Introduction
Presales are one of the most discussed and misunderstood parts of property development finance.
Developers are often told that a lender will require a certain percentage of presales before construction funding can commence. This can make presales appear to be a simple threshold: achieve the required number, satisfy the lender and start building.
In practice, presales are more complicated. Lenders assess not only the total value of contracts but also the quality of the purchasers, deposit levels, contract terms, settlement timing, concentration, marketability and the amount of debt each settlement will repay.
Presales can be essential for apartment and larger residential projects, helpful but not always mandatory for townhouses and subdivisions, and largely irrelevant for some commercial or specialist developments where the exit is supported by leases, investment sales or refinance.
A high presale level does not automatically make a project financeable. Presales cannot compensate for an incomplete cost plan, weak builder, insufficient equity, unrealistic valuation or poor sponsor experience. Equally, a project with limited presales may still secure finance if the lender is comfortable with the market, leverage, sponsor and exit strategy.
This guide explains why lenders require presales, when they matter most, when alternative evidence can be sufficient and how developers should structure a sales program to support both finance approval and project delivery.
What is a presale?
A presale is a binding contract to purchase a property before the development has been completed.
The purchaser usually pays a deposit, with the balance due at settlement after construction, certification and title registration. The deposit is generally held in trust and is not available to fund construction.
This distinction is important. A presale does not normally provide immediate project cash. Its primary value is that it demonstrates demand and supports the lender’s repayment strategy.
The lender can estimate how much debt will be repaid when contracted purchasers settle. Presales also provide market evidence for the valuer and reduce the amount of unsold stock remaining at completion.
However, a contract is only valuable if the purchaser is likely to complete and the terms are legally acceptable. The lender therefore assesses the substance of the contract rather than relying solely on the signed purchase price.
“Presales buy you cheaper debt; they also cost you time.”
— The Australian Property Development Handbook
Why lenders require presales
Development lenders are exposed to both construction risk and market risk.
Construction risk relates to whether the project can be completed on time and within budget. Market risk relates to whether the completed product can be sold at the values assumed in the feasibility.
Presales reduce market risk by securing buyers before construction is complete. They give the lender evidence that the proposed product and pricing have been accepted by the market.
They also provide a clearer debt-repayment path. If sufficient contracted settlements will repay the facility, the lender is less reliant on future sales after completion.
Presales can be particularly important where the facility is highly leveraged or the development contains many similar dwellings settling at the same time.
The lender does not assume that every contract will settle. It may apply discounts, exclude certain sales or require presales well above the amount technically needed to repay the debt.
The requirement is therefore both a market test and a repayment test.
When presales matter most
Presales generally matter most for apartment developments and other projects with concentrated completion and settlement risk.
In an apartment project, the lender may have advanced a large amount of debt before any sale proceeds are received. Construction can take several years, and most purchasers settle only after the building is complete and individual titles have issued.
The lender therefore wants meaningful evidence that the completed apartments will convert into cash at settlement.
Large townhouse developments can create similar concerns, particularly where the dwellings are completed at the same time and the facility depends on a high volume of settlements.
Presales also matter where the sponsor is less experienced, the project has a thin margin, the location has uncertain demand or the requested leverage is high.
The higher the lender’s exposure to future market conditions, the more important presales become.
When presales may matter less
Presales may be less important for small residential projects with low leverage and a strong sponsor.
A four-townhouse development in an established market may be financed with limited presales if the lender is comfortable with comparable sales, equity, builder and exit.
Land subdivisions may be funded with a lower presale threshold where the project can be staged and lots can settle progressively. The lender will still examine demand and release prices, but the risk differs from a large apartment building.
Commercial developments often rely on preleases rather than presales. A leased industrial, childcare or service station project may be valued and refinanced as an income-producing investment.
A project may also have a binding sale of the completed investment to a purchaser or fund-through investor. In that situation, the lender is assessing the sale contract rather than individual residential presales.
Private credit lenders may accept reduced presales where leverage is appropriate and the developer can demonstrate strong demand and liquidity. This flexibility is reflected in pricing and structure.
Qualifying presales versus headline presales
Developers often report the total value of all signed contracts, but the lender may recognise a lower qualifying amount.
A qualifying presale is one that satisfies the lender’s legal and credit requirements.
The lender may require a minimum cash deposit, an unconditional or substantially unconditional contract, acceptable sunset dates and a purchaser that is independent from the developer.
Contracts with related parties may be excluded because they do not provide genuine third-party demand evidence.
Low-deposit contracts may receive limited recognition because the purchaser has less money at risk and may be more likely to default.
