Dave lets us know what happens when a buyer purchases a brand new townhouse that hasn’t titled yet. What does this mean, and how do the lenders treat it?

• It officially means that the subdivision hasn’t registered through the titles office. This can sometimes be delayed up to a few months, and the important thing for buyers to note is that it technically means they have bought off the plan
• Dave can discuss how lenders treat an off-the-plan purchase in terms of issuing formal approval
  • Differs between lenders:
    • Some will issue formal approval without the registration of sub-division and it will be a condition for settlement that the title is registered.
      • However if you get formal approval and then receive the loan documents, they are normally valid for 3 months – so if the title hasn’t been registered and settlement takes longer than 3 months, you need to go through the process again so it can be a tricky balancing act regarding timing.
      • Often the expected settlement date V the actual settlement date can vary by anywhere to 1 month to 1 year. 
      • It is important that you keep speaking to the developer or sales agent to gauge how things are tracking, but even then it doesn’t guarantee accuracy.
      • If things drag out, your personal circumstance can change, the lender selected policy can change, interest rate may increase, or government regulation can change all of which can negatively impact your borrowing capacity. 
    • Other lenders will not issue formal until the title is registered so you and your broker are waiting on tenterhooks for this to happen. 
    • Then when it finally does, you and your broker normally have a two week deadline to get from title registered to settlement – which means it is often a stressful process as the buyer may have to collect and provide more supporting documents, wait for formal approval, sign and return loan documents immediately, get any other documents together (like building insurance), have the documents certified by the bank all within two weeks.  

Building a multi-unit site is beyond just getting a residential loan approval. Dave talks our listeners through some of the challenges they need to consider.

Dave to discuss the challenges that developers face when financing land purchasing, land banking, development and building costs and pre-sales. Touch on commercial lending, specialised products and funds that have to be held in cash to satisfy the lenders.

Challenges for developers

1. First of all, there are essentially 3 tiers of development finance. Those who are building 2-4 usually will qualify for some kind of residential construction loan.
2. Those doing a medium size development that generally caps out at around up to $20m of lending. 
3. And then full bona fide multi-unit residential blocks that are large scale commercial developments. 
4. If you are building only 2 -4 properties, you should be ok to obtain residential lending, an 80% LVR, or even up to 90% with only building 2, your rates will be residential rates and the bank will do a valuation on the land plus the estimated end value based on the council approved plans generally which is known as an AS IF complete. Some may just value it on the land plus construction. 
5. If you don’t qualify for a resi loan, you will need to go via a commercial loan.  The upfront cost of purchasing land can be significant, and many lenders require a substantial equity contribution from the developer (70% LVR). This can be a barrier, particularly for smaller developers or new entrants. With these loans you may either be able to borrow 70% of the land plus construction costs OR the gross realisation value which is the estimated end value. Similar to the AS IF complete value for resi construction. These loans often only have a term of 3 years, a minimum loan size of $1m up to $20m.
6. Beyond that you are at the serious end of development finance.
7. Many lenders require in the commercial development space require a certain percentage of the project to be pre-sold to demonstrate market demand and secure the loan. Achieving these pre-sales can be challenging, particularly in a slow or saturated market.
8. Obtaining the necessary permits and approvals can be a lengthy and unpredictable process. Delays can impact the project timeline and increase costs, affecting overall feasibility, especially due to the holding costs from interest on the loan because of the delay in receiving the funds. This means during construction, you are paying a mortgage for longer without earning income from the project. If you land bank for a period, this goes for even longer. 
9. Development projects are susceptible to cost overruns due to unexpected issues such as construction delays, increases in material costs, labour shortages, or unforeseen site problems. These can strain the project’s budget and timeline.
10. Changes in the real estate market can affect both the cost of development and the potential sales price of the finished properties. A downturn in the market can lead to difficulties in selling units at the projected price, impacting the project’s profitability.

Overall, generally development finance at any level isn’t a straightforward journey.

Cate canvases some of the considerations for those who are trying to purchase optimal townhouse development site:

• A site where the build costs and projected sale costs stack up for the developer
• High amenity
• A location where the local planning dept will say yes
• Not a location that will be saturated with townhouses
• Locations where a quality product will sell well
• Crossovers for each so that no land is shared
• Limited overshadowing
• Great floorplan
• Family-friendly floorplan when the townhouse is a large family townhouse
• Good orientation
• A site where no land is wasted by awkward easements or setbacks
• The challenges people face when they want a subdividable site but don’t have the time/energy/resources to build it yet
• A site that can be financed … and this includes development costs.

Click here to read some of our supporting articles:

• Is a Townhouse Your Ideal Starter Home?
• Navigating the Complexities of Development Finance: Challenges for Property Developers
• Houses and units… where do townhouses fit?
• Townhouses, Subdivisions, Owners Corporation, …Shared Land?