How many presales do I need for a small unit development?

Not every signed contract counts. Lenders want unconditional contracts with a cash or bank guarantee deposit of at least 10 per cent, exchanged at arm's length with buyers who are not related to the developer, with a sunset date that gives the project room, and with no rebates or side agreements. Many lenders limit how many presales can go to a single buyer, and foreign buyers are sometimes counted at a lower weighting or excluded because of settlement risk. The lender's solicitor reviews each contract.

Debt cover is the total of qualifying presale values, net of GST and commissions, divided by the loan amount. A $2,400,000 facility with two presales at $850,000 each has about 71 per cent debt cover. Banks set their requirement by project risk: townhouses in an established suburb might need 50 per cent, high-rise apartments in an oversupplied market might need 100 per cent or more. The requirement is a condition precedent, meaning no construction draws until it is met.

On a two, three or four unit project the lender's exposure is modest and the end product is usually saleable house-like stock. Non-bank lenders will fund these on the strength of the borrower, the location and a conservative end value, without presales, at loan to cost ratios around 65 to 70 per cent and rates above bank levels. Some borrowers deliberately avoid presales because selling off the plan means selling at today's price and paying commission on a project not yet built.

Presales reduce the lender's risk and the developer's upside. No presales keeps the upside but requires a lender who will wear the risk, more equity and a plan for the exit: sell on completion, or retain and refinance to investment loans. A specialist will price both paths so you can see whether the bank's cheaper money is worth the presale discount.