Dear All,
An Alternative to Mezzanine — and Complementary to Government Guarantees
A residential developer can have all the pieces lined up. And yet the development can still be delayed because there aren’t enough qualifying presales to meet the lender’s requirements and provide the confidence needed to support the project.
There is also another perspective, often not fully appreciated. Understanding the broader relevance and contribution a buyer can make to the development. That can have a significant impact on the overall project sales:
the buyer.
Because for an off-the-plan development, a buyer isn’t simply a customer.
An off-the-plan buyer can also be part of the development finance and bottom-line profits.
This is where the AffordAssist structure can be a game changer
AffordAssist offers lenders, developers, and buyers a new and different structure. We believe it is a smarter way to manage lender LVR, achieve presales with higher ROI, and procure buyers that can benefit from an affordable deposit solution.
AffordAssist is an innovative Interest-Free Deferred Deposit Solution that allows a new discussion between the buyer and developer: to defer an agreed portion of their deposit and pay it over an agreed period.
Eligible buyers may be able to purchase with as little as $1,000 upfront. The deferred amount and term are flexible, ranging from 1% to 25% of the property purchase price, with a term of up to 15 years (typically 10% over 5 years), while enjoying 100% ownership from day one. And subject to seller participation.
AffordAssist addresses two of the barriers sitting between the buyer and settlement:
- The upfront deposit — helping an eligible buyer defer an agreed portion of the deposit over time can help the developer to potentially make the sale possible, and thus form an important part of the lender’s assessment of the development; and
- Valuation variances at settlement — the strength of that presale ultimately depends on the buyer’s ability to complete the contract — providing a mechanism to consider and manage a variance where the final property valuation differs from the contracted purchase price. Thus, with AffordAssist, all settlements are possible. The presale becomes stronger.
The AffordAssist structure considers an important distinction between finding a buyer and finding a buyer who can complete. To complete and exit a project, that distinction matters.
This means AffordAssist can potentially become part of the lending, presales and settlement strategy.
The economics of the deferred deposit are different to mezzanine
AffordAssist is obviously good for buyers. Below is a simple example showing the numbers for a lender and developers’ consideration.
A developer has:
10 off-the-plan properties
at:
$1 million each.
The developer offers eligible purchasers a:
10% Deferred Deposit.
That’s:
$100,000 per property
or:
$1 million across 10 sales.
Each buyer agrees to pay their $100,000 deferred amount over an agreed 60-month period.
That’s approximately:
$1,667 per month per buyer.
Across 10 buyers:
$16,667 per month.
The developer hasn’t simply created a discount.
The developer has potentially created 10 additional pathways to purchase while retaining the full contracted property price.
Assume an average 5% annual return or saving.
On $100,000, using a simple annual approximation, the total opportunity cost would be around:
$12,500 over five years.
Approximately:
$2,500 per year.
The AffordAssist interest-free deferred deposit solution has a declining opportunity cost as the balance is progressively paid. Fundamentally different from paying interest on borrowed capital.
Consider the same $1 million example with mezzanine funding
If a developer raises an additional $1 million through mezzanine or private funding at an illustrative 18% per annum, the interest alone could be:
$180,000 per year.
Over three years:
$540,000.
And that is before establishment fees, legal costs, line fees and potential exit costs.
Summation to ponder
Does the developer actually need another $1 million of development finance?
Or:
Is the underlying problem that $1 million of buyer deposits is preventing otherwise viable sales?
If the lender(s) is already prepared to fund the project based on sufficient presales, then solving the buyer-deposit issue may be a very different proposition from raising another layer of expensive development capital.
The point is that interest-free deferred deposits can have a fundamentally different cost profile from expensive development capital.
And the deferred deposit potentially becomes an asset
The developer may therefore be creating a structured book of future receivables through the sales process.
The Government is already recognising the importance of presales
The NSW Government has introduced a $1 billion Pre-sale Finance Guarantee designed to help eligible residential developments overcome presale requirements and secure construction finance.
The government guarantee approaches that issue from the finance side.
AffordAssist approaches it from the buyer side.
The two mechanisms are therefore not necessarily competitors.
They potentially address different parts of the same structure.
Government guarantee
→ helps address the lender’s presale requirement.
AffordAssist
→ helps address the buyer’s deposit requirement with an affordable deposit solution.
Developer
→ potentially achieves stronger, more achievable presales.
Lender(s)
→ potentially has a stronger development-finance proposition.
A changed landscape
Perhaps the traditional development approach needs a new discussion focused on: Buyer affordability.
Perhaps the question isn’t limited to:
“How much development finance can we raise, or adding another layer of expensive capital?”
Perhaps it includes:
“How can we strengthen the presales that support our development finance and bottom line?”
AffordAssist
Interest-Free Deferred Deposit Solution
A Smarter Alternative to Mezzanine Funding. Reduce LVR lending. Enable Pre-sales. Improve bottom-line profits.
Regards
AA
B2B – AffordAssist facilitates and oversees the governance process. Are you a mortgage broker, lender, developer, real estate agent, affordable housing advocate, a community leader or housing minister? Pair your services with AffordAssist. Join us in our mission to expand access to home ownership. Together, we can make a lasting impact. Schedule a B2B phone or video call (around 15 minutes).
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