Finance with unapproved dwelling: A major curly one

Hi everyone.

First post here (and a long one too!). I hope you don't mind me jumping in to tap into your expertise. This is the scenario that might just hit a finance hurdle.

My partner and I have made a written offer for a property in the Byron Shire hinterland - exchange will happen soon. The property has quite a lovely house in good condition that was built in the last few years without approvals. The owner apparently had more money than interest in dealing with 'petty bureaucracy'. Just to reassure you there are a series of due diligence expert checks now taking place to ensure it isn't a lemon nor a major expense to get the property to DA approval standard over the next few months. Byron Shire are happy to cooperate patiently they say.

My broker has started 'off the record' conversations with bankers. The buy price is 800k with a 10% deposit. Our combined salary is 150k with no debt. The broker's concern is that the unapproved dwelling will result in a 'no thanks' from either the MI or bank if they are alerted to it. The contract says land and dwelling but there are a range of 'no guarantee of compliance' disclaimers through the contract, concerning house, studio, pool etc. We go into this transaction very clear about the absence of current compliance and will use expert assessments to determine whether the discounts on asking price warrants an offer.

The broker's feedback today is that lenders will not just consider the land value on its own if there is a dwelling (even if it is unapproved). We cannot have the dwelling removed from the contract as the valuator will clearly bump into it. The broker is hoping that the disclaimer clauses in the contract don't raise a red flag. My understanding is that the MI part could be the biggest problem. I can probably get the LVR down to 85% with a bit of reordering. So....I have a few thoughts to raise with the broker tomorrow and wanted to see what anyone thought. It might be a combo of these approaches. Your thoughts very appreciated. :)

Option 1
Rather than specific exclusions of the vendor’s liability adopt a blanket exclusion something like “The vendor accepts no liability in relation to any claims arising from this contract”.

If we got the contract reworded the question would be should this change happen prior to lodging the mortgage application?

2. Option 2. Borrow money to get LVR down 80%. (a real squeeze)

3. Option 3. Family Guarantor

Option 4: Find a friendly banker

Option 5: Property risk insurance or Title insurance as part of the application to protect the bank's interests.

Any thoughts please?
 
or what about an offer subject to obtaining the required approvals? gives you time to get approval, risk is limited to a the cost of the da (in the scheme of the cost of the property small) and once you have approval normal lending rules should apply.

it is unlikely anyone is competing with you for an unapproved dwelling as they will have the same issues re lenders. Unless its so good and underpriced that other people with cash are going to want it?
 
Easy answer - upfront valuation.
All this nonsense about the contract exclusion clauses means nothing. The valuation will make or break it.
 
Easy answer - upfront valuation.
All this nonsense about the contract exclusion clauses means nothing. The valuation will make or break it.

Very encouraging thanks! The evaluation is expected to be a healthy margin above the purchase price. So if I understand you correctly the immediate task is the valuation and once that is done then the mortgage app.
 
Very encouraging thanks! The evaluation is expected to be a healthy margin above the purchase price. So if I understand you correctly the immediate task is the valuation and once that is done then the mortgage app.

Pixie dust :) and other similar magic

If there is an agreed price, and a front page of the contract, and the purchase isnt "favourable", the valuer will value it at selling price or less.

If the val is done without a contract or price agreement in place, the valuation may come in higher, BUT will cause special attention for the lender.

If you are relying on the diff between selling price and val for part of the deposit ,IE lending on val over contract.............red flag, and even if not, you are better off to balance the val to the price so that deal doesnt get special attention

Byron Shire is known to be a PAIN x3, which means a local valuer may pay specific attention to the zoning..........and compliance and use of the dwelling, may result in a 5 risk rating. Dead in the water with most lenders, but still workable, We did a duplex in Brissie just after the floods with a 5 risk rating for enviro because it just had a metre of water through the bottom level ( high set), bit of work and a building report that foundations were ok,and 90 % lend thank you.

Byron also has a slow market at the moment, so there is another likely risk4 rating...

If you were my client id go

CBA with a COV val
HSL with an upfront val
AMP with an upfront val


All of them have their own DUA with LMI.

M

Land based only valuation can be done on an exception basis with all of the above lenders. This tends to be more so where the dwelling is tired.

Recent eg in the northern beaches, PP was 1400k dwelling was livable, just, but needed lots of essential repairs. Land only val - demo cost was 1320 and thats what formed security

Finally, if your contract special conditions have all these exclusions, even with the val clean many lenders will want and pay special attention to the special conditions

ta
rolf
 
Pixie dust :) and other similar magic

CBA with a COV val
HSL with an upfront val
AMP with an upfront val


All of them have their own DUA with LMI.
Thanks for your help Rolf. I'm new to this so what exactly is a COV val? And also what is DUA? I get this sinking feeling that because the house is unapproved we are not going to get any joy :-( Even though we are currently taking all steps to document with expert input and meeting the council Development Assessment Panel to determine exactly what would be needed to get it approved.

Land has builting entitlement and zoning is fine. No building envelope problem. Fire risk, but with fire set backs. The fire inspection will be conduction shortly.

Would you have the one page of legalese (that basically says vendor makes no claims whether dwelling, studio, pool etc are compliant with local regulations") in the contract altered so it no longer raises red flags while still continuing to cover the vendor's interest as intended? This seems the major alert problem. Otherwise the only problem would be a too high valuation that signals there is something the valuer didn't know about.....Thanks again Rolf.
 
