Development finance - current market

Discussion in 'Loans & Mortgage Brokers' started by Starkey, 31st May, 2017.

Join Australia's most dynamic and respected property investment community
  1. Starkey

    Starkey Member

    Joined:
    31st May, 2017
    Posts:
    14
    Location:
    Adelaide
    Hello,

    I've read a lot of posts on this forum in regards to development finance but just thought i'd post here to get a current snapshot of the lender market. We're trying to gauge how much deposit lenders require. Could you acquire a site (land and existing dwelling for instance) for 10% deposit plus stamp with LMI tacked onto the loan, then acquire your DA approval (own cash), then finally could you borrow 90% of the construction costs (say for a 2 or 3 TH project) as well or would lenders require you to have more equity in the deal?

    Thank you
     
  2. tobe

    tobe Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,814
    Location:
    Melbourne
    There's a number of lenders who can do 90% on the land purchase, this week at least. A few will do 80% for the construction on the end value which might mean 90% of construction costs if your valuer falls the right way (if the end value is more than land purchase plus build cost).

    It's a difficult time to be getting general advice. Next week it's more than likely to change. Pretty risky going into something like this without specific advice and a plan b if lending policy changes again.
     
  3. Starkey

    Starkey Member

    Joined:
    31st May, 2017
    Posts:
    14
    Location:
    Adelaide
    Hi Tobe, thanks for the reply. Are you saying as a hypothetical example the following may be possible. Please note, these figures have been plucked out of thin air.

    Development site - $500k
    Construction costs for 3 TH - $600k

    End value $1500k

    80% of $1500k = $1200k

    This is more than the $1100k (land plus construction) and therefore it is possible that they would lend 90% - $540k of the $600k construction costs.

    Thanks
     
  4. tobe

    tobe Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,814
    Location:
    Melbourne
    It's possible, but some lenders, and some individual credit assessors aren't comfortable lending against inflated 'construction' values in valuation reports. The val report breaks up the value between house and land. If the increase shows on the land, rather than the build, it's possible. If the val 'falls' the wrong way, the increase is noted against the build rather than the land, or equally between them, there's problems.

    I'd suggest getting a long dd clause in the land contract, getting the build contract prepared, the whole thing valued and approved, before committing to the land.
     
  5. euro73

    euro73 Well-Known Member Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,125
    Location:
    The beautiful Hills District, Sydney Australia
    You are talking about 2 -3 townhouses...thats resi lending. Development finance is commercial lending...

    Resi lending - you should be assuming 80%. Yes 90% can be done today as @tobe has suggested, but given the number of lenders who have dropped to 80% in just the last week or so, I wouldnt be entering into anything assuming 90% will be available unless you had the DA, tender, drawings, fixed price building contracts etc, ready to go right now. ie today

    @tobe is also being a little too diplomatic when he says "some "lenders arent comfy with inflated "end value" valuations . I dont write construction deals by the dozen or anything, but I do quite a few and I'd be amazed if the banks would give you 90% based on assumed inflated vals. Do your numbers at 80% and you will be on much safer ground.
     
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    10,598
    Location:
    Gold Coast (Australia Wide)
    we do a few of the triplexes........

    the core issue at higher Lvrs is that valuers will haircut the End value by 15 to 25 % to account for risk, GST etc

    Its here that having a lender that will bump to 90 % are a useful fall back

    ta
    rolf
     
  7. Starkey

    Starkey Member

    Joined:
    31st May, 2017
    Posts:
    14
    Location:
    Adelaide
    Thanks for your input. From what you're saying I understand that in regards to site acquisition lenders are tightening up and therefore a 20% deposit would be required as those offering 90% are reducing.

    In regards to construction loans you've mentioned how inflated "end value" valuations arent favoured by lenders and advise to complete numbers at 80%. Do you mean 80% of the construction costs? Forgetting about end valuation.

    Thanks
     
  8. euro73

    euro73 Well-Known Member Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,125
    Location:
    The beautiful Hills District, Sydney Australia
    I mean that lenders will generally be guided by valuations, and valuers will generally take the land value + the construction cost. That is what will determine loan policies.