Contracts subject to finance, sale of another property or unusual purchaser rights can also be excluded.
The difference between headline and qualifying presales can be substantial. Developers should understand the lender’s policy before designing the sales strategy.
Deposit levels and purchaser commitment
The deposit provides evidence of purchaser commitment and can help compensate the developer if the purchaser defaults, subject to the contract and law.
Lenders generally prefer meaningful cash deposits rather than deposit bonds or guarantees, although some may accept alternative forms under specific conditions.
A low deposit can increase settlement risk. If the market value falls before completion, the purchaser may decide that forfeiting a small deposit is less costly than proceeding with the purchase.
The lender will therefore assess deposit type and amount when determining whether a contract qualifies.
The developer should also consider whether the deposit structure supports the project’s broader legal and settlement strategy. A contract accepted for marketing purposes may not satisfy the construction lender.
Sales agents and lawyers should understand the intended funding requirements before contracts are issued.
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Purchaser concentration
A presale schedule can appear strong while remaining highly concentrated.
If one investor or related group has purchased a large number of dwellings, the lender is exposed to a single settlement decision.
A default by that purchaser can affect multiple units at the same time and materially weaken debt repayment.
Lenders may therefore cap the amount recognised from any one purchaser, group or investor category.
A diversified purchaser base generally provides stronger support than the same dollar value concentrated among a small number of buyers.
The lender may also distinguish between owner-occupiers and investors. The preferred mix depends on the project, market and lender policy.
Developers should monitor concentration throughout the sales campaign rather than discovering the issue shortly before finance approval.
Foreign purchasers and investor buyers
Foreign and investor purchasers can form an important part of a sales program, but lenders may treat them conservatively.
Foreign purchaser contracts can involve additional approval, funding and settlement considerations. The lender may limit the proportion of qualifying presales attributed to foreign buyers.
Investor purchasers may be more sensitive to valuation, interest rates and rental assumptions than owner-occupiers. A project with heavy investor concentration can therefore be more exposed to market changes.
This does not mean these sales are inherently weak. The lender is assessing diversification and settlement certainty.
The development should ideally have a purchaser mix suited to the product and location.
A lender may accept a higher investor component in a proven investment market than in a project marketed primarily through incentives or speculative growth assumptions.
Sunset dates and contract expiry
The presale contracts must remain valid long enough to support the expected completion and settlement program.
If the sunset date is close to the forecast completion date, a delay can allow purchasers to terminate or create legal uncertainty.
Lenders and their lawyers will review the sunset provisions, extension rights and consequences of delay.
A contract that expires before the end of the lender’s construction program may receive limited recognition.
Developers should build a realistic time buffer into the contract documents and ensure the sales contracts align with the construction schedule.
Long sunset dates can protect the project, but they must still comply with applicable legal requirements and be commercially acceptable to purchasers.
Presales and valuation support
Presales can support the valuer’s assessment of gross realisation value, but they do not automatically determine the valuation.
The valuer will examine whether the contracts are representative of market value and whether incentives, rebates, furniture packages or other benefits have affected the price.
An isolated high-value presale may not support the same price across the entire project.
The timing of the sale also matters. Contracts signed early in the marketing campaign may not reflect current market conditions at finance approval or completion.
The lender’s valuer may adopt the contract price, a lower market value or a combination of evidence depending on the circumstances.
Developers should ensure all incentives and related arrangements are disclosed. Hidden rebates can undermine both the valuation and lender confidence.
“A presale is only as good as the buyer behind it.”
— The Australian Property Development Handbook
Presales and debt coverage
One of the most important lender calculations is how much debt the qualifying presales will repay.
The lender may calculate contracted debt coverage by applying release prices or net settlement proceeds to each presold property.
Gross contract value is not the same as debt repayment. GST, selling costs, adjustments and lender release requirements reduce the amount available.
A project may have presales equal to half of gross realisation value but still provide insufficient coverage of peak debt.
The lender will also account for settlement timing. Contracts settling late may not assist with an earlier facility maturity.
Developers should model net debt repayment from each sale rather than relying on the total presale percentage.
Release prices and settlement proceeds
The lender generally controls how much of each settlement is applied to debt.
A release price is the minimum amount the lender requires before releasing its mortgage over a completed dwelling or lot.
The release price may be a fixed amount, a percentage of net sale proceeds or an amount required to maintain a particular debt coverage ratio.
High release prices accelerate debt repayment but reduce the cash available to the developer during the project.
In staged developments, this can create a liquidity problem if the developer expects settlement proceeds to fund later works.
