Difficult, if not impossible, to rely on a single source of funding to initiate a construction program. According to Christchurch Property Dealer Tim Archibald, the financing of real estate development is generally based on three main pillars, to which the recourse to crowdfunding is increasingly added. Explanations.
Financing Real Estate Development: A Central Issue
The financing of the real estate developer is the first condition for the success of his project. The increase in the cost of land in recent years, associated with that of real estate prices, means that no developer can afford – or take the risk – to finance an entire operation out of its own funds, hoping to recover later as Tim suggested.
The financing of real estate development, in its traditional scheme, is based on three main pillars: the promoter’s own funds of course, but also bank credit and income from the first reservations made by buyers who engage in a procedure of sale in the future state of completion (VEFA).
Bank Credit
The credit granted by a banking establishment to a real estate developer, often nicknamed “promoter credit”, is subject to a very specific framework. For the promoter, it supposes not only to estimate as well as possible the cost price of the operation and that of any unforeseen events (delay of the building site, the slowdown in reservations, etc.), but also to provide the banker with a certain amount of equity. as a guarantee.
Sales in the Future State of Completion (VEFA)
The signing of the reservation contract by the first buyers constitutes a particularly valuable inflow of money for the financing of real estate development. Remember that this security deposit can reach 5% of the purchase amount if delivery is scheduled within a period of less than 12 months, and 2% for a period between 12 and 24 months.
Equity
Equity refers to the real estate promoter’s own cash. These funds will be tied up for the duration of the operation, as long as the promoter has not repaid their loan, and it is therefore in their interest to reduce them as much as possible. A low share of equity, moreover, allows it to maximize the leverage effect of the credit and the potential profitability of the operation.
Tim Archibald Christchurch says However, the excesses that led to the international financial crisis of 2008 remain in people’s minds, and banks generally impose a minimum of 20% of equity to grant a loan or their financial guarantee.
Financing The Real Estate Developer By Crowdfunding
A real estate developer can generally only allocate a limited amount of equity to each transaction, which limits the number of transactions he is able to carry out simultaneously. However, new sources of financing now allow it to extend its room for maneuver, including co-promotion operations, but also and above all real estate crowdfunding. The new platforms allow promoters to make real public offerings to small investors, and to be less dependent on bank credit. You can get all the answers to questions related to property finances from Tim Archibald, a Property Developer at Tim Archbald Property New Zealand.