Construction Loan for a Development Project

[pi2012]

Hello All,
I will start with our current situation:
IP:
Value (last valuation done by the bank in June 07) - $350,000
Re-financed and Mortgage (95%) - $332,500
Equity (as per last valuation) - $17,500

PPOR:
Purchased in Aug 07
Purchase Price - $595,000
Mortgage (95%) – 565,250
Equity (as per Aug 07) - $29,750

Future Plan:
In the process of Sub-dividing PPOR and building 3 units. One will be future PPOR and 2 will be IPs.
After the development is completed,
PPOR (Unit1, 3 bed) will be worth - $650,000
Unit 2 (3 bed) will be worth - $600,000
Unit 3 (2 bed) will be worth - $550,000

We will have enough funds to cover the costs of getting the plans and permits.
Now the dilemma is how to approach the banks to get the construction loan which I am expecting to be approx $600,000 without any deposit, as in 100% LVR.
I am earning approx $110,000 and wife $35,000 per annum but at the moment, it will be hard to save for the deposit money for construction loan.
Please suggest.

 

[Rolf Latham]

Hiya

if your Gross realisatiov value is 1800 k as you suggest, and you need 1165 k most lenders will put their hand up for this on a commercial style build loan.

GRV of 65 % should also allow u to do capitalise some interest

ta
rolf

 

[pi2012]

Hiya

if your Gross realisatiov value is 1800 k as you suggest, and you need 1165 k most lenders will put their hand up for this on a commercial style build loan.

GRV of 65 % should also allow u to do capitalise some interest

ta
rolf

Thanks for the reply Rolf.
Could you please explain me what is meant by Gross Realisation and how you got the figures of 1800K and 1165 K.
So commercial lending is the only solution...can't be like a normal Residential construction loan considering its only $600,000.
Thanks

 

[mortgageman]

Hi pi2012,

Gross Realisation refers to the end value of the project. Lenders will look at both the costs of the project and the gross realisation, and some lenders will lend only against the gross realisation. However, to be frank, with your current asset base, it would be very difficult to get a commercial lender to fund 100% of the construction costs without a signficant injection of capital from yourself. As a general rule, lenders will go 65% against the GR (gross realisation) and 80% of your total costs (including cost of purchase) although they often will go higher if there are mitigating factors (or you pay a hell of a lot more in fees and rates). As Rolf says, 65% against the end value would on the surface be enough for you. However, they would also look at your asset base, and this may be a little small. Furthermore, the numbers look a bit unrealistic to me. An end value of $1.8m arising out of the current value and construction costs you have mentioned would be very very unusual in today's market.
Where is the development located? This is another key factor.

I think your best chance of getting this through would be as a full doc residential loan. This way, you could possibly get up to 90% of the current value plus 90% of the construction costs. You may be a chance to service using the end rental value of the new investment properties. I hope this has been helpful for you.

Kind Regards,

Cameron Perry
Perry Financial Strategies

 

[pi2012]

Thanks Mortgageman for explaining GR. The figure of $1.8m is probably too optimistic, really based on the recent sales of similar sort of development in the area.
To be more realistic (safe side), lets assume that the GR is $1.7m. As mentioned before, purchase price was $595,000 and Mortgage (95%LVR) $565,250.
Now assuming we can borrow 65% of GR (if I am not mistaken), ie; 65% of $1.7m = $1105000.
Am I right in calculating this, Amount that we can borrow for construction = $1105000 - $565250(amount already borrowed to purchase the property) = $539750.

Ralf, could you please explain this, “GRV of 65 % should also allow u to do capitalise some interest”. Could you please elaborate more on this.
Also, when it comes to development construction loan, can servisibility be a major issue especially in our case when we already got 1 IP and after the completion will have 2 more IP.
Also, am i being optimistic again by quoting $600,000 for a construction of this sort of development.

Thanks Mortgageman and Ralf.

 

[pi2012]

Any suggestions please.

 

[mortgageman]

Hi Pi,

If the end value did come in at $1.7m, at 65% GR, your total lend would be $1,105,000. However, as you are currently highly leveraged against the property, I doubt they would agree to refinance your existing facility, as development lenders would be unlikely to be prepared to be exposed at 95% against the current value of the property. So you would need to tip in a significant amount of capital or get very lucky with the valuation. This is another reason why I think your best option is to do it as a residential construction loan rather than a development loan.

Kind Regards,

Cameron Perry
Perry Financial Strategies

 

[pi2012]

Hi Pi,

This is another reason why I think your best option is to do it as a residential construction loan rather than a development loan.

