When embarking on a development project, one of the initial decisions to make is whether to follow a pre-sale or on-the-spot sale model. This choice carries significant implications when it comes to recommending a loan at Summit Funding, as each approach has its unique set of advantages and disadvantages, depending on the prevailing economic conditions. Key factors to consider include potential access to loan capital, protection against market volatility, and the assurance of meeting projected timelines.
Traditionally, securing development financing has often hinged on achieving a specific number of pre-sales, a requirement imposed by lenders before they approve a mortgage. Sometimes, this threshold can be as high as 60%, serving as a litmus test for a project's feasibility. The idea is that this level of pre-sales provides lenders with confidence in guaranteed returns and full repayment of the loan. However, this metric may not always reflect the actual health of a project. Instead, a more reliable indicator of a project's sustainability and profitability could be found by examining the expertise of the development team and ensuring their financial standing is solid.
The insistence on pre-sales places additional financial burdens on a project in the form of upfront marketing expenses and real estate agents commissions. Often, these costs are deducted from the project's equity, reducing the total amount the developer can borrow. If the pre-sales target isn't met, developers may need to resort to a costlier mezzanine loan to bridge the gap. Whilst you can access mezzanine debt through Summit Funding being pressed to do so because of a pre sales requirement can reduce profitability when compared to the higher costs of such lending. Furthermore, reaching the elusive 60% pre-sale mark can result in an indefinite project start date. Selling properties takes time, and until pre-sales are secured, funding remains uncertain, and construction cannot commence. This introduces the risk of delays and potential contract breaches with buyers if the agreed-upon deadlines are not met, further inflating marketing and realtor expenses.
While pre-sales offer the advantage of locking in a price for the property and shielding it from market volatility, they can also lead to reduced profits when carried out in the context of a rising market. By selling upon project completion, when property values are higher, developers can maximise their returns. However, in a steadily appreciating market, developers miss out on the true value of the project once completed. Conversely, locking in sales at the project's outset during a depreciating market can protect the developer from the loss in value when the project is finished.
Regrettably, this predicament can result in developers forfeiting substantial profits if they are compelled to opt for a pre-sale strategy to secure funding. Moreover, many developers are encountering situations where pre-sales are not a viable option. These cases may involve scenarios such as constructing duplexes, small multi-unit projects, or retaining the properties for lease upon completion. Securing funding for these projects can prove nearly impossible through conventional lenders, which is why Summit Funding accesses specialised loans for developers with no pre-sale requirements.
This funding solution is tailored to support developers looking to preserve higher profit margins or those unable to secure pre-sales. This loan helps mitigate significant financial risks while saving time and energy that would otherwise be spent securing pre-sales. While we can access traditional pre-sale loans sometimes the no pre sales funding can provide a higher profitability result with loans up to $30,000,000.
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