Owner buider construction loan for duplex

[andini]

Hi everyone,

I have a property close to Parramatta I'd like to subdivide and build a duplex on, the property would most likely be valued at $850k and I have a $360k mortgage owing on it. From my research, duplexes in the area are fetching up to $900k and by the time my project is complete, that figure may increase to $950k for each lot, so there are some healthy gains in it. After doing a quick feasibility on it, it seems as though I may be almost as well off if I just add some value to the place and sell it, rather than going through the whole subdivision and developing it. But at the end of the day, I'm after both the experience and the profit as this is what I'd like to get into.

I'm a licensed builder but after reading through SS and contacting a bank and a broker regarding a construction loan, I need to provide a lump sum contract from another builder, even though I own a building entity. I understand the risks involved for owner builders, but I don't agree with the banks not wanting to offer builders loans.

If you have any experience in the field, I have a few questions I hope you could answer for me.
At this point, I imagine there are 2 scenarios I could use to get past this obstacle.

Scenario 1
I have friends who are also licensed builders that I could ask for a contract and just complete the works myself. My only concern in this scenario would be how and who the bank would transfer the progress payments to. If it would be to my friend's bank account, then I'd be a little worried!
So ideally, if the bank doesn't send a quantity surveyor out to inspect at every stage of construction and if the funds are being put into my account, then I don't forecast any issues.
In regards to this scenario, my questions would be does the bank send out a QS to inspect before each progress payment? and who does the bank transfer the funds to?

Scenario 2
I bite the bullet and allow another builder to complete the project. I imagine it'd be a whole lot easier for me to secure a construction loan in this scenario, but I wouldn't be saving on builder's profit, overheads and some trades/labour I'd be able to carry out myself.

Regardless which scenario I end up using, would the bank be able to fund the entire $700k to build?

Thanks in advance

 

[Rolf Latham]

I'm a licensed builder but after reading through SS and contacting a bank and a broker regarding a construction loan, I need to provide a lump sum contract from another builder, even though I own a building entity. I understand the risks involved for owner builders, but I don't agree with the banks not wanting to offer builders loans.

Thats ok, its not your money you are offering . many lenders will do OB, perhaps not at the terms workable for you

Scenario 1
I have friends who are also licensed builders


In regards to this scenario, my questions would be does the bank send out a QS to inspect before each progress payment? and who does the bank transfer the funds to?

No QS, usually valuer will pop out at slab and at completion. Money goes to builder as it should.

Scenario 2
I bite the bullet and allow another builder to complete the project. I imagine it'd be a whole lot easier for me to secure a construction loan in this scenario, but I wouldn't be saving on builder's profit, overheads and some trades/labour I'd be able to carry out myself.

Regardless which scenario I end up using, would the bank be able to fund the entire $700k to build?

Thanks in advance

Subject to serviceability and valuation, yes lenders will lend the full cost to complete, we do it regularly. Your equity posn should allow it if valuer agrees

ta
rolf

 

[D.T.]

Perhaps

 

[Shahin_Afarin]

You are trying to do the extra sneaky sanchez and its going to work because:

1. Home warranty insurance amongst many things must be in the name of the builder. So your builder friend would need to pay for this and goes without saying the significant ramifications of lying to an insurance company.

2. You will be also lying to the bank in which case if the proverbial hits the fan they will cancel your loan contract.

So what's the answer? Do it the legal way.

RAMS is the only lender that will do owner builder at 80% subject to:

1. you are a licenced builder (which you are) - so tick
2. you can put together a fixed priced contract (which I'm sure you can) - so tick

 

[Terry_w]

You are trying to do the extra sneaky sanchez and its going to work because:

Did you mean "its NOT going to work because..."

I am sure the friend also would not like to be responsible for the repairs under warranty.

 

[Shahin_Afarin]

Yep meant not hence the sanchez

 

[andini]

Thanks for the advice guys.

RAMS is the only lender that will do owner builder at 80% subject to:

I might book an appointment with them to see if they'd like to do business. I also read St George do low doc loans, do you know if they'd do construction low docs? And when you say 80%, will that mean in my case value of property minus mortgage?

 

[Rolf Latham]

Thanks for the advice guys.

I might book an appointment with them to see if they'd like to do business. I also read St George do low doc loans, do you know if they'd do construction low docs? And when you say 80%, will that mean in my case value of property minus mortgage?

In a hybrid discretionary trust as well Im guessing ?

ta

rolf

 

[Ausprop]

I am sure the friend also would not like to be responsible for the repairs under warranty.

are we talking about indemnity? the term 'warranty' has little do with repairs. Sadly it creates a wide misunderstanding in the community that they are being covered for something meaningful. It's such a useless policy that they were talking of scrapping it altogether in WA.

 

[andini]

Thanks very much for the information Shahin_Afarin, I contacted Rams and they will do owner builder as long the contract is from a licensed third party, which it is. I'm surprised there aren't many other lending institutions or banks who lend to builders with companies.

 

[andini]

In a hybrid discretionary trust as well

Rolf, I've never heard of such thing before and haven't considered a trust. Is it something you'd recommend to look into and set up accordingly?

I'm having a quick read up on it now.

 

[Shahin_Afarin]

Thanks very much for the information Shahin_Afarin, I contacted Rams and they will do owner builder as long the contract is from a licensed third party, which it is. I'm surprised there aren't many other lending institutions or banks who lend to builders with companies.

Good luck and let us know how you go.