Thanks Cameron.
So if we apply for Residential construction loan, what are the factors bank will consider apart from servicibility.
Do we still need to present Feasibility Study to the banks for residebtial construction loan?
Do we need to go with the same bank with whom we've got the current loan on this property or can we go with another bank and if yes, once the development is completed, how can we seperate the loans on 3 different properties?
How much we can borrow as in LVR? Is it possible to get 100% or 97% LVR?
Sorry for asking so many questions.
Thanks again.
Regards,
pi

 

[mortgageman]

Hi Pi,

No need to apologise. You wouldn't need to present a feasibility to the bank, just a building contract as the loan would be drawn down against the building contract. I would think, given the numbers you have mentioned, that the maximum you would be able to borrow would be 90% of hard costs.

Kind Regards,

Cameron Perry
Perry Financial Strategies

 

[pi2012]

Thanks again Cameron.
Just one more question, since the current mortgage is on the old house that we will demolish to put 3 dwelings, how the new loan will be structured.
What i mean to say, current mortgage - $595000 and say construction cost - $600,000...how is this amount going to be divided among the 3 new dwellings.
And are we stuck with our bank with whom we got the current loan on this propertuy to get the construction loan or can we go with different institution?
Thanks.

 

[mortgageman]

Hi Pi,

If the house is to be demolished, it is likely that any refinance would be valued at the land value only, which would mean that you may be required to tip some more cash in. Other than that, the loan would simply be drawn down as to the building contract. It could be done as 1 loan against all 3 properties. I hope this helps.

Kind Regards,

Cameron Perry
Perry Financial Strategies

 

[grossreal]

hi
couple of things
1 the build cost seem low at 200k per 3br unit is low its fine for the 2br but 245 to 250 is more in the mark for a 3br.
the lender wants to see at least 10 to 15% of the construction cost in the project as hurt money so they would be looking to see about 105k some where on top of the land and build costs.
thats why they usually want to see 30 to 50% presales so they are covered or 15% money from the developer.
80% gr is hard at the moment and when you see 85% gr and 100% gr start running cos they are after your money.usually you can get 80% land and tahts hard it usually 70% and 100% construct costs but they want to see your money in the deal.
mine is via uplift in land value but they still want to see it.

just as a side line I run on a 21% min profit margin and your figures in my spread sheet gives me a -0.52% margin

 

[pi2012]

Thanks Grossreal.

hi
couple of things
1 the build cost seem low at 200k per 3br unit is low its fine for the 2br but 245 to 250 is more in the mark for a 3br.

The size of the dwellimngs will be:
Unit 1 - 150sqm (Double Storey, 3 Bed) - 150 * 1400(per sqm) = $210,000
Unit 2 - 130sqm (Double Storey, 3 Bed) - 130 * 1400 (per sqm) = $182,000
Unit 3 - 100sqm (Single Storey, 2 Bed) - 100 * 1000 (per sqm) = $100,000
Total Construction Costs - $492,000
Please help me if i am under quoting these figures ...

the lender wants to see at least 10 to 15% of the construction cost in the project as hurt money so they would be looking to see about 105k some where on top of the land and build costs.
thats why they usually want to see 30 to 50% presales so they are covered or 15% money from the developer.

Please help me in understaing the figures you have mentioned...
As mentioned earlier, the first unit will be PPOR and rest of the two will be IPs. So no pre-sales..i guess in that case we have to provide some sort of rental estimates from REA...

80% gr is hard at the moment and when you see 85% gr and 100% gr start running cos they are after your money.usually you can get 80% land and tahts hard it usually 70% and 100% construct costs but they want to see your money in the deal.
mine is via uplift in land value but they still want to see it.

just as a side line I run on a 21% min profit margin and your figures in my spread sheet gives me a -0.52% margin

As suggested by Cameron, we will be able to get Residential Construction Loan rather than Commercial, do we still need to consider GR?
Could you please share a spreadsheet that you have mentioned and please help me calculating the Margin as 0.52% is really really low.
Thanks again.

 

[pi2012]

Hi Pi,

If the house is to be demolished, it is likely that any refinance would be valued at the land value only, which would mean that you may be required to tip some more cash in. Other than that, the loan would simply be drawn down as to the building contract. It could be done as 1 loan against all 3 properties. I hope this helps.

Kind Regards,

Cameron Perry
Perry Financial Strategies
www.perryfinance.com

My sincere thanks again.

 

[Minx]

Future Plan:
In the process of Sub-dividing PPOR and building 3 units. One will be future PPOR and 2 will be IPs.
After the development is completed,
PPOR (Unit1, 3 bed) will be worth - $650,000
Unit 2 (3 bed) will be worth - $600,000
Unit 3 (2 bed) will be worth - $550,000

What area in Melbourne would this development be in?

 

[pi2012]

What area in Melbourne would this development be in?

Hi Minx.
The development will be in Ivanhoe.
Cheers