There was an interesting article in AFR this week about the rise of the number of mortgagee in possession development blocks currently available in Sydney, this rise was attributed to Private Lending. The article made several intriguing points, some of which were valid. Some of which, unfortunately, were generalisations that were clearly reaching for an angle.
Private Funding is on the increase in Australia. Tighter credit controls within banks, changes to policies, and lack of appetite are all causing a drought of funds for property developers.
Private Lending doesn’t mean you are an unworthy borrower from a credit perspective. Or that you are “dodgy”. Or that your project is without merit.
Private Lending is a facilitation tool.
Private Lending allows you to continue your project so you can get your pre-sales target for your bank. It affords you the opportunity to take advantage of a last minute supplier offer because you can have the cash flow available quickly to secure the offer. It allows you to buy and hold a block of land until such time as you are ready to develop it. Private Lending allows you to turn your “need” into a “done”.
Property Development is not for everyone.
The article, however, does make a good point regarding people who have purchased a block or parcel of land with dreams of making their fortune (or just a “quick buck”) through developing it, only to discover when crunch time comes that they don’t have the skills, abilities or understanding to make it happen.
We frequently receive calls for funding from first-timers who aren’t familiar with the most basic of development terms like ‘Q.S.’, ‘GRV’ or even ‘D.A.’. Our advice to these requests is always the same: “We don’t believe you have the skills, knowledge or understanding to take on a project of this scale at this time. We can point you in the direction of qualified project managers you can speak with to fully understand what you are trying to achieve and who can assist you with your development goals. Once you have undertaken this step, please come back to us and we will be able to assist”
Sometimes they do. And when they return to us they understand the magnitude of what they are proposing to undertake. They have gathered a team of experts to guide them through their first development. They have a completed and feasible proposal and can speak to merit of their project. And we help them. And it’s glorious.
No one wants to see a failure.
At the end of the day, no one wants to see someone lose their property. No one wants to see a goal or dream fall flat, leaving a trail of devastation behind them. But to attribute losses to Private Lending is to search for someone to blame, instead of reflecting on the validity of the deal and the strength of the skills of the borrower.
Private Lending doesn’t need to see your balance sheet, or know the name of your dog.
Private Lenders assess the proposal, based on the merit of the proposal.
They ask questions to understand: What is the desired outcome? When it’s complete, will the development be worth the dollars you are hoping to achieve? How much ‘skin in the game’ do you have? Is the development in an area that will support this type of development?
I could go on.
Private Lending is specific lending, designed to facilitate your proposal’s ability to progress. It is short term, the rates are higher and reflect the risk.
An example of Private Lending
Think of it this way (this is an actual deal we placed with a Private Lender earlier this year):
You have plans to build a small block of 12 apartments. You purchased the land 3 years ago. Based on the advice you received from your family’s long-term banker, the deal was a goer. The bank was happy to lend you the funds to complete your development.
Fast forward three years, you have earned (yes, earned!) your DA from Council and have signed a contract with your builder, everyone is on-board and ready to go.
You approach your bank only to find that your family banker (he who promised you your funding) has retired, and the bank’s “policy has changed”.
They aren’t going to lend you the funds until you can show that you have pre-sold half of your proposed apartments.
Now, you ask yourself, “How am I going to sell something that doesn’t yet exist? We haven’t turned soil, there is nothing coming out of the ground even to show. I have a block of land that is now worth slightly less than I paid for it. I still believe in my development, what are my options?”
The answer to that question, is Private Lending.
Private Lenders will loan you the funds to get your development started, so you can get those pre-sales happening. Once you have your pre-sales you can refinance to your bank and continue your project.
The risk to the Private Lender is reflective of the reward to you. You get your development funded and sold. End of story.
Talk to us
If you are in a position with a lender who isn’t able to work with you through your development, IBN Direct can help. We have a panel of over 600 Private Lenders who have the appetite and the ability to fund development deals.