or Commercial Funding is a very profitable and at the same time risky business to finance.
Australian Mortgage Centre first piece of advice for prospective developers is to remember that borrowing for development is very different from borrowing for investment.
Financing property development is a lot riskier for lenders and therefore their requirements are more stringent. If you don’t have much experience in the field, banks may have an issue advancing any funding. Until you get a good reputation or a good track record, you should either bring an experienced person into your development team – such as a project manager or development manager – or use a good mortgage consultant, “because they’re going to understand what the different lenders’ requirements are”.
Every lender also has its own ideas about what constitutes a feasible project. The level of equity required, the profit margins expected and the risks they are willing to take will vary widely. Some lenders draw a distinction between ‘residential’ projects and ‘commercial residential’ projects – the difference lies in the number of units to be built.
The finance submission should start with an executive summary, outlining the broad scope of the proposal and the amount of money required. A thorough feasibility study should come next – but you can’t just punch random figures into an Excel spreadsheet and then massage them until they show the required profit margin. You need to show your working.
To increase your chances of success, the suburb you’re looking to develop in must show strong demand and have good access to infrastructure and transport. Lenders will definitely take these features into account.
Once the lender is satisfied that the numbers look reasonable, the valuers will be sent out to value the Gross realisation value of the development. Unlike the valuation for a simple investment property purchase, the development valuation process is always exhaustive. A professional valuer from the bank’s panel of independent firms will be appointed, and they will certainly uncover any issues that could potentially derail the development project.
The valuer will go through the feasibility study with a fine-toothed comb and ensure that you have included all of your expenses. Even if you’re not planning on selling the project, they will include selling and agents’ costs, just in case you default and the lender needs to liquidate
Finally, even if a development lender does accept your application, unforseen errors could possibly leave you exposed to a cost blow-out or even a mortgagee repossession if these are not mitigated prior.