Lending for developers is different from lending to mum and dad, residential property owners
Published 10:15 pm 7 May 2019
Did you know that lending for developers is different from lending to mum and dad, residential property owners? DG Institute Founder and CEO, Dominique Grubisa explains why commercial lending for a developer is different from residential lending. How commercial lending is actually easier and finally where to start if you’re looking to get financing for development.
Having trained hundreds of successful developers and watched the deals that they do, I can tell you that there is a world of difference when it comes to the way they finance their deals. You see, developers don’t do the same thing that mum and dad investors and owner occupiers do when it comes to property.
They use a different arm of the bank, different lending criteria. When we buy a normal residential property, we get a residential loan and that is regulated by APRA, the Australian Prudential Regulation Authority. They control how lenders advance finance to investors and to owner occupiers and there are lots of rules around that.
Right now, it’s harder to get a loan because of the Royal Commission, we’ve got higher lending standards and a lot more compliance involved and APRA is really getting a stranglehold on how people can borrow.
There’s less and less credit for residential investment but the development world and loans to developers are not regulated by APRA. It’s part of the bank that comes under discretionary lending – that means there are no rules, there are no regulations.
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They look at it as a deal and their questions are:
- Is there a risk here?
- Is this a profitable deal?
These are all that they worry about. Commercial lending is deal focused – not borrower focused. When you’re borrowing to buy a home or a residential property – whether you’re buying it as an investment or to live in, the bank will look at you. They’ll assess you and responsible lending laws say that they’ve got to actually do a lot of work. They’ve got to make sure you can afford it, they’ve got to get your tax returns, your pay slips, what you spend each month, your expenditure.
A whole of stuff comes under the microscope and there is a lot of red tape around what, how, and who they can lend to. However, if you’re a developer, they’re not focused on you – they’re focused on the deal.
They’re going to ask:
- How much money do you want?
- How long do you want it for?
- What are we going to get out of this?
- What’s the profit in this development?
Development is about getting other money in to do the deal and it doesn’t have to be your money. Even the billionaires don’t use their own money and the beauty of it is if you’re doing a $20 million dollar development, the bank isn’t going to say to you, well, we need to see that 20% deposit, we need to make sure that you’ve got an income to service debt of $20 million dollars.
They don’t look at that, they look at:
- What is the profit in this deal?
- Are there pre-sales?
- Have you sold any off the plan?
They’ll have those sort of requirements which is fantastic news for you because what you really need are the knowledge and the connections to be able to do development – not the bank balance.
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Isn’t that refreshing? Even though it’s hard work to have to get knowledge, it’s not dependent on you having money and you don’t need money to make money. That’s just an excuse! You just need to have the knowledge of what to do and how to do it to find that deal to present to lenders and money partners to fund your vision of building that development.
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