Knockdown Rebuild Finance

[albanga]

Hey All,

I'm curious as to how lenders finance a knockdown rebuild.

Scenario:
Property Valued at 500k (350k land, 150k house).
Current Loan = 250k
Build Contract = 350k
Finished Valuation = 850k

Do they base on end valuation? So LVR would be 600kloan/850 valuation = 76.54 LVR

Or do they lend on the build contract which would then require 70k equity. If this is the case then the part I am unsure of is given the existing house would be destroyed then can they only release the equity based on the land value of the home?
Therefore meaning land value 350k, current loan 250k so only 30k in useable equity?

Sorry if i am confusing how this is actually done.

 

[tobe]

They do a valuation on the end product, and then the bank lends on either the end value or the construction cost, whichever is the lower.

Most lenders will treat it as a purchase and lend up to 95%.

SO in this case the loan amount would be lets say 80% of $700 ($350 build, $350 land) $560, minus existing loan $250 means there is only $310 to put towards the build unless you wanted to pay LMI.

 

[albanga]

They do a valuation on the end product, and then the bank lends on either the end value or the construction cost, whichever is the lower.

Most lenders will treat it as a purchase and lend up to 95%.

SO in this case the loan amount would be lets say 80% of $700 ($350 build, $350 land) $560, minus existing loan $250 means there is only $310 to put towards the build unless you wanted to pay LMI.

Hi Toby,
That makes perfect sense. So in this scenario the LVR would be 85.71% so a small amount of LMI would be payable.

Just out of our curiosity though when would the end value be worse than the construction cost?

 

[tobe]

when you try and build the taj mahal in Melton.

Basically, when you overcapitalise. ie a double story 5/3/2 with an indoor pool in an area where all the comparables are single fronted weatherboards 3/2/1

 

[Peter_Tersteeg]

Just out of our curiosity though when would the end value be worse than the construction cost?

By knocking down an existing house you actually devalue the existing property. Right now your property is worth $500k but after demolition it's only worth $350k.

Doesn't appear to be a problem in this case, but can be if you buy at a high LVR and want to build straight away.

 

[imbi3]

Hey All,

I'm curious as to how lenders finance a knockdown rebuild.

Scenario:
Property Valued at 500k (350k land, 150k house).
Current Loan = 250k
Build Contract = 350k
Finished Valuation = 850k

Do they base on end valuation? So LVR would be 600kloan/850 valuation = 76.54 LVR

Or do they lend on the build contract which would then require 70k equity. If this is the case then the part I am unsure of is given the existing house would be destroyed then can they only release the equity based on the land value of the home?
Therefore meaning land value 350k, current loan 250k so only 30k in useable equity?

Sorry if i am confusing how this is actually done.

Bank will need to make sure their current exposure is covered on the land value given you will demolish. The as-if complete will most likely be the land + hard cost

 

[albanga]

Sorry just had another thought on this.
Tobe on your example to the scenario you deducted the existing equity 250k from the cost (700k construction cost, 560k at 80% LVR a then minus 250k current equity = 310k for build).

My question though is that equity is based on the current house and land value, when it gets demolished, wouldn't it mean the only equity available is land value 350k minus current loan of 250k = 100k?

So only 160k for the build at 80% LVR?

 

[Peter_Tersteeg]

In many cases, the value of the property will be determined on Land Value + Improvements.

If you demolish, the land value will be $350k and the improvements would be the build cost of $350k.


Some lenders will look at the value of the individual units using current comparibles in the area. They'll then subtract the cost of subdivision and this will be the completed value of the project.

 

[albanga]

I guess the issue I am having trouble getting my head around is the equity that exists in the current house/land and how that is used for the future house. In my example there currently is 250k in equity, but if the house was demolished there would only be 100k in equity.

So how does the bank use that equity when assessing the LVR?

 

[SK Investments]

I'll try and explain what I think you are asking.

As you outlined you will have approx $30k in available equity on the land component only @ 80% LVR

You will then take out a construction loan for the build, but again the bank will probably only fund 80% of this unless you use LMI.

From what I can see here I'm not sure you will have enough funds to complete.

 

[albanga]

ok makes sense, I was confusing myself!
Thanks for the replies all.

 

[oc1]

So what LVR in my scenario would I be at?

Mate, do you have a broker? One from the forum? Most of the questions you ask here can be easily answered by a competent broker. Not having a go at you, but i would establish a relationship with a good one and go from there.