Explainer on Residual Stock

A residual stock loan is a financing option provided to real estate developers or builders who have completed a project, but still have unsold units. This loan helps developers manage cash flow and bridge the financial gap between project completion and sales. 

Key characteristics of a Residual Stock facility:

1. Loan Purpose: To finance unsold units in a completed real estate project. 
2. Loan Type: Fully drawn cash advance.  
3. Loan Term: Short-term, usually 6-24 months. 
4. Security: Registered mortgage (usually first) over the unsold units in the development.  
5. Project Security extends to a registered PSR charge over the corporate borrower and Personal Guarantees from directors and shareholders.  
6. Loan to Valuation Ration (LVR): Typically 60-70% of the property value (exclusive of GST).

How Residual Stock loans typically work

The developer completes a real estate project and unsold units remain, creating cash flow challenges. At this stage in the project, the developer can apply for a residual stock loan.  

A Lender will evaluate the value of security property, marketability, and developer’s creditworthiness. Once the loan is approved, the lender provides the funds.  

The developer repays the loan as units are sold. 100% of net proceeds from all sales are applied to amortise the loan until completely discharged.  

Benefits to the Property Developer: 

• Improved Cash Flow: Developers receive funds to capitalise on other opportunities and manage operational costs. 
• Increased Sales Time: Developers can focus on marketing and selling units without immediate financial pressure (which can result in discounting). 
• Flexibility: Loan terms can be tailored to suit developer’s needs. 

Lender Requirements 

There are a series of questions a prudent lender should ask when assessing a residual stock loan. Some of these including:   

1. Who is the builder and developer that constructed the project? 
2. Are there any building quality or defect issues associated with the project? 
3. Who is the incumbent lender and is the facility well conducted? 
4. When was the project completed? 
5. How many lots / dwellings in the total development ? 
6. How many lots (if any) have sold in the past 3 months? 
7. What are the remaining dwellings in the project and are they “the runt of the litter”? 
8. Has an Occupation Certificate (OC) been issued? If sales have settled then it is assumed an OC has been issued. 
9. Has the subdivision plan been registered? If sales have settled then it is assumed the subdivision plan is registered.
10. Are the properties leased or vacant?  
11. Are the properties on the market for sale?

Vado Private Scenario 

A developer completed a residential development of five luxury homes. One of the properties was sold with the remaining four on marketed for sale. Prior to completing construction, the developer exchanged contracts to purchase another project to develop 24 apartments. To be able to settle this contract, the developer obtained a residual stock loan secured against the four unsold houses. The proceeds from this loan were sufficient to complete the contract. The loan term was 12 months and was repaid in four months following the sale of the houses.

For assistance

We would love the opportunity to chat to you regarding any scenarios or questions you might have for any of your clients seeking residual stock funding on development projects.  

Please contact the Business Development team at Vado Private to discuss any opportunities on the details below, or you can submit a scenario online via our website.