We often work with clients on purchasing turn key or off plan properties and there is some work to navigating an approval with the banks for one of these purchases not to mention some key risks that can be mitigated by asking some simple questions. Below we look to address what we consider the top 5 to be;
When will you get underway on the project and when is expected completion?
Most banks are happy to give an approval for the purchase of a property that is valid for 90 days. Some will, however, also look at an approval that is valid for 12 months for turnkey or off-plan purchases which greatly reduces any risk for a purchaser by securing that funding at the point of signing the contract thus avoiding market changes that could impact on your ability to secure funding at the point of needing to settle the property.
What is important as part of the process to secure a 12 month approval with the bank, however, is confirmation of the expected completion date as banks will typically require this to be within 12 months of the approval. They want to know that the approval will continue to be valid at the time of settlement.
This often isn’t achievable when signing up for an off-plans purchase in multi unit developments as the typical delivery time on a project is 12 months and if you are signing up for the purchase prior to construction commencing you could be more than 12 months out from completion.
The workaround for this is to secure the 90 day approval mentioned earlier and subsequently convert that to a 12 month approval once we can tick off the relevant conditions, including construction commencing. You do need, however, some certainty the project will be underway within those 90 days.
Another factor that is important when requesting a 12 month approval is a full registered valuation. This will need to confirm both the value of the property as of today, and the expected valuation upon completion of the build. This provides the lender with greater certainty over their exposure and security to help mitigate the increased risk of the longer term.
2. Are you reliant on other sales to get the project underway / secure your finance?
This is an often missed but important question to ask and links to question 1. Frequently to secure the finance for a development there will be a requirement for pre-sales a developer will need to obtain before the lender will drawdown on their funding. If it is a larger development (think 20+ units) there will almost certainly be a pre-sale requirement. This then normally means the developer cannot get underway on the project until they secure these sales as cannot pay the contractor without the finance.
Understanding how many sales are needed and how many the developer has secured this far can give you an indication as to the likelihood and timing of a project getting underway. This can inform your decision on the purchase if it impacts your ability to secure a 12 month approval. A well located development in a strong market is unlikely to have any issues with pre-sales, however, a project that is outside of a main city centre or if the current property market (such as now) is soft it may be a bigger push for the developer to secure the sales and therefore a longer time to delivery. The larger the project the more likely it will require sales as well. Projects of less than 10 units can normally attract funding reasonably easily without the need for any off-plan sales, however, larger developments will often have a requirement for sales and therefore may be slower to get going.
At Lateral Partners, we have seen clients who have been stuck in a contract with a long sunset date unable to exit despite a development not moving forward. It can mean that your capital (deposit) is tied up in a purchase contract for 2+ years depending on the sunset dates. There are many requirements in a sale and purchase contract for an off-plan purchase that the funder of the development will require to rely on the sale which often means the sunset dates are set well in the future, this in itself isn’t the end of the world so far as you can secure some confidence yourself in the delivery of the project.
Having some knowledge to the developers requirements to get a project underway, including sales targets, is therefore crucial to securing comfort with your purchase.
3. When will you be applying for titles?
When you are borrowing against a property you will take out a mortgage from a lender. The lender registers this mortgage against the title of the property and therefore requires this title to document their loan.
Under a resource or subdivision consent for a development there will often be certain requirements the developer will need to meet before they can apply for the titles. This often includes the connection of services and pouring of the driveway.
Historically developers have left the pouring of the driveway and application for titles towards the end of the project. The reason for this was that if the driveway is poured early it will often be damaged by the heavy vehicles and trades on site during construction and require to be re-poured later in the project.
This works well if the council is efficient in producing the titles, however, in todays market these applications can often take upwards of a month to complete. We, therefore, are seeing more developers bring this forward in their programme to avoid having completed stock that can’t be settled whilst having a fully drawn development facility incurring interest costs.
The other advantage this can bring, however, is allowing the purchasers to document their loans earlier. If you can tick off your remaining conditions on your loan offer and move towards documentation of the loan early it will allow a few things. Firstly, it gives you an early option to secure your interest rate. This may not be as crucial today as we expect rates to fall over the next year, however, the previous few years as rates were climbing this could have made a significant difference in your end borrowing costs.
It also can remove some pressure at the end of the project where typically there is a requirement to settle 10 – 15 days after title which can be a tight turnaround with a bank. Securing documentation early allows this to be easily managed.
Not all banks are able to achieve this but work with your broker to understand this and if the developer is titling early it could be advantageous.
4. What previous projects have you completed?
This is an obvious question but sometimes missed. Like anything in life, we want to engage with businesses who have a pedigree and reputation for delivery and quality. Property development is a risky and capital intensive undertaking and therefore working with businesses that have experience is valuable as they have demonstrated an ability to deliver projects and manage these risks.
You can also dive a bit into those previous developments and look to understand if there were any issues on delivery and how those were addressed or, best case, they were delivered on time or early without issues.
Lastly, often the best a property will ever look is in the renders designed prior to construction. If a developer has completed previous projects and you can gain access to these you will get a good feel for the product they deliver helping you make the best informed decision.
5. What other projects have you got underway or in the pipeline?
This links to the previous question a little but is also vital to understand. As mentioned earlier, property development is a risky and capital-intensive undertaking. If a developer has many projects underway or in a pipeline there is a greater level of risk that there could be issues that impact their ability to deliver the project you are interested in buying a property in.
3 things to look out for are;
- How big are the other projects they have in the pipeline or underway relevant to what they have completed previously?
- If they normally complete projects of 4 – 6 units and suddenly are looking at projects with 20+ units then there could be some concern about their ability to manage projects of that scale.
- How many have they completed before and how does that compare to the number of projects they currently have underway?
- Developers that do well often have a tight control on their contractors and subtrades. If they are expanding then they may be working with new parties bringing uncertainty to the project.
- This may also effect their funding relationships and capital stacks in the project. In simple terms, the more you do the more capital you need OR less capital you have in each project which can increase the risk and tolerance for cost or time overruns in projects.
- Where are the projects located?
- If they are beginning to look at projects further afield (i.e. different cities) then this can present a project management risk as they may no longer be able to keep as tight a control over the project.
Overall, there are a number of things you should ask a developer when looking to buy off plans and the above are 5 things we recommend querying. You should always engage with your financial adviser when working through that process as well to ensure you can best manage the loan application process and financial risks.
If you are looking at a turnkey purchase reach out today!
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