I often find that people starting out on the journey to become a Property Developer believe finding deals is the hard part.
And don't get me wrong - finding the right deal DOES involve a lot of learning, research and work. But none of that makes a bit of difference if you get turned down for a loan.
Now, I know I talk about lots of creative ways to buy property without using your own money or serviceability, but let's put that topic aside for now and focus on the situation where you have the resources to finance the deal yourself.
You've found a cracker of a deal. You have enough equity to fund the deposit and run the deal. All that's left is to get your loan approved.
Here are my Top 10 Tips for making sure that's exactly what happens.
1. Residential or Commercial?
Before you even apply for a loan, know what type of loan you need. Getting your loan approved won't happen if you've applied for the wrong one in the first place.
If your property development deal is smaller, you fit into the residential finance space. If it's bigger, look at commercial. The line between the two is a little blurry, but you will cross over around the point where you're turning 1 site into 3 or 4 new sites / dwellings.
2. Broker or Bank?
Once you know the type of finance you need, you then need to decide who is the best person to help you get it approved.
Your choice will depend a lot on your personal network and knowledge, so I'm going to go with a rule of thumb here. If your deal is small, your financial circumstances are straightforward and you have a long history with a particular bank, then dealing directly with that bank may work well for you.
For anything outside that, a broker is likely to be the best option. But beware - if you're going to work with a broker, then pick one who understands the type of finance you need, as well as the financial circumstances you bring to the table.
A broker who mostly does standard residential home loans probably isn't your best choice. Instead, you should be looking for a broker who has a lot of experience in working with property developers, company and trust structures, and has good connections with non-bank lenders.
If you choose to work with a broker, spend time with them before you have a deal on the table. They can help you identify credit issues, get pre approval if needed, and compare policies of different lenders so they know which ones to approach when you have a deal.
And remember - ALWAYS tell your broker the truth. Enough said.
3. Be Prepared
I touched on this in a recent article "Getting Finance: Plan Ahead to Make Your Application Irresistible". The last thing you want to do is get a cracker of a deal lined up and your offer accepted, only to find out you don't have all the necessary paperwork to get a loan. If you're using a broker, talk to them about what's required and make sure it's ready.
As a side note, this also applies when you need joint venture partners or investors for your deal. You should be nurturing those relationships long before you've actually signed on the dotted line for a deal.
4. Know the Rules
All lenders have rules they work within. From your perspective, there are 2 types of rules:
Your job (together with your broker if you already know you mightn't be able to follow the rules!) is to know the difference. If any aspect of your application puts you into the second category, then you need a crash course in speaking the language of lenders.
Rules that are unlikely to be broken:
Rules that might be bent:
Although the lender might bend some rules, it's likely the loan LVR will also be lower or the interest rate higher, so be prepared for that. And again, read the article I linked to earlier in the "Be Prepared" section for ideas on what you might be able to do so the lender is more willing to bend the rules for you.
5. Know the Red Flags
Every lender has their own set of red flags. The big banks often have a whole forest of them! Choose your lender carefully if you're going to cause a flag-raising ceremony for any reason.
This is particularly important if you these two red flags apply to you:
Seriously, if that's you, work with an experienced broker - you're going to need them unless you're keen to either get rejected or end up with lousy loan terms.
6. Your Deposit
People often joke that banks won't lend you money until you can prove you don't need it, and I reckon you can apply the same philosophy to all lenders. So if you rock up with a deal and it's clear you didn't supply the deposit funds, they get nervous.
Add in a company / trust structure and that you're planning to develop the property... Well, let's just say they're likely to be so nervous they'll say no.
As a rule of thumb, they want to see at least 5% genuine savings. So if you're borrowing from the "bank of mum and dad" for your deposit, have the funds in your bank account at least 3 months in advance.
Or (and yes, I'm beginning to sound like a stuck record) work with a broker experienced in dealing with Developers. They'll know which lenders are more likely to accept your scenario - but as I've said before, you might end up with a lower LVR or higher interest rate as a result.
