Finance for purchasing property and building Duplex

Hi,

I would like to get advice on this investment proposition:

I currently own a residential property(A)(mortgaged) and the property directly behind me (B) it is up for sale. The previous owners of B prepared a Development Application to knock down the existing old house and build an attached Duplex on their land. The DA application is conditionally approved (Deferred Commencement) provided that I grant the construction through my land (A). I rejected the easement and their property is now up for sale.

Duplexes sell for approximatel $680K-$720K each in my area.

Now, my proposition is that I want purchase my neighbours property (B) for approx $600 and also need approx. $400,000 to build the Duplex(2 properties) on the land. I will therefore grant the easement on my property for the purpose of this development.

So I need a loan of approx. $1,020, 000 for a potential profit of about $340,000 for selling the two Duplexes immediately after they are constructed (6 months later).

Here are my questions:

*Will it be possible for me to get finance of $1,020,000? Will the big banks, e.g. CBA/Bankwest be able to help me?
*Shall I approach a Private Broker? Can you suggest any good Brokers you know?
*If anyone is prepared to give me the loan/partner in this investment, please reply here or send me a PM.

If anyone has any ideas/suggestions, please post here.

Thanks,

Bob
 
Essentially it's not a very difficult proposition. You need to demonstrate to the lender that you've got enough equity in the deal and that you can afford the end result, in line with their policies around these things.

The most common problem with this type of deal is that people often don't have the equity. Each property may sell for $720k, so the end result is worth $1.44M.

On the other hand, lenders usually value the deal based on the cost price. Assume you buy the site for $600k. You knock down the existing house and the land is now worth $400k. It costs $400k to build, so the bank values the property at $800k. Assuming they'll lend 80%, you get $640k in funding.

You know it's worth $1.44M, but the bank won't recognise that until the construction is completed. When they assess the project it's only worth $800k.

There are potentially numerous ways around the problem. Commerical funding can help (but is more costly and complex). You may have equity in your existing property to offer as additional security. Some lenders can will have different policies which might work in your favour.

With residential finance you've also got to demonstrate that you can afford to hold the properties once they're built, or have a realistic exit strategy. This usually isn't a big deal, but it may depend on your specific circumstances.

My suggestion is that you contact a broker to discuss the specifics of the deal and how it can work with your financial circustances. This can almost certainly be made to work for you, but it has to be presented to the right lender in the right way.

I'm not a huge fan of equity partners if they can be avoided. The partner will ask what you bring to the deal - experience or funding. If they're abel to provide both, then they don't need you. Besides, you can likely do it yourself if it's put together properly.
 
Thanks so much for your reply Peter.
So you beleive that I will be able to get Residential or Commercial finance.

Could you pls clarify the following:

"You need to demonstrate to the lender that you've got enough equity in the deal and that you can afford the end result, in line with their policies around these things"

-What amount of equity will I need? What do you mean by "afford the end result"?

Please explain:
"With residential finance you've also got to demonstrate that you can afford to hold the properties once they're built".. what do you mean by "hold"?

What are the usual costs with Commercial funding? Will I be able to take out a 100% loan with commercial funding?

Thanks for explaining this to me, I appreciate your help.
 
Peter, can you please send me the contact details of some private Brokers in Sydney who would be interested in this deal?

Thanks
 
Thanks so much for your reply Peter.
So you beleive that I will be able to get Residential or Commercial finance.
I don't really know anything about you, but it may be possible. To give you a difinitive answer, a broker needs to understand your full financial position including income and current assets and liablities.

"You need to demonstrate to the lender that you've got enough equity in the deal and that you can afford the end result, in line with their policies around these things"

-What amount of equity will I need? What do you mean by "afford the end result"?

"Afford the end result", means that you've built the two duplexes and borrowed money to do this. Can you afford the loans and the repayments at the end, or will you need to sell the properties?

"Equity in the deal", means that the bank will only lend you up to about 80% of what they believe the security property is worth. My previous post explained their thinking on this. From their point of view, the development might only be worth $800k, but you want to borrow far more than this. You'll need to put in more money or other security (such as your own home) for them to be comfortable with lending you the money.

Please explain:
"With residential finance you've also got to demonstrate that you can afford to hold the properties once they're built".. what do you mean by "hold"?

Again, you've got to show that you can afford the loan at the end. "Hold", means keep the properties, as opposed to, "Sell".

What are the usual costs with Commercial funding? Will I be able to take out a 100% loan with commercial funding?

Chances are a commercial loan won't suit your circumstances, but the most you're likely to get is probably 70% of the property value. Again, you need to put some 'equity' into the deal to cover the other 30%. There's lots of other considerations as well. My gut feel is that this project is better suited to a residential loan than a commercial loan.

You're welcome to give me a call, I've got plenty of clients based in Sydney.
 
