Development finance is probably one of the hardest types of finance to get approved for.
A bank traditionally would want the project pre-sold. By that I mean, they’d want the homes that are being built to be sold before the finance is approved. That poses a problem for a developer as they generally would have to discount those homes to get them sold off the plans. As you can imagine, someone would likely pay a higher price for a home they can walk through and see and touch rather than paying for a plan off a piece of paper, hoping that in 12 months, it’ll eventuate as they think or feel that it should.
So developing can give up quite a margin by pre-selling the project. And most of the developers I deal with, would prefer to pay a slight premium to fund the project without pre-sales, and that’s typically done through non-bank private lenders, which are more flexible in many ways.
Also, developers can spend quite a substantial amount of money having quantity survey reports and registered valuations done at the outset before the bank would even give approval for their project. Often we can avoid those requirements dealing with private lenders and on a six house development that could save anywhere from $15,000 – $40,000 dollars in professional fees for valuations in quantity survey reports. The bank might want those updated at each stage of the project, whereas a non bank or private lender would typically come out with them or with the broker and see the progress and make their own assessment in terms of value and cost and review the budget.
So development finance is something that’s always been more difficult to obtain, but there are plenty of options around. It’s just a matter of finding the one that’s priced well and that offers some flexibility in terms of the drawdown process. Interest rates for development finance at the moment would typically start somewhere around 7.5 to 8 percent and range from there to 12 percent, depending on the risk and size of the project.