To some developers, all pre-sales are equal. Yet, developers
need to understand that lenders, concerned with maintaining prudent
lending standards, focus on the quality of pre-sales.
At BRI Ferrier, we encourage lenders to follow some key
principles to mitigate potential risks before allowing loan funds
to be drawn:
Do not be complacent.
Check and follow internal policies.
Be sceptical, particularly where no agent is involved
(misrepresentation can be a key issue).
Review the pre-sale information that developers provide.
Try to identify all buyers.
Refer all contracts to a lawyer for sign-off.
Manage diligently on an ongoing basis.
Pre-sales aren't always what they're cracked up
Developers often consider pre-sales to be a necessary evil. The
downside for them is that pre-sales are a funding requirement that
can reduce the end value and profitability of the project. However,
developers have no choice but to lock-in pre-sales.
Problems can arise if project delays occur – in Council,
in contractor negotiations and when seeking finance. These days,
lenders often require a development consent, construction contract
and pre-sales to have been locked in before they consider a loan
application. With finance difficult to obtain, there are often
delays, which will result in cost increases, particularly in a
rising market. Once pre-sales are locked in, there is no
opportunity to pass these cost increases on. Someone in the
development chain must bear these cost.
In this article, we have focused on pre-sales risk from a
lender's point of view. Ultimately, lenders' securities
entitle them to receive 100% of pre-sales revenue and in turn they
bear 100% of pre-sale settlement risk until the loan is repaid.
The following table lists many of a lender's key pre-sale
risks. It outlines when these risks occur, possible symptoms, where
they can be identified and where the risks are likely to stem
Lenders recognise sponsor reputational risk as a significant
risk in property development lending. Many pre-sale risks occur at
the very beginning of a project, and many stem directly from the
sponsor (e.g. misrepresentation).
With thorough due diligence, lenders can eliminate key risks
before drawdown. Errors at this point can reflect poorly on a
lender in a default scenario, so care is advised.
Lenders should include the following steps in their pre-sales
Understand the developer's sales process and commission
Visit the display suite and the development website and do
further online research.
Consider sales rates and movements in average prices over
Is the sold stock representative of the whole development? Does
it raise any design or value questions about the unsold stock?
Check the plans against the sale contracts and marketing
material and reconcile them to the building contract and quantity
Review the proforma contract and special conditions.
Identify the purchasers where possible, and the location and
amount of deposits paid.
Ensure a comprehensive legal review of the pre-sales is
Developers should be mindful of the concerns of lenders in
relation to pre-sales. Efforts should be made to explain why
possible risks do not apply in their case. Developers should
produce supporting evidence as inadequate information will cause
Regular reporting of ongoing pre-sales results will be required
and an appropriate compliance process should be put in place.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Whilst option to purchase clauses are more in commercial properties, they are now being included in residential leases.
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