    However, after settlement, you can get a property revalued and if the end value is higher than the land + construction cost, at that time you can draw out equity, subject to lender policies at the time and subject to borrowing capacity
     
    Starkey likes this.
  9. Brady

    Brady Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,561
    Location:
    Adelaide, SA
    @Starkey
    Are the TH going to be in SA?
    Will they be torrens or strata titled?
    Will there be party walls or standalone?
     
  10. Starkey

    Starkey Member

    Joined:
    31st May, 2017
    Posts:
    14
    Location:
    Adelaide
    @Brady
    When it comes to it, I'd like to develop in SA.
    I can't give you a definite answer on the titling but I was thinking it may be a community title (shared driveway) residential flat building. In that case there would be party walls. Of course nothing is definite and I don't have any particular site in mind at this point so it could be completely different.
    Could I ask why?
     
    Brady likes this.
  11. Brady

    Brady Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,561
    Location:
    Adelaide, SA
    Big differences, a lot of my 'mum and dad' investors who're doing splits of 1 > 2 or 1 > 3 stick to doing torrens titles, no party wall.
    In SA title/development plan is issued before construction. Which in turn means you can have titles before construction.
    Meaning you're still able to do the 2 or 3 not only under residential but based on end value, so you don't get the haircut from the valuer based on 'in one line valuation'
    Result is less cash/capital required to complete the development.
    Pre-APRA meant could do 95% construction loans with CBA for Investment w/ IO
    Now you're looking at 80 IO or 90% P&I
    But key for a lot is being able to use the end value.
     
    tobe likes this.
  12. Starkey

    Starkey Member

    Joined:
    31st May, 2017
    Posts:
    14
    Location:
    Adelaide
    I understand what you're saying. Torrens title the way to go! Just a shame that the situation has changed as you have mentioned. Thanks a lot for the info, appreciated!
     
  13. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,130
    Location:
    03 9877 3000
    If you're looking for >80% LVR, I'd be very cautious given that the big 4 are no longer offering IO loans above 80%. They will do a 90% loan as IO during the construction period, but it's very clear that they don't have an appetite for it. This leads to uncertainty and can mean the application gets declined even when everything appears to stack up.

    I've now had 3 instances where people were purchasing a regular house on a big block in a designated growth zone. The valuer got permission to do a 'long form' valuation to identify the 'highest and best possible use' of the property. This has led to the properties being identified as development sites and the loan application being declined as it's outside of the lenders residential policy.

    Put another way, you want to buy an older home with a big back yard. You've got the deposit and affordability, you're a good risk. The bank declines the application because the best use of the property is to develop 4 town houses. Never mind that right now it's just a 3 bedroom house on a large block.
     
  14. Starkey

    Starkey Member

    Joined:
    31st May, 2017
    Posts:
    14
    Location:
    Adelaide

    Wow, that would be infuriating! I understand that its not wise when making a purchase with the intention of developing down the line to mention that intention, but that seems pretty harsh!
     
  15. wombat777

    wombat777 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    3,565
    Location:
    On a Capital and Income Growth Safari
    Wow! @Brady - do you know if this is possible for townhouses in QLD. Although in my situation the townhouses will have party/shared walls. More of interest at this point.
     
  16. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    1,648
    Location:
    Sydney
    Couple of points:

    1. Don't want to be a party pooper but the number one thing with developing is that you need to have plenty of surplus cash to keep the project going for either unexpected costs or soft costs that you can't finance. If you are playing in LMI territory then this shows that you may not have sufficient funds to develop. Last thing you want is to get stuck on a project due to insufficient funds. Im certainly not saying you should proceed but just be super mindful of this.

    2. Anything that is a LMI and over $1mil loan amount combo is going to be a hard sell if you are a mere mortal (i.e. not a medico).

    3. 2 units is fine in LMI territory but not 3 or more.

    This thread may also help you some what:

    Development Finance Guide
     
  17. Brady

    Brady Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,561
    Location:
    Adelaide, SA
    Not sure on QLD haven't financed a development there. Plenty in SA.

    Party wall would mean 'in line valuation' required.