Pre-Sales in Development Finance: How Many You Need and Why Lenders Ask

Key takeaways

• Pre-sale cover = qualifying contract value excluding GST / senior debt. The lender sets the percentage; it varies by lender and project.
• In the worked example, covering 100% of a $7.2 million loan takes 11 of 12 units; 60% cover takes seven.
• A pre-sale usually qualifies only if it is unconditional, at arm's length, near the valuation, with a full deposit held properly.
• Foreign buyers generally need foreign investment approval, and lenders often cap or discount their contracts.
• Sunset dates must leave room for delays, and several states now limit a developer's right to rescind under them.
• Funding without pre-sales is possible with some lenders, but the extra cost has to be weighed against pre-sale discounts.

Why do development finance lenders ask for pre-sales?

A development loan is repaid from sales at the end. Until then, the lender is relying on a forecast. A signed, unconditional contract with a deposit paid converts part of that forecast into a legal obligation on a buyer to settle at a known price. The more of the debt that is covered by such contracts, the less the lender depends on the market at completion.

Pre-sales also test the product. If a project cannot attract enough buyers off the plan, a lender reads that as a warning about price, design or location, whatever the feasibility study says. And they reduce the risk of being left with unsold stock that has to be held or refinanced; residual stock loans for developers covers what happens when that occurs.

Requirements are most common on apartment and larger townhouse projects, where the product cannot be seen before it is built and the debt is large relative to the developer's equity.

How is pre-sale cover calculated?

Lenders usually express the requirement as cover: the value of qualifying pre-sale contracts, net of GST, divided by the senior debt (often the peak facility limit including capitalised interest). Some measure against the loan, some against total cost; ask which.

For illustration: 12 units with an average price of $750,000 including GST, and a senior loan of $7,200,000. Assuming GST on the full price, each contract counts at $681,818 ($750,000 x 10 / 11).

Full debt cover on this project means selling almost everything before construction starts. That is why the cover percentage matters as much as the interest rate when comparing lenders, and why a lower requirement is worth paying something for. Cover levels vary by lender, product, location and the developer's track record (indicative); they are negotiated, not fixed.

If the margin scheme is used, the GST on each contract is smaller, so each contract counts for more and the numbers move slightly in your favour. Confirm the GST position with your accountant; the rules are in the GST Act, and how GST is collected at settlement is covered in the ATO's GST at settlement guidance.

What counts as a qualifying pre-sale?

Each lender has its own definition, but the tests are similar:

• Unconditional. No finance clause, no "subject to sale" and no other condition left to satisfy. A contract still awaiting foreign investment approval is usually not yet counted.
• Deposit paid and held properly. Commonly 10% of the price, held in a trust account or provided as a deposit bond or bank guarantee the lender accepts (indicative).
• Arm's length. Not sold to you, your family, related companies, the builder or the selling agent. Related-party sales are usually excluded or capped.
• At or near the valuation. Contracts well above the valuer's figure may be counted at the valuation, and contracts with large rebates or incentives may be discounted by the value of the incentive.
• No excessive concentration. Limits on how many units one buyer can hold.
• A sunset date with room. The contract must not be capable of termination before the project can realistically be finished.

For illustration: nine contracts are signed on the 12-unit project. Two are to related parties, one carries only a 5% deposit against the lender's 10% rule, and one is a foreign buyer still waiting for foreign investment approval. Only five qualify, worth $3,409,091 excluding GST, which is 47.3% cover. Against a 60% requirement, two more qualifying sales are needed before the first draw.

How do lenders treat foreign buyers?

Foreign persons generally need foreign investment approval before buying residential property in Australia, and Treasury notes that foreign investment proposals are reviewed against the national interest on a case-by-case basis. A contract with a foreign buyer is therefore not secure until the foreign investment approval is in place and the contract is unconditional.

Lenders add their own caution. Settlement depends on the buyer moving money across borders, possibly years after signing, and on the buyer's ability to finance the balance. State taxes add cost: for example, Revenue NSW notes that foreign persons who acquire residential-related property may need to pay surcharge purchaser duty. Many lenders cap the share of qualifying pre-sales that can be to foreign buyers, or ask for larger deposits from them (indicative; it varies by lender).

The rules on foreign investment change from time to time. Check the current position with a lawyer before you market to overseas buyers, and before you count their contracts in your pre-sale numbers.

Why do sunset clauses matter to the lender?

An off-the-plan contract usually has a sunset date: if the project is not finished, or the plan not registered, by that date, the contract can be ended. If that happens, the pre-sale disappears and so does the lender's cover. Lenders therefore want sunset dates comfortably after the expected completion, with room for weather, trades and final certification (indicative).

