Development Finance Guide

Discussion in 'Loans & Mortgage Brokers' started by Shahin_Afarin, 21st Jun, 2015.

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  1. Jonathan D

    Jonathan D Member

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    - No issues as yet, finance has been applied for. I understand it will have to go commercial, couldn't imagine banks wanting to lend through residential finance knowing they will be sold.

    - 20% has been paid for the land so 80% lend (residential lending at the moment). Hoping not to put another cent into the deal (except for architect, council, surveyor etc. - these i will pay for).

    ^ see above. Great to know!

    ^ see above x2 - sorry for being unclear.

    1. Does anyone have any suggestions as to which bank would be best to go to. I've heard to avoid ANZ, CBA and BoM. This leaves me with NAB and WBC.
    2. How can I ensure the valuations come in at contract price?
    3. Is 80% realistic, I've been hearing 65/70% is what is the most likely outcome. I'm surprised by all the positivity here! ha.
     
  2. Cactus

    Cactus Well-Known Member

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    Don't know about the ones you were told to avoid. I have had both nab and westpac be happy to do it as residential on 80/20. Meanwhile I was getting 10% back in GST so it was really 90/10. I had already sold and westpac bankmanger did not want to know about this he was providing finance on the basis of retention and end serviceability.

    Valuations will often be lower than your end prices. But as long as there high enough for what you need, this won't be a problem.

    80% realistic for resi. Com depends on dollars and timeframe but 70% of ex GST (ie 60%) is the lowest I would expect. Unless your talking a larger subdivision with a 3 year timeframe or rezoning issues.
     
  3. Jonathan D

    Jonathan D Member

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    From my understanding, residential lending won't look at GRV ('end value') and will only do a land + build at 80% - which is not what I want... No?
     
  4. tobe

    tobe Well-Known Member

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    Contact @Shahin_Afarin the original poster rather than trying to do it yourself from bank to bank. The process with him will give you a better understanding of development finance and it'll be much easier than trying to do it yourself.
     
  5. wrexter

    wrexter Active Member

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    Hi @Shahin_Afarin, i had a question hopefully you might be able to help with.

    I am about to embark on a 3 unit development in Perth and have asked our bank NAB for final approval (we already had pre-approval). The valuation has been done but the bank has excluded GST from valuation which has created a shortfall for me to get finance approval.

    The issue for bank is that as its on one title until subdivision they see it as a risk until its subdivided hence excluding GST.

    Since we already have WAPC approval for subdivision here in WA (we can have subdivision titles 4 months after starting demolition/construction), is it possible to have a conditional finance with Bank so that they provide finance but withhold final payment until we have titles? that we they only provide finance they are prepared to give now and once i have titles they can re-evaluate the valuation ?
     
  6. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    All lenders are going to off the lower of val or cost plus land. You can by exception go off the higher of the 2 but this is quite difficult and dependent on a) the lender and b) the overall strength of the application.

    No one is going to go off subdivided/end values under residential lending.
     
  7. Blacky

    Blacky Well-Known Member

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    Yep, all banks will do the same.
    You either have to throw Additional security in or;
    Demolish and subdivide ( at your cost) then submit for 3x loans for the three houses.

    But this is not a guaranteed solution as there is nothing to say they will finance it.

    I take it you have went direct to NaB as they are ‘your’ bank.
    Suggest you take it to a broker who knows development finance.
    However sounds to me like you will struggle to source finance and thus the project will stall.

    Look at options b) sell with DA and c) sell off the plans for d) subdivide and sell the vacant land.

    To be honest, in Perth at present, I doubt these options would net you much less than completing the full dev anyway.

    Blacky
     
  8. wrexter

    wrexter Active Member

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    I am going through a broker. My bank is CBA but they don't finance 3 unit developments. NAB is our only option because of our current situation (long story).

    My only option is to develop, all my case studies show significant higher return by completing the development.

    I have other options for coming up with extra equity but I'd rather work something with bank.
     
  9. Blacky

    Blacky Well-Known Member

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    Hmm.
    See comments above. Not sure who is telling you some of this stuff, but if I was doing a 3unit development right now NAB wouldn’t be my first choice, and doubt it would make the top 5.
    You do have other options (most of which would be better choices).