COV = Client Ordered Valuation

DUA = Delegated Underwriting Authority ( from mortgage insurer, so lender can make own decisions - gives the lender much more flexibility )

Cant help with the legal questions.

If you were my client I would set it up so that you go fwd with maximum disclosure needed.

There is no point getting to settlement day and the funder pulls the loan, because believe me it does happen! Unconditional loan approvals dont mean unconditional, especially where new material information comes to light post approval.

ta
rolf
 
COV = Client Ordered Valuation


There is no point getting to settlement day and the funder pulls the loan, because believe me it does happen! Unconditional loan approvals dont mean unconditional, especially where new material information comes to light post approval.

ta
rolf

Good advice there. Do you think a lender would be more satisfied if title or mortgage risk insurance was in place? And/or if there was a clear plan and timeframe of getting to DA submission standard?
 
COV - Customer Ordered Valuation - You order the valuation before putting the deal in, essentially what Aaron said.

DUA - Deferred Underwriting Authority - This is an agreement between the bank and their mortgage insurer, where the bank has the ability to sign off on the deal without the mortgage insuer seeing it. For a lot of deals it makes it substantially easier.

As already suggested, this deal doesn't appear too difficult. Use a lender where the broker can order the valuation up front. If it has no adverse comments, send the application to the bank (otherwise don't bother). In many cases the valuation would be a simple, "Use contract price", in which case they don't even send a valuer to look at the property.

If no valuer sees the property or the valuation doesn't mention a lack of approvals, the bank will be none the wiser (unless you disclose it in the applicaiton or the contract special conditions). It's a bit sneaky, but it's the banks that allow these loopholes in the name of cost cutting.
 
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If the valuer knows that the improvements are not permitted than the valuation could come in at land value less cost to remove the improvements.

If the valuer does not know about this and values it as if the dwelling is permitted then the lender may still get suspicious based on the contract and it could result in them asking the valuer to value it at land less the cost of improvements.

Valuers generally do not contact councils and ask if permits are in place as it could cause the council to come around and require the non permitted improvements to be removed.

I would not touch this property with a barge pole.

There are less issues if it is just a building permit that is required, however if the improvements require planning permission as well then you could be in for a whole world of pain.

In any contract there must be legality of object so you may be able to wiggle out of this contract with a decent lawyer, if you want.

good luck
 
COV - Customer Ordered Valuation - You order the valuation before putting the deal in, essentially what Aaron said.

DUA - Deferred Underwriting Authority - This is an agreement between the bank and their mortgage insurer, where the bank has the ability to sign off on the deal without the mortgage insuer seeing it. For a lot of deals it makes it substantially easier.

As already suggested, this deal is a no-brainer. Use a lender where the broker can order the valuation up front. If it has no adverse comments, send the application to the bank (otherwise don't bother). In many cases the valuation would be a simple, "Use contract price", in which case they don't even send a valuer to look at the property.

If no valuer sees the property or the valuation doesn't mention a lack of approvals, the bank will be none the wiser (unless you disclose it in the applicaiton or the contract special conditions). It's a bit sneaky, but it's the banks that allow these loopholes in the name of cost cutting.

Thanks Bear. I will see if the mortgage broker is proposing to follow this route. The main thing is that I am not forced to misrepresent on the application. We can't have any chance the deal could be reneged by the bank between exchange and settlement.
 
We can't have any chance the deal could be reneged by the bank between exchange and settlement.

That always exists, even with squeeky clean deal.

Less likely to happen with a major where you can hold them to account, but unless you RAISE the issue with the lender, and waive the flag at it, the fact that the information was witheld, and the lender acted in reliance of same, you are still out in the cold.

Just my 2 c worth

ta
rolf
 
Thanks Bear. I will see if the mortgage broker is proposing to follow this route. The main thing is that I am not forced to misrepresent on the application. We can't have any chance the deal could be reneged by the bank between exchange and settlement.

I can see how to get the deal done and realistically the odds of you being caught out are minimal.

You recognise that this sort of deal is considered highly risky by the banks. In that light, is this really a good deal for you?
 
Yes it is possibly a very good deal. That said no exchange will happen until all the due diligence reports are compiled. Someone recommended I should speak with the local CBA lending manager with full disclosure if the broker comes back tomorrow with pessimistic feedback from her CBA contact and the CBA risk area.

Does anyone know whether mortgage risk insurance or title insurance is accepted by the lender if they are noted as having an interest?
 
Yes it is possibly a very good deal. That said no exchange will happen until all the due diligence reports are compiled. Someone recommended I should speak with the local CBA lending manager with full disclosure if the broker comes back tomorrow with pessimistic feedback from her CBA contact and the CBA risk area.

Does anyone know whether mortgage risk insurance or title insurance is accepted by the lender if they are noted as having an interest?

You have had fantastic advice from some of the brokers here, if your current broker doesnt come up with a solution why not use one of them?
 
If the valuer knows that the improvements are not permitted than the valuation could come in at land value less cost to remove the improvements.

good luck

Thanks. Land value (with exempted development improvements taken into account) less dwelling removal would probably still come in at or marginally above the purchase price
 
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