Funding a small townhouse development?

[Xjas]

I tried to seach this but "development" cant be searched due to too many results.

If I was to purchase a block with a house on it for 300k with the intention to rent it out for 12 months and then knock it down and spend a furthur 600K to build 3 townhouses on the block how would the finance typically be structured?


Do you get a loan for 240k (80% of 300K) to purchase and then refinance the whole thing into a contruction loan for 900K after 12 months?
What LVRs are typically availiable with a costruction loan and what value would the construction loan LVR be based on?

 

[tobe]

I tried to seach this but "development" cant be searched due to too many results.

If I was to purchase a block with a house on it for 300k with the intention to rent it out for 12 months and then knock it down and spend a furthur 600K to build 3 townhouses on the block how would the finance typically be structured?


Do you get a loan for 240k (80% of 300K) to purchase and then refinance the whole thing into a contruction loan for 900K after 12 months?
What LVRs are typically availiable with a costruction loan and what value would the construction loan LVR be based on?

yup, about right. LVRs vary for the construction, from 50% to 80% of the 'hard costs' or end value, whichever is the lesser.

 

[Aaron_C]

Yes as you described is how it works....80% LVR on land+hard/building costs.

 

[Xjas]

Thanks guys.

So how does the lender estimate the hard cost or end value? Do they rely on the developers estimates or do they have another way of assessing the value of the deal?

 

[Aaron_C]

Thanks guys.

So how does the lender estimate the hard cost or end value? Do they rely on the developers estimates or do they have another way of assessing the value of the deal?

The valuer...

 

[Peter_Tersteeg]

This can be treated as a fairly straight forward construction loan in many cases. It essentially becomes a land loan for the initial purchase, then a construction component when you want to build.

There's quite a few lenders who will easily lend against a 3 town house development, we've done quite a few where there were 4 town houses or units involved.

The tricky part tends to be in the valuation and this can be a bit unpredictable. You may purchase a property with a house on it, but if you demolish the house, you're actually reducing the value of the property and this will effect the value of the project (in the immediate term).

The other challenge is that the valuer may look at the total value of the property based on the land value and the construction value, but then they'll deduct the costs of sub-dividing the property (which can be substantial) leaving you with a lower valuation.

It's fairly easy to fund up to 90% of the valuation result, but getting the valuation result you need can be tricky. I'd suggest that you should start with a very conservative LVR on the original property when you start the construction. It depends on the overall deal, but the highest starting LVR I've seen was 80% (on the original property), but 60% or lower would be better.

 

[Aaron_C]

Just to give an example of how valuers can stuff things up - a client had 3 units on one title just finished. Valuer valued it at $940,000. A month later post subdivision, it was revalued at $1,190,000. It's insane.

 

[RightValue]

Just to give an example of how valuers can stuff things up - a client had 3 units on one title just finished. Valuer valued it at $940,000. A month later post subdivision, it was revalued at $1,190,000. It's insane.

No it's not insane. It sounds right. One is three units on one title (which has a limited market) and the other is three separate properties which are far easier to transact and can be done so individually.

if you knew the costs valuers need to deduct (which the bank would be liable for in the event they need to take it over) they are substantial.

Subdivision costs are minor, it is the liability for the other expenses that are large.

Valuations of multiple units on one title are always savage when you allow for costs and profit and risk.

Yesterday I had to inspect 3 townhouse on one title under construction that have gone mortgagee in possession. The bank/purchaser will be liable for the CGT on the new lots, the GST on the build with no input credits. Add to that very poor design, crap quality and that fact that a builder taking over the job will charge an arm and a leg (can't assume that a builder will buy it), profit and risk return, I will be surprised if the end value is much above land value.

 

[Blacky]

But this is the problem with many bank Val's.
if they adopted a real market Val the borrower is more likely to be able to borrow their way out of trouble. Finish the project, sell the units and repay in full.

I have worked at different banks. The first one addopted a more reasonable lending principle and allowed projects to go to completion. It resulted in less defaults and less losses when they did fall over as the projects were complete. The later bank "cut losses" and called the loan in at the first hint of trouble. It resulted in a lot of stressed sales and big losses.

Not saying this is the result of the above. But if the bank had a reasonable on completion Val, then maybe there wouldn't be a distressed sale.

Blacky

 

[RightValue]

But this is the problem with many bank Val's.
if they adopted a real market Val the borrower is more likely to be able to borrow their way out of trouble. Finish the project, sell the units and repay in full.

I have worked at different banks. The first one addopted a more reasonable lending principle and allowed projects to go to completion. It resulted in less defaults and less losses when they did fall over as the projects were complete. The later bank "cut losses" and called the loan in at the first hint of trouble. It resulted in a lot of stressed sales and big losses.

Not saying this is the result of the above. But if the bank had a reasonable on completion Val, then maybe there wouldn't be a distressed sale.

Blacky

We give them the figures for the units upon completion as if on separate titles. The bank can use them if they want, they are not bound by the valuation which is valued as instructed which is usually as if on on title and the bank needs to be aware of their liability for various costs and expenses.

I agree that adopting a on completion as if on separate titles would be a better way to go as most go to completion and get separate titles. But if it stops before this stage or completion, the banks do not usually want to mess about with getting things to a separate title stage, plus they are still liable for the taxes etc.

 

[HD_ACE]

Yes as you described is how it works....80% LVR on land+hard/building costs.

Aaron

would they deem the land value as it sits?
Or potential realised value. End value of all units minus all costs = land value?

cheers

 

[MTR]

I understand we are all at the mercy of the valuer.

My plans and permits for 3 unit site (survey strata) with Council, once approved I could throw it on the market it would be worth more than the house on the block of land, I have added value.

However my intention would be then to apply for a building loan against the value with plans and permits already in place.

Confused

 

[Aaron_C]

For a residential land it would be worth as is. For commercial purposes it would be valued with the DA. It has no real link to end value minus costs.

 

[MTR]

For a residential land it would be worth as is. For commercial purposes it would be valued with the DA. It has no real link to end value minus costs.

I understand now, fortunately land values have gone up, however, I have noticed that values are very conservative, not just my properties but other investors I know.... damn it.