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Most projects end the same way. The bulk of the stock settles, the construction lender is mostly repaid, and a handful of units are still on the market when the facility falls due. The developer then has two choices: cut prices to clear the stock by the deadline, or refinance the remaining units and sell them in an orderly way.
A worked comparison
Six townhouses remain, worth $900,000 each, $5.4 million in total. The construction facility has $3.2 million outstanding and expires in eight weeks.
| Discount to clear | Finance the stock | |
|---|---|---|
| Action | Cut prices 10% | Borrow $3.4m at 11% p.a. |
| Direct cost | $540,000 of margin | Up to about $190,000 interest over 6 months, less as units sell |
| Fees | Agent incentives | Establishment fee around 2%, legal and valuation |
| Side effect | Resets comparable sales for the project | None on price |
Even with fees, financing costs roughly half the discount in this example, and the interest bill falls each time a unit settles. The numbers turn the other way if the stock is overpriced and will not sell at the asking figure at all. In that case the holding cost is simply added to a discount that still has to happen.
When discounting is the better call
- The market for that product is falling and waiting is likely to cost more than the discount.
- The stock has been listed for a long time at a price the market has rejected.
- The remaining debt is small enough that one or two discounted sales clear it.
When financing is the better call
- The units are fairly priced and selling steadily, just not fast enough for the deadline.
- The construction lender is moving to default interest, which often costs more than a new loan.
- Earlier buyers or valuers would be affected by a visible price cut.
- You want to release equity from the finished stock for the next site.
What the lender looks at
A residual stock loan is assessed on the completed value, the sales rate to date, the marketing plan and the pricing. The lender wants to see that the stock is genuinely saleable at the figures in the valuation. Titles need to be issued, or close to it, and the occupancy certificate in hand.
Timing
Start before the construction facility expires. A refinance arranged with six weeks to run is negotiated on normal terms. One arranged after default is slower and dearer. If the facility is already close to expiry, read my construction loan is expiring and look at take-out funding, which covers the wider case where the whole facility is being replaced.
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Get matched with a funderFAQ
How much can I borrow against unsold stock?
Up to 75% of the completed value of the unsold units, lots or townhouses, valued as finished stock on separate titles.
Can I rent the units while they are financed?
Generally yes. Leasing can help cover interest, but a tenancy can narrow the buyer pool, so agree the approach with the lender at the start.
How is the loan repaid?
Progressively. As each unit settles, an agreed release amount goes to the lender and that title is discharged.