Australia: Risks grow as property developments grow

This is the third in our series of articles on pre-sales risk mitigation in the residential property development sector, where we detail the process lenders undertake, or at least should always undertake, to analyse and mitigate the risks of pre-sales.

Rigorous analysis of pre-sales risks is vital as residential property developments grow in cost, size and complexity.

Whereas, five to ten years ago, a large development may comprise 100 units, it is not unusual today for projects to have over 200 units. In fact, some recent projects have over 1,000 units.

In March 2017, APRA wrote to Authorised Deposit-taking Institutions (ADIs) following a thematic review of Commercial Property Finance practises. APRA said "the thoroughness of analysis of presales achieved for particular transactions was sometimes lacking".

The implication for ADIs is they should use a sophisticated model that quickly, yet rigorously, helps them analyse pre-sales in complicated developments.

We believe non-bank lenders should also apply best practice.

What is acceptable due diligence?

Based on our experience and enquiries, we believe lenders will spend around 12-hours reviewing and qualifying the pre-sales of a medium size residential property development, required as a condition precedent of finance. As the size of the development increases, so will the time spent on the review.

This due diligence process typically involves:

  • 2 hours inspecting the display suite and marketing materials
  • 30 minutes obtaining pre-sales information from the client
  • 30 minutes reviewing the pro-forma contract
  • 90 minutes reviewing the front pages of contracts
  • 2 hours preparing the sales schedule
  • 2 hours qualifying the buyers
  • 30 minutes comparing the application with the approval and lending policies
  • 2 hours signing-off the pre-sales and dealing with variances
  • 30 minutes sending the package to (and instructing) the lawyer
  • 30 minutes reviewing the lawyer's certification of qualifying pre-sales

Is this sufficient to mitigate the underlying take-out risk and demonstrate market acceptance?

Qualifying criteria vs risks

Lenders will have a range of qualifying criteria, or policies, that apply to pre-sales supporting a development finance loan. These policies are in place to address the specific risks faced and include:

  • Pre-sale contracts must be 'arms-length', which means the purchaser is not related to the developer. This policy ensures the borrower doesn't use associates to activate funding;
  • Contracts must be 'unconditional'. They should not contain references to side deeds or rebates that can distort market values;
  • Limits on overseas buyers, as the lenders generally consider these sales to have a higher fall-over risk and to be difficult to enforce; and
  • Contract prices must be at or above valuation with 10% cash deposits. This will give the lender confidence in the value of the underlying security.

Such policies are basic, prudent lending practice. All the banks have similar policies. Generally, non-bank lenders have less sophisticated policies.

Analysis step 1 – Obtaining the information

A lender's first step in analysing pre-sales is to obtain the relevant information about them. For each pre-sale, this will include (but is not limited to):

  • property attributes – aspect, layout, level size, number of bedrooms, bathrooms and parking spaces
  • purchaser details – name, address, contact details, domicile and lawyer
  • sale particulars – price, agent, status (exchanged, under offer or unsold), special conditions (if any) and deposit (amount, type and holder)
  • summary – aggregate price vs valuation, sales number and rate of sale, balance unsold and lending ratios.

The lender will also identify issues that require clarification, such as sales by lot type (and what type is not selling), whether the buyers can be identified and are local or foreign, and whether there are any rebates or if pre-sales are at a premium/discount to valuation.

Analysis step 2 – Pre-sales modelling

Once they have obtained key information on pre-sales, most lenders will use a spreadsheet to aid analysis.

Modelling pre-sales enables the lender to:

  • summarise, illustrate and highlight key data;
  • quickly understand specific areas of risk;
  • locate risks at the individual dwelling level; and,
  • speed up analysis and reporting to credit/investors.

Most lenders have simple spreadsheets that tabulate elements such as unit numbers, purchaser's name, deposit, contract price, settlement date, and any conditions.

BRI Ferrier promotes the use of the Plinth model, which has a much more sophisticated pre-sales analysis module. It is available free-of-charge. BRI Ferrier provides assistance to users of the model. We also provide due diligence outsourcing services tailored to individual lenders' needs.

This model considers around 20 different elements to help lenders understand pre-sales risks. These include all the elements on a pre-sale contract and every major attribute in a development. The model prompts users for information about the purchaser's status (owner-occupier, investor etc.) and the commission rate payable on the sale. These two important elements of pre-sales are not noted on pre-sale contracts.

The model helps to identify issues with rates of sales, timing of sales, high and low rates per square metre and risk concentrations.

Analysis step 3 – Legal due diligence

The third step in analysing pre-sales involves a lawyer certifying qualifying pre-sales.

The lawyer will examine the pro-forma contract for enforceability (considering technical issues), noting special conditions (inclusions, rebates and side agreements) and any rescission clause, sunset date or assignment clause.

They will also review the front pages of contracts and the certification from the borrower's solicitor confirming that all sales contracts use the pro-forma contract.

However, the lawyer will often only analyse a sample of pre-sales' documentation. The major trading banks typically require that 25% of pre-sales are assessed. The lawyer determines the sample set.

We also suggest that lawyers use a comprehensive model (such as Plinth) to identify the "riskiest"

pre-sales. These pre-sales should be included in the sample set, minimising the lawyer's own risk when reporting on qualifying pre-sales.

Analysis step 4 – ongoing monitoring

The final step in pre-sales risk mitigation involves longer-term monitoring of ongoing risk.

Lending on the basis of pre-sales is not a 'set and forget' type of arrangement, because projects play out over a two-to-three-year period.

A lender should continually monitor the market, reviewing media, auction clearance rates, clients, agents, valuations and other information sources (such as and

They will need ongoing updates from the developer, such as the value and number of pre-sales still on foot and the value and number of new sales.

They will also update their pre-sales model for changes. For annual reviews, they will re-assess the pre-sales status and update loan approvals as required.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Brett Lennane
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.