The three month rule

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Too many developers focus on the interest rate rather than the overall cost of finance.

Banks traditionally require presales before construction can commence. Presales required by banks are currently at high levels and are likely to go even higher. Presales are getting harder and more expensive to achieve. Most marketers prefer to market product which will settle within 90 days as it is an easier sell and they have to wait less time for their commissions. Unconditional pre-commencement sale contracts are also now more difficult to achieve as end purchaser’s financiers will generally want a “subject to valuation” clause which makes end purchasers more hesitant about going unconditional on their purchase contract. Media about APRA (regulator of the banks) pushing banks to limit investment lending does not assist.

Loan to value ratios (LVRs) and total development costs (TDCs) for bank construction lending are currently quite low and are likely to get even lower. This increases the amount of equity required for a project and further increases the real cost of funding from banks.

Private lenders generally require no presales or a substantially reduced level of presales from those required by the banks. They also lend at higher LVRs.

When you add into the price of funding, the cost and project delays occasioned by achieving presales and the cost of the additional capital bank finance required, it substantially increases the real cost.

Private lenders are generally owner operated which should translate to better service and direct access to the decision makers. The value of certainty and service should be factored into the price of finance.

As a general rule, I endeavour to work on the principle that if GPS can reduce the time frame of a project by at least three months then we are competitive in overall costings to the option of obtaining finance from a bank.

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