    I’m interested to know more about your development and the numbers behind it. I’m suprised to see a 3x development stack up so well in Perth In’T he current environment. Can you share more detail about it? (Suburb, plan, Feaso, etc?)

    Blacky
     
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  10. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    Just of our of curiosity were you explained how the valuations work prior to you ordering the valuations? Have you tried contesting the valuation? Bit of scrapping the barrel suggestions but it really depends on how short you are in funds. It does sound like its quite a bit hence the reliance on the end values.
     
  11. wrexter

    wrexter Active Member

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    Im not sure why you are trying to **** on everything I say, I came looking for advice but if you don't want to be helpful, then don't worry about it.
     
  12. wrexter

    wrexter Active Member

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    My broker and my builder are suprised GST was excluded. Is there anything else they should of explained? We contested the GST exlcusion but it's a bank requirement. The value itself was very good and not going to challenge that.

    The shortfall is 75k, as I said I have equity elsewhere I can access but I wanted to work something with bank whereby they provide finance until I get titles before they provide the remainder of finance so that they are happy to not be exposed to risk of a 3 unit developments on 1 title (the reasons they are excluding GST).
     
  13. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    Hey Wrexter I don't think Blacky is trying to be negative - he has done a couple of developments in WA and can provide some good advice.

    The whole GST thing actually consist of a number of things and not just GST deduction.

    Its good that you are happy with the valuation as often they don't come back satisfactory. Anyways not sure if any of the above points were of use but nevertheless good luck with the project. Its always exciting starting a new project.
     
  14. Blacky

    Blacky Well-Known Member

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    I’m not trying to **** on anything you say. And sorry if you took it that way. Though
    I do disagree with some of the points made in regards to financing options.

    My point goes back to an earlier one in this thread which refers to brokers experience. Many brokers do not know how commercial and or development finance works. You need to find one who does.
    I’m suprised your broker is suprised he didn’t know GST is exluded from the end Val’s. As this is how development finance has always worked.
    Have you applied through NaB commercial or resi finance?

    You do have options, some of which I have already listed.

    However without more detail of the project it’s going to be hard for anyone to help much more than Sahin already has.
    And I’m also curious to know where 3x devs are working in Perth.

    Hence why I was asking.

    Blacky
     
  15. wrexter

    wrexter Active Member

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    Ok fair enough, just felt that way.

    All our loans are with CBA and we are moving to NAB (resi loan for development) because as my broker has advised, CBA will not provide loans for multi ino developments , I believe it's because we our block is on one title. Would be a different story if we subdivide first then apply for build finance.

    From what my broker says, NAB was our best choice because my wife is currently on maternity leave and they will allow the use of her maternity pay to calculate borrowing power.

    We purchased a duplex in Carlisle 4 years back either possibility to build a 3rd unit in the back. (It's 895 sqm).

    After attempts to split and subdivide the block to build in new in back and retain 2x existing it was proving too difficult with getting approval. All our eggs are in this property and we have no room to move especially with Perth market not doing that well in recent years. The properties are not doing anything for us and we can't do anything else so decided we need to free up equity for other projects.

    I did a case study looking at following options and demolishing and building 3 new came out on top,

    - sell the 895sqm block as is
    - demolish, subdivide and sell 3 blocks
    - demolish, and build/subdivde 3 new units

    Feaso showed last option best. I also liked the idea of being able to retain 1 of the new units to add to my portfolio.

    Purchase price is $800k plus duties ($30k)

    Development costs are $640 to build 3x new 3x2 units (Inc all siteworks, turnkey).

    Interest during construction etc is ~$50k

    All up $1.52M

    Projected average Value for each unit = $585k

    Total = $1.755

    Gain = 235k,

    Aim to to be left with a a new unit that I can rent out and be postivley geared and also freed up equity to pursue other projects.

    I know the gain is not huge but it's Alot better in my opinion than being negative on it right now and waiting for years to improve.

    At this stage even if I broke even I would be happy because I do not want to hold on this duplex as it is

    The above is based on best information I have and limited experience in development so I don't professional to know it all, i'll take any genuine advice on board. Thank you.
     
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