Finance and construction

[MichaelM]

Hello all. I need some help in getting a better understanding of construction finance or selling off the plan. Say you take some vacant land and apply for basic construction finance with the view of keeping the house and renting it out. The bank would take into account the expected rental return when assessing the finance application.

Now, say you have the same vacant land but due to your other investment loans have already reached your borrowing capacity, and with your serviceability problem do not qualify for further (construction) finance. So you decide to sell the vacant lot of land instead and take your profits now.

I have explained this scenario to a real estate agent in that should I not qualify for finance allowing me to build and hold I would sell the land before construction. The agent suggested I WOULD still qualify for finance as long as we get a pre-sale, and sell the house and land off the plan (rather than selling only the land).

I’m mixed up because sure I would then have a guaranteed sale but why would this change the bankers mind about lending me the money? Don’t I still need to show that I can service the loan during the construction period? If I could do that then I wouldn’t worry about the pre-sale – I could qualify for the finance AND keep the property!

 

[DaveP]

Michael
What I feel the RE is advising you is that their is other ways to obatin finance.

If you can show some of the finance companies a contract of purchase, they may be prepared to finance.

Its what large developers do when they do units. They get a certain amount of pre-sales and then arrange MEZ and GR Finance.

Hope this helps.

DP

 

[Rolf Latham]

Hiya

Id suggest that if you have trouble holding the asset AND you have tried all avenues of finane then maybe the risk is a little high as far as the lenders are concerned.

Can you do an equity pull against your existing stock using a progressive funder ?

ta
rolf

 

[MichaelM]

What I didn't completely understand is how a contract of sale would mean the difference between a finance company being prepared to finance or not.

When large developers get a certain amount of pre-sales for their units do they still need to show serviceability or is the lender prepared to finance on pre-sales only - allowing the developer to capitalize the interest during construction until they take their profits on settlement?

Rolf: when you mean pull equity from other stock do you mean like a line of credit against other properties? I'd still need to show serviceability to take out further finance so unless I've misunderstood I'm not sure how that works.

Mick.

 

[Rolf Latham]

Hi MM

We would do what you are proposing about once a week, using a variety of lo/no doc loans to fund constrcution on ANOTHER property.

In fact if you have the equity, regardless of "obvious" serviceability its commony the best and easiest method to fund many of these things
ta

rolf

 

[juzz]

Mick,

A contract of sale means that the lender has Debt coverage.
At the end of the construction period the lenders want their money. Usually the property will be settled by the presale meaning money is guaranteed to come in.
If you want the property you have to show how the money is going to be repaid.ie Re-financed out at Completion.

As always this is not any sort of advice.

Justin