The rules have tightened. In several states, including NSW and Victoria, a developer generally can no longer rescind an off-the-plan residential contract under a sunset clause without the buyer's consent or a court order. That protects buyers from a developer ending contracts to resell at higher prices, but it also means a delayed project cannot easily release itself from contracts that have become uneconomic. Get legal advice on how the rules affect your contracts.

What if pre-sale buyers cannot settle?

A pre-sale is only as good as the buyer's ability to settle. Off-the-plan buyers usually arrange their own loan at completion, when their lender values the finished unit. If values have fallen, that loan may be smaller than the buyer planned.

For illustration: a buyer at $750,000 has paid a $75,000 deposit and owes $675,000 at settlement. They planned to borrow $600,000 (80% of the price) and bring $75,000 in cash. If the finished unit is valued at $690,000, an 80% loan is $552,000, so they need $123,000 in cash: a $48,000 gap. Some buyers find it; some walk away, forfeit the deposit and leave the developer to resell, possibly for less, and pursue any shortfall under the contract.

Lenders know this, which is why they look at deposit size, buyer concentration, and how far contract prices sit above the valuation. A pre-sale book full of small deposits and prices above valuation gives less real cover than its headline number suggests.

What does pre-selling cost, and what does funding without pre-sales cost?

Pre-sales are not costless. Buyers who commit two years early usually expect a discount, incentives or both, and the marketing campaign has to start before construction. Those costs come out of profit.

The alternative is a lender that accepts fewer or no pre-sales. Some non-bank lenders and private credit funds do, usually at a higher rate, with larger fees and sometimes lower leverage (indicative). Moneysmart's explainer on private credit notes that this market includes construction and development lending, and private credit's push into Australian property lending covers why it has grown.

In this example the no-pre-sale path looks cheaper, but it carries all the market risk: if prices fall before completion, there are no contracts to fall back on. The right answer depends on the market and on how much of that risk your equity can absorb.

How do lender types differ on pre-sales?

These are general patterns; individual lenders differ, and requirements move with the market. Product type matters too. The ABS Building Approvals series separates houses from dwellings excluding houses, and lenders tend to be most cautious about pre-sales on the latter, where buyers commit long before they can see the product.

How should you plan pre-sales into the project?

1. Ask each lender for its cover requirement, how it is measured, and its qualifying rules, before you launch sales.
2. Build the pre-sale target into the program: the first draw may wait until cover is reached.
3. Set deposits, sunset dates and incentive terms that satisfy the lender's rules from the first contract.
4. Track qualifying and non-qualifying contracts separately.
5. Run the feasibility study both ways, with pre-sale discounts and with a dearer no-pre-sale lender, in the development feasibility calculator.
6. Read construction and development finance for how the facility is drawn once cover is reached.

When you know your numbers, post one development finance request on ADS and 200+ verified lenders and brokers can ask about it.

Frequently asked questions

How many pre-sales do I need for development finance?

It depends on the lender, the project and your experience. Requirements are usually set as cover of the senior debt by qualifying contracts excluding GST, and can range from none with some non-bank and private lenders to the full debt with some banks on apartment projects (indicative). Ask each lender how it measures cover.

Do pre-sales to family members count?

Usually not, or only up to a small cap. Lenders want arm's-length buyers, so sales to the developer, relatives, related companies, the builder or the selling agent are commonly excluded from qualifying pre-sales. Disclose them; a related sale presented as arm's length can undermine the whole credit submission.

What deposit makes a pre-sale qualify?

Commonly 10% of the contract price, held in a trust account or provided as a deposit bond or bank guarantee the lender accepts (indicative). Contracts with smaller deposits may be excluded or counted at a discount, because a buyer with little at stake is more likely to walk away.

Can I get development finance without pre-sales?

Often yes, from some non-bank lenders and private credit funds, especially on smaller projects. Expect a higher rate, larger fees and possibly lower leverage. Compare that extra cost with the discounts you would give to pre-sell, and remember that without pre-sales you carry all the market risk at completion.

What happens to my pre-sales if the project is delayed?

If completion slips past a contract's sunset date, the contract may become terminable, and the lender's cover can fall. In several states, including NSW and Victoria, the developer generally cannot rescind under a sunset clause without the buyer's consent or a court order. Set sunset dates with room for delay.

Related reading

• Residual Stock Loans for Developers
• Private Credit's Push into Australian Property Lending
• Construction and Development Finance

Sources

• Foreign investment — The Treasury
• Transfer duty (including surcharge purchaser duty) — Revenue NSW
• What is private credit — Moneysmart (ASIC)
• Building Approvals, Australia — Australian Bureau of Statistics
• GST at settlement — Australian Taxation Office