This is especially the case with commercial lenders. If you don't have hurt money in the deal, they'll still fund you if the deal is good enough; but expect to pay top dollar for it.
7. Vendor Finance
This is an interesting one. I'm talking about a situation where a vendor will accept 80% or 90% at settlement and leave the "deposit" in the deal as a loan, or is willing to accept a delayed payment (for example, after you've completed the development). This type of arrangement means you only have to get a loan to settle, not find equity as well.
In the case of residential finance, they avoid it like the plague. Commercial finance, on the other hand, is a little more open to the idea, as it's much more common when it comes to selling a business.
From your perspective, then, you might want to reserve vendor finance for a deal where you know you're going to end up with 4+ lots or dwellings, as you will have a better chance of getting your loan approved. Be warned, though - the lender may still want to see hurt money in the deal.
8. Using Structures
If you're using some type of structure, then be forewarned that it's all just going to be that much harder. Make sure you know what paperwork you're going to need and have it ready. Allow more time to get your loan sorted. And then add a little bit more time!
9. Structure Name
This is potentially more relevant if you're planning to get residential finance, but if you want to use a structure for your property development, pick a relatively generic name like ABC Holdings or ABC Investments. Avoid words like "developments" or "construction".
Why? One of the reasons residential finance has lower rates than commercial is because they're banking (haha) on you being in the loan for 25 to 30 years. Their expectation is that for all those years you'll be paying them interest, and that's how they make their profit.
So if they think you're going to buy a property, develop it and then sell up in a couple of years' time, they're not going to be happy.
10. Keep It Simple
Do everything you can to keep your application simple. Try to eliminate any potential pain points for the lender before you even apply. And if your application is going to be something other than simple, getting an experienced broker involved is likely to save you a lot of headaches.
So there you have it - my Top 10 Tips for Getting Your Loan Approved. Now you can put a plan in place so you're ready when you find your next development deal.
And don't get me wrong - finding the right deal DOES involve a lot of learning, research and work. But none of that makes a bit of difference if you get turned down for a loan.
Now, I know I talk about lots of creative ways to buy property without using your own money or serviceability, but let's put that topic aside for now and focus on the situation where you have the resources to finance the deal yourself.
You've found a cracker of a deal. You have enough equity to fund the deposit and run the deal. All that's left is to get your loan approved.
Here are my Top 10 Tips for making sure that's exactly what happens.
1. Residential or Commercial?
Before you even apply for a loan, know what type of loan you need. Getting your loan approved won't happen if you've applied for the wrong one in the first place.
If your property development deal is smaller, you fit into the residential finance space. If it's bigger, look at commercial. The line between the two is a little blurry, but you will cross over around the point where you're turning 1 site into 3 or 4 new sites / dwellings.
2. Broker or Bank?
Once you know the type of finance you need, you then need to decide who is the best person to help you get it approved.
Your choice will depend a lot on your personal network and knowledge, so I'm going to go with a rule of thumb here. If your deal is small, your financial circumstances are straightforward and you have a long history with a particular bank, then dealing directly with that bank may work well for you.
For anything outside that, a broker is likely to be the best option. But beware - if you're going to work with a broker, then pick one who understands the type of finance you need, as well as the financial circumstances you bring to the table.
A broker who mostly does standard residential home loans probably isn't your best choice. Instead, you should be looking for a broker who has a lot of experience in working with property developers, company and trust structures, and has good connections with non-bank lenders.
If you choose to work with a broker, spend time with them before you have a deal on the table. They can help you identify credit issues, get pre approval if needed, and compare policies of different lenders so they know which ones to approach when you have a deal.
And remember - ALWAYS tell your broker the truth. Enough said.
3. Be Prepared
I touched on this in a recent article "Getting Finance: Plan Ahead to Make Your Application Irresistible". The last thing you want to do is get a cracker of a deal lined up and your offer accepted, only to find out you don't have all the necessary paperwork to get a loan. If you're using a broker, talk to them about what's required and make sure it's ready.