Hiya

By the time you pay council contribs etc , the 400 k wont buy much of a duplex construct commensurate with a 700 k buy price.

Just stabbing at the dark here, but have you done a fully costed Feaso on this puppy ?

AS pete says, he can likley get you the dough if it all stacks up, but if your "build" costs are out by 30 to 50 % that wont be useful

ta
rolf
 
Hi Rolf,

Yes we have done a feasibility analysis on this proposal.
As I mentioned, the building costs are $400,000. Another $10K for excavation and $4K for council charges. Everything else, e.g. plans have already been approved and the build will take approx 6 months.


Why won't it buy much? The profits (approx $340,000) significantly outweigh the council charges and minor costs...

What do you foresee as any other risks/charges?
 
Hi Rolf,

Yes we have done a feasibility analysis on this proposal.
As I mentioned, the building costs are $400,000. Another $10K for excavation and $4K for council charges. Everything else, e.g. plans have already been approved and the build will take approx 6 months.


Why won't it buy much? The profits (approx $340,000) significantly outweigh the council charges and minor costs...

What do you foresee as any other risks/charges?

thats cool

just the numbers didnt stack up to me.........but could just be sensational margin

200 / 720 = 28 % total construction cost on end value implies a very large land $ component, which normally implies upmarket area, where there is an expection of 1200 to 1500 / sqm of build quality fixtures and fittings.

Manage your CGT on this puppy :)

ta
rolf
 
Yes, that's right. It's in an upmarket area and the land area for the two duplex units to be built on is 750m2.

The floor space for each Duplex is approx 230m2. Many Duplexes are built in this upmarket area and sell very easily for this size.
 
Hi Rolf,
Yes we have done a feasibility analysis on this proposal.
As I mentioned, the building costs are $400,000. Another $10K for excavation and $4K for council charges. Everything else, e.g. plans have already been approved and the build will take approx 6 months.

Why won't it buy much? The profits (approx $340,000) significantly outweigh the council charges and minor costs...

What do you foresee as any other risks/charges?

4k for council sounds a bit cheap....10k for excavation maybe, there are a few things you should have a buffer for ;
- Soil testing not meeting the build type standard ...ie change of design and material etc.
- the fixed price contract not including land scrapping, extra drive way space etc...
- Have you check if it's flood or fire zoned? if it is special material must be used and this will add another cost on top!
- From your Opening post it sounds like the backhouse is a "battle axe property?" if so expect another 20k for concreting a 4-5m drive way+ sealing etc..

---

Overall; how this deal will be done will depend on your serviceability ( end, mid and pre debt) , deposit or equity.

Equity is used as a backup in case of any short falls.

If you have good serviceability and equity/deposit - then residential lending is fine.

1. If you lack serviceability or equity- then you may need to go through the commercial lending channel during the construction stage; till it's built.

2. if you lack both - Then you will need some sort of pre-sales. Being in NSW you may get a first home buyer who wants to max the new stamp duty benefit, given it's selling for around the $600k mark.

Regards
Michael
 
Yes, that's right. It's in an upmarket area and the land area for the two duplex units to be built on is 750m2.

The floor space for each Duplex is approx 230m2. Many Duplexes are built in this upmarket area and sell very easily for this size.

Which council??
You sure 750 is enough for Sub? + is the frontage large enough.

Lastly im guessing it's going to be SP titled? rather then DP.

Regards
Michael
 
Bobgar,
Have you allowed for the 50K or so to fit out the duplex?
Carpets, blinds, gardens etc.

Water Corp fees were a big hit for my duplex $7000.
 
Bobgar,

As rolf has pointed out, I don't think your calculations look correct at all. You have not taken into account all the other fees and charges which eat into your margin very, very quickly. This includes soft costs such as engineering, agent fees and INTEREST. $200k per house may be OK quality for a ordinary suburb but if it is as upmarket as you think it is, well I think you are undercapitalising for a 150-200sqm home. If you think you can make a 30% profit on costs from a 2 unit development, I think you are gravely mistaken. Even for large projects 30% is hard to achieve after factoring in the economy of scale from having larger numbers to play with.

In any case, use one of the mortgage brokers here like Peter/rolf/Mick to give you some advice on how you should get finance. Expect 80% (or more) for residential lend, and 60% of GDV for a commercial lend.
 
Yes, that's right. It's in an upmarket area and the land area for the two duplex units to be built on is 750m2.

The floor space for each Duplex is approx 230m2. Many Duplexes are built in this upmarket area and sell very easily for this size.

870 / sq m is sensationally good build cost


Typically where I live that sort of thing with a medium level of finish ( assuming 2 stories) would be 1200 plus

ta
ta
rolf
 
+ sell cost, CGT, agent fee etc...

Don't get us wrong, it could work out; but def need more planning and a much more detail + analytic forecast and projection on your " puppy" ( as rolf would put it)
 
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