7 Secrets To Getting The Funding You Need
I see it every day, clients who don’t understand how the financing game works and why some deals get funded and others don’t. Here are seven secrets that will help you get what you need.
Valuation is everything. Private lenders are not in the business of betting on you; they are in the business of betting on your ASSETS. The reason private lenders don’t care very much about your credit score, or whether your a PAYG taxpayer, is that if things go sideways, they aren’t looking at you as their primary way of getting their money back - they’re looking at your assets. And they take a hard look at that. They do valuations on a forced sale basis, because they want to be able to get their money back quickly. They look at what’s going on in the neighbourhood, and whether there’s already unsold stock there. They feel better if they have recourse against more than one asset, because it spreads their risk. So valuation is key.
The lender is in it to make a buck. One of the lenders I work with says, “Some people see loans as loans; some people see them as a gift - I never lend to the second group.” Private lenders are all backed by private money, meaning that there’s some rich person or family behind the money that’s being lent out. Most of those rich people didn’t get rich by undervaluing risk, or overlooking opportunities to make money. They are hard, and they charge what the market will bear. That’s why short term money is so expensive - if you need a big chunk of money fast, it’s usually because you’re going to lose an even bigger chunk of money if you don’t come up with it. The lenders know that and charge accordingly.
Complexity is bad. Lenders don’t fund things they can’t understand, so the simpler you can make your deal, the more likely you are to get it funded. I and every lender I know have looked at deals and said, “It might be great, but it’s all just too complex. I’m out.” So keep it simple.
Location, location, location. Location REALLY matters when it comes to property finance. Sydney and Melbourne CBD are the easiest - there are funders lined up to provide money for deals in prime locations. The further you get away from those areas, the more difficult the deals are to fund, which usually shows up in higher rates and requirements around presales. Perth and Brisbane pay a premium over Sydney and Melbourne. Adelaide, Gold Coast, Hobart and Darwin pay a premium over Perth. Rural is more expensive than metro. And so on.
A consistent story helps. One of the things that’s almost impossible to fund is a new developer, who’s never done a development before, but who wants to jump into a $20M project that they’re going to run on their own. To a lender, that doesn’t make sense, in the same way it wouldn’t make sense for Nick Kyrgios to rock up to the Sydney Roosters and expect to play. He’s a great tennis player, but can he play in the NRL? A lender wants to see a history of successful projects. If you don’t have that history, they want to see you start with something small, and to use a reputable builder and get a proper QS report as you go along. The same with finances - if you ask for $20M, but your assets and liabilities statement says you’re only worth $250k, that doesn’t make sense to the lender. So think about the story you’re telling, and make it make sense.
Your assets and liabilities matter - a lot. As discussed above, the lender wants to see a financial story that makes sense - they don’t want to lend $20M to someone who’s only worth a few hundred thousand. They are also really interested to see how good or bad you’ve been at managing your own finances. If you haven’t been good at that, that’s ok - but the lender will probably want more security from you before they do the deal. They also want to see that you have enough resources to sort out any problems that come along. If the development goes over budget by 20%, do you have the money to deal with that, or will THEY have to deal with it. So think about how your assets and liabilities might impact your story to the lender.
If it looks too good to be true, it is. A sad fact about the private lending world is that some lenders are happy to see you fail. Typically, this is because they are either associated with a firm that does a lot of bankruptcy work or because they’d be happy to take your site over from you. The way they usually operate is that they give you very attractive LVRs (75% to 100%) with reasonable rates, but terms and conditions that are easy to violate. Perhaps it’s a monthly status report. Perhaps it’s a draconian late payment clause. Everything is good until you hit a small bump in the road - and there are ALWAYS bumps in the road when you’re a developer - and HEY PRESTO! - your 8% rate becomes and 18% rate, and you can’t get money from anyone else because all your assets are pledged to the current loan. In either case, things go sideways, it’s almost impossible to get out of, and you end up losing the project, and maybe more. So be careful about deals that look a lot better than other things you’ve seen in the market.