As a side note, this also applies when you need joint venture partners or investors for your deal. You should be nurturing those relationships long before you've actually signed on the dotted line for a deal.
4. Know the Rules
All lenders have rules they work within. From your perspective, there are 2 types of rules:
- Rules that cannot be broken
- Rules that can be bent, if there's a good enough reason
Your job (together with your broker if you already know you mightn't be able to follow the rules!) is to know the difference. If any aspect of your application puts you into the second category, then you need a crash course in speaking the language of lenders.
Rules that are unlikely to be broken:
- Maximum LVR (loan to value ratio)
- They don't lend for development
- Land size limits
- Minimum dwelling size limit
- Serviceability requirements
Rules that might be bent:
- Time in your job
- Type of property
- Credit history issues
Although the lender might bend some rules, it's likely the loan LVR will also be lower or the interest rate higher, so be prepared for that. And again, read the article I linked to earlier in the "Be Prepared" section for ideas on what you might be able to do so the lender is more willing to bend the rules for you.
5. Know the Red Flags
Every lender has their own set of red flags. The big banks often have a whole forest of them! Choose your lender carefully if you're going to cause a flag-raising ceremony for any reason.
This is particularly important if you these two red flags apply to you:
- Self-employed with foreign income
- 2 borrowers, but only 1 is on title
Seriously, if that's you, work with an experienced broker - you're going to need them unless you're keen to either get rejected or end up with lousy loan terms.
6. Your Deposit
People often joke that banks won't lend you money until you can prove you don't need it, and I reckon you can apply the same philosophy to all lenders. So if you rock up with a deal and it's clear you didn't supply the deposit funds, they get nervous.
Add in a company / trust structure and that you're planning to develop the property... Well, let's just say they're likely to be so nervous they'll say no.
As a rule of thumb, they want to see at least 5% genuine savings. So if you're borrowing from the "bank of mum and dad" for your deposit, have the funds in your bank account at least 3 months in advance.
Or (and yes, I'm beginning to sound like a stuck record) work with a broker experienced in dealing with Developers. They'll know which lenders are more likely to accept your scenario - but as I've said before, you might end up with a lower LVR or higher interest rate as a result.
This is especially the case with commercial lenders. If you don't have hurt money in the deal, they'll still fund you if the deal is good enough; but expect to pay top dollar for it.
7. Vendor FinanceThis is an interesting one. I'm talking about a situation where a vendor will accept 80% or 90% at settlement and leave the "deposit" in the deal as a loan, or is willing to accept a delayed payment (for example, after you've completed the development). This type of arrangement means you only have to get a loan to settle, not find equity as well.
In the case of residential finance, they avoid it like the plague. Commercial finance, on the other hand, is a little more open to the idea, as it's much more common when it comes to selling a business.
From your perspective, then, you might want to reserve vendor finance for a deal where you know you're going to end up with 4+ lots or dwellings, as you will have a better chance of getting your loan approved. Be warned, though - the lender may still want to see hurt money in the deal.
8. Using Structures
If you're using some type of structure, then be forewarned that it's all just going to be that much harder. Make sure you know what paperwork you're going to need and have it ready. Allow more time to get your loan sorted. And then add a little bit more time!
9. Structure Name
This is potentially more relevant if you're planning to get residential finance, but if you want to use a structure for your property development, pick a relatively generic name like ABC Holdings or ABC Investments. Avoid words like "developments" or "construction".
Why? One of the reasons residential finance has lower rates than commercial is because they're banking (haha) on you being in the loan for 25 to 30 years. Their expectation is that for all those years you'll be paying them interest, and that's how they make their profit.
So if they think you're going to buy a property, develop it and then sell up in a couple of years' time, they're not going to be happy.
10. Keep It Simple
Do everything you can to keep your application simple. Try to eliminate any potential pain points for the lender before you even apply. And if your application is going to be something other than simple, getting an experienced broker involved is likely to save you a lot of headaches.
So there you have it - my Top 10 Tips for Getting Your Loan Approved. Now you can put a plan in place so you're ready when you find your next development deal.