The release-price schedule should be reviewed before accepting the facility. Presales are only useful if the repayment mechanics work with the project cash flow.
Settlement risk
A signed contract does not guarantee settlement.
Purchasers may experience finance difficulties, valuation shortfalls, employment changes, relationship breakdown, insolvency or changes in investment strategy.
A market decline can increase default risk if the contract price is above the completed valuation.
The developer may retain the deposit and pursue legal remedies, but this does not provide immediate repayment of the lender.
The project needs a strategy for failed settlements, including remarketing, liquidity and facility extensions.
Lenders may apply a settlement-default allowance when assessing presale coverage.
The longer the period between contract and completion, the greater the opportunity for purchaser circumstances and market conditions to change.
Presales in apartment developments
Apartment developments commonly have the strongest presale requirements.
The lender may require a specified percentage of qualifying presales, a minimum debt-coverage amount and restrictions on purchaser concentration.
The sales must usually be supported by acceptable deposits and contracts reviewed by the lender’s solicitor.
The lender may also require the presale condition to be maintained until construction commences or until a specified level of progress has been achieved.
If contracts are cancelled or fail to qualify, the developer may need replacement sales before further drawdowns.
Apartment developers should coordinate the finance strategy, marketing campaign, contract form and construction program from the beginning.
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Townhouse projects can attract more flexible treatment, particularly where the development is smaller and the product has broad owner-occupier appeal.
A lender may accept lower presales if the developer has strong equity, a fixed-price contract and relevant experience.
Larger townhouse estates can still face substantial presale requirements, especially if many dwellings complete simultaneously.
Staging can reduce exposure by allowing smaller groups of dwellings to be constructed and settled progressively.
The lender will assess whether each stage can be completed and repaid independently or whether later stages depend on cash from earlier settlements.
The most suitable structure depends on project size, title arrangements and market demand.
Presales in land subdivisions
Land subdivision finance often relies on presales differently from built-form development.
Lots can sometimes settle progressively as titles issue, allowing the lender to receive repayment during the project.
The lender may require contracts covering a portion of stage debt rather than a percentage of total project value.
Release prices are particularly important because settlement proceeds may be needed to fund later stages.
A broadacre project may also use builder or wholesale agreements, but the lender will assess concentration and contractual strength.
A staged subdivision with strong demand and conservative leverage may secure finance with fewer presales than a large apartment project.
However, civil construction and title-registration risk remain significant even where the sales position is strong.
Presales in commercial developments
Commercial developments may involve presales, but preleases are often more important.
An industrial unit project sold to owner-occupiers may use contracts similar to residential presales.
A leased industrial warehouse, retail centre, childcare centre or service station is more likely to rely on an agreement for lease and completed investment valuation.
A pre-agreed sale of the completed property can provide strong exit support if the purchaser is credible and the contract has limited conditions.
The lender will assess tenant covenant, lease terms, rent, completion conditions and purchaser termination rights.
A non-binding expression of interest is not equivalent to a presale or executed lease.
Commercial projects therefore require the form of precommitment that matches the intended exit.
Alternatives to presales
A project can sometimes be financed without substantial presales if other risk mitigants are strong.
Lower leverage creates a larger equity buffer and reduces the amount that must be repaid from early settlements.
A highly experienced sponsor with strong liquidity may give the lender confidence that slower sales can be managed.
A well-supported independent valuation and strong comparable evidence can demonstrate marketability.
Staged construction can reduce peak debt and prevent the lender from funding the entire project before revenue is received.
A binding lease, pre-agreed investment sale or fund-through arrangement can replace residential-style presales in commercial projects.
Private credit may also provide a reduced-presale structure at higher pricing.
These alternatives do not eliminate market risk. They address it through capital, structure and sponsor capacity rather than contracted sales.
“The right presale level is the lender’s call, not the developer’s.”
— The Australian Property Development Handbook
Worked example: two townhouse projects
Consider two townhouse projects, each with a total development cost of $20 million and gross realisation value of $27 million.
Project A has presales covering twelve of twenty dwellings. The contracts have ten per cent cash deposits, diversified owner-occupier purchasers and settlement dates aligned with completion. The developer has relevant experience and contributes $6 million of equity.
Project B has presales covering fifteen dwellings, but eight contracts are held by one investor group, several deposits are supported by guarantees and the contracts have short sunset dates. The developer contributes only $3.5 million and has limited experience.
Project B has more headline presales, but the lender may consider Project A safer. Its sales are more diversified, the deposits are stronger and the equity buffer is larger.
