There’s an old saying that sums up the relationship between conventional bank finance and private lending finance—“horses for courses”.
A common misconception and error made by property developers is an improper comparison made between the two finance options.
Whilst it may seem that these two product offerings are in competition with one another, the reality is often that they are in fact two very different solutions with two very different user-cases.
Both are cars? Yes.
Both get you “from A to B”? Sure.
Both cost the same? Don’t we all wish.
It goes without saying that rarely any serious car buyers would make a comparison between two drastically different car offerings, yet they are both technically forms of automotive transport.
Why? Well, in large part, it’s about how a Ferrari gets you from A to B, amongst other things.
In the case of conventional bank finance versus private lending, whilst both are technically forms of finance, it’s the how that separates them.
For property developers, finance is more than simply “money”. Rather, finance for property developers is something akin to a silent partner in a project—giving a project confidence and firing power to propel itself towards completion.
Given the importance of finance to property developers, most developers would agree that finding the “right” finance is crucial to a project’s success.
The “right” finance to a smart property developer extends beyond simply and bluntly comparing interest rates and fees alone.
For some developers, conventional bank finance makes perfect sense and looking for private finance would not only be unwise, it will also likely be more expensive.
However, for many property developers (increasingly so in current times), private finance makes much more sense due to how private lenders extend private debt to property developers.
Throw a stone in any direction and you’ll likely run into somebody with a horror story about the amount of time they’ve wasted waiting on a conventional bank to approve or reject a loan application.
For property developers, time means holding costs, which means money—something their projects can’t afford to waste.
Whilst banks assess loans typically in increments of months, private lenders typically are able to assess a loan and issue full approvals in 1-2 weeks.
Even more, if there is an urgency attached to an application, many established private lenders can settle in days.
For a property developer that isn’t too keen on waiting months or years for a bank to kick into gear, either on account of urgency or simply because they wish to improve their internal rate of return by acting quickly, private lending makes much more sense than a conventional bank.
In such circumstances, a comparison is somewhat useless, as the difference in timing between the two options is arguably in orders of magnitude.
Conventional banks aren’t exactly well known for leverage. They tend to be conservative with leverage—something that most property developers would rather avoid.
Private lenders can extend leverage as high as 75 per cent for property developers in search of high leverage. Whilst such high leverage would not be possible (or very unlikely) for a conventional bank, it is somewhat commonplace in the private debt markets.
Furthermore, private lenders are rather flexible in how they are able to extend their leverage. This includes tailored finance solutions such as: stretch-senior, mezzanine funding and/or equity (preferred equity and/or hard equity).
For a property developer seeking high leverage on either a settlement/refinance or a construction project, there is no real proper way to compare a bank to a private lender in terms of leverage.
Where banks typically lose steam at 50 per cent to 60 per cent, private lenders are willing to extend to 75 per cent on given loans.
For property developers seeking maximum leverage, they need a lender willing to provide it, in many cases meaning a lender that isn’t a conventional bank.
To be blunt, any property developer seeking low/no presale construction funding will likely face an uphill battle with conventional banks. Experience dictates that banks typically seek 100 per cent to 110 per cent of debt coverage in qualifying presales from property developers.
Presales are becoming harder to achieve on account of nervousness in buyer sentiment due to recent high-profile industry scandals.
As such, in many instances, property developers are having to offer large discounts and incentives to attract presales.
Many developers have locked in revenues too early in order to satisfy such high presale requirements of banks and have learned the hard way that this approach can be expensive in a future market that has matured at the time of completion and settlement.
It is common for property developers to have bank approvals in place but still seek out private lenders because their bank approvals have presale requirements that they don’t want to be held to.
Such property developers don’t look to compare the banks rates and fees to those of the private lenders’ because they simply need the private lending solution—being no/low presales.
Dealing with conventional banks can rarely be described as something “personal” by property developers. Unfortunately, the nature of conventional banks means they are largely bureaucratic and process driven - leaving little room for flexibility in service provision.
Private lenders ordinarily differ insofar as they are able to offer truly customised service outcomes for property developers. This can mean:
Approachability of decision makers
Speedy turnaround times
Flexibility in provision of terms and conditions
Development of custom finance documents to meet specific developer requirements
For a property developer seeking “old-school” banking service of previous years, private lending offers a good option. Trying to compare a public banks’ level of service provision to a smaller and more agile private funder is futile - they’re simply different offerings for different clients.
The moral of the story here is that private lenders suit certain types of property developers—not all.
For those property developers, comparing private lending options to conventional bank options doesn’t make much sense, as they serve different purposes.
It’s very common for property developers to have certain projects that are bank funded and certain projects that are privately funded.
For those projects that require higher leverage, lower presales, speed and specialised service—private lending may be a great option.
For assistance in finding the right private lender, the team at www.privatelendingbrokers.com.au are always available for an obligation-free discussion.
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