Financing property – knowledge is power

Applying for property finance in the current business climate is a complex and lengthy process. Knowing what lies ahead and how to properly prepare will give you the edge.

As banks become more wary of risk, accessing finance for property acquisitions is becoming more arduous. Gary Palmer, CEO or Paragon Lending Solutions looks at how best to prepare for the process.

Expect to wait

Banks are carefully examining all the fundamentals and proceeding with utmost caution. Most people are expecting a decision in a week. In our experience, this is closer two to three months.

Be prepared for paperwork

Part of the reason for the delay is the level of detail banks are examining. If you’re buying commercial property you have to provide a detailed statement of assets and liabilities; details on the leases on that property; expenses associated with the property; and details of the tenant.

Buying through your business

If you’re looking for an overdraft for your business, expect additional documentation, which will include: detailed forecasts; three years of audited financial statements; up to date management accounts; an explanation of the business’ financial performance, and this is just for starters. We have a client who was asked to provide copies of all his previous bond statements, reference letters from his business partners, pictures of all the assets listed on his balance sheet (this is so banks can understand the valuations of those assets), as well as rental income on other properties reflected on his balance sheet.

Assume nothing when it comes to value

As banks become more discerning about granting loans, we are also seeing some very conservative valuations. In fact, this trend is scuttling some lucrative deals. We have seen a commercial property with an agreed sale price of R55 million which was then valued at R32 million.

All is not lost to those who prepare

Despite the hurdles, there is still value to be had in the current market. We believe the following pointers can assist those who still want to take the plunge:

1.    Don’t inflate the numbers – take at least 25% off the expected monthly income generated by the property for expenses. Then, factor in additional interest rate hikes, and reduce your forecasts accordingly.
2.    Make sure you have the capital to negotiate – although the market is technically in hiatus, there are still good deals to be had – if you have the capital. Speak to banks and to alternate lenders for a complete understanding of what is available to you.
3.    Make it easy for the banks – do market research on the rental market in that area and do your calculations at different cap rates
4.    It is about location – make sure you look at the location, banks are turning down acquisitions in mining towns due to mine closures and in agricultural towns due to the drought.
5.    Manage your expectations – be prepared to put in the hard yards with the documentation, and don’t expect to hear about your application in under a month.