The example shows why lenders assess presale quality, not simply quantity.
If Project B replaces the concentrated sales, extends the contract dates and increases equity, the project may become financeable. The issue is not the total number of signed contracts. It is the reliability of the repayment pathway.
What happens if presales fall below the required level
A project can lose qualifying presales before or during construction.
Purchasers may rescind under contract rights, fail to satisfy conditions or request termination.
If the facility requires a minimum presale level, the lender may suspend drawdowns until replacement contracts are secured.
The lender may also require additional equity or reduce the facility.
A developer should monitor the sales schedule continuously and notify the lender of material changes.
Replacement sales may take time and may require lower pricing if market conditions have softened.
The facility should include enough time and liquidity to manage a reasonable level of contract fallout.
Should developers discount heavily to secure presales?
Heavy discounting can help achieve a lender threshold, but it can also damage the feasibility and valuation.
A discounted sale may become a comparable for the remaining dwellings.
Purchasers may also expect incentives if early buyers received substantial benefits.
The value of a presale must therefore be weighed against the effect on project revenue.
Strategic early-buyer incentives can be appropriate, particularly when establishing market evidence. However, the true net price should be disclosed and reflected in the feasibility.
Achieving a nominal presale target at unprofitable prices does not make the project stronger.
The objective is to secure credible market demand while preserving a sustainable project margin.
How to prepare a presale schedule for lenders
A lender-ready presale schedule should identify each property, purchaser, contract price, deposit amount, deposit type, contract date, sunset date and settlement timing.
It should disclose related parties, foreign purchasers, multiple purchases and incentives.
The developer should also calculate net settlement proceeds and estimated debt repayment.
The schedule should reconcile with the solicitor’s contract report and the feasibility.
Any contract conditions or unusual terms should be explained.
A clear schedule allows the lender to determine which sales qualify and whether they provide sufficient coverage.
Incomplete or inconsistent sales information can delay approval even where the project has achieved strong market interest.
These principles come from our free guide.
Download the handbook →Questions to ask a lender about presales
The developer should ask how the lender defines a qualifying presale.
The minimum deposit, acceptable deposit types and treatment of related-party or foreign purchasers should be confirmed.
The developer should understand whether the requirement is based on a percentage of stock, gross value, net debt coverage or a combination.
The lender should explain how purchaser concentration is treated and whether maximum caps apply.
Sunset-date and settlement-timing requirements should be clear.
The developer should also confirm what happens if a contract is cancelled after construction has commenced.
Release prices and the application of settlement proceeds should be reviewed carefully.
These questions should be answered before the sales contracts and marketing strategy are finalised.
Frequently asked questions
Are presale deposits available to fund construction? Generally no. Deposits are usually held in trust until settlement or otherwise dealt with under the contract and applicable law.
Do all signed contracts count toward the lender’s requirement? No. The lender may exclude contracts that do not satisfy deposit, purchaser, legal or timing requirements.
Can a project be financed with no presales? Sometimes. Lower leverage, strong sponsor support, staging, private credit, leases or a pre-agreed sale may provide alternatives.
Are more presales always better? Not necessarily. Presale quality, price, purchaser diversity and debt coverage matter more than the headline number alone.
Can a lender change the presale requirement? Indicative requirements may change after valuation, legal review or credit approval. The final facility documents control.
What happens if a purchaser does not settle? The developer may need to remarket the property, contribute additional equity or extend the facility while legal and contractual remedies are pursued.
Do commercial developments need presales? Some do, particularly strata industrial projects. Others rely more heavily on preleases, investment-sale contracts or refinance.
Should sales contracts be prepared before lender discussion? The proposed contract form should be reviewed with the finance strategy in mind. Lender requirements can affect deposits, sunset dates and purchaser conditions.
Conclusion
Presales matter because they reduce market risk and support the lender’s repayment strategy.
They are most important where debt is high, completion is concentrated and the lender will not receive repayment until the project is finished.
They may matter less where the project is small, staged, conservatively leveraged or supported by strong leases, investment sales or sponsor liquidity.
The critical distinction is between headline presales and qualifying presales. Lenders assess the purchaser, deposit, contract, concentration, timing and net debt coverage.
Developers should align the sales strategy with the funding structure from the beginning. Contracts designed without lender requirements in mind can create avoidable problems later.
Disclaimer
This article provides general information only and does not constitute financial, legal, tax, property, investment or credit advice. Presale requirements and contract treatment vary between lenders, projects and jurisdictions. Developers should obtain advice from appropriately qualified professionals before entering into any transaction.