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How much will the banks be willing to lend for townhouse developments? - Valuation and Loan Amount

Discussion in 'Property Finance' started by Rick Sorkin, 2nd Aug, 2016.

  1. Rick Sorkin

    Rick Sorkin New Member

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    Hi everyone,

    Long time lurker, first time poster. This ones for the experts…

    We’re doing our initial feasibility on a small townhouse development and we’re trying to work out what level of capital is required before moving forward.

    We’ve managed to get a good sense of all the costs involved after talking to a few experts, but are stumbling on how valuations work from a finance point of view.

    Some brokers and lenders I talk to mention that the valuation will be done on a cost basis: ‘land value + build contract’ method, and the loan amount set at 80% of this. This happens to be quite a low loan amount. My understanding is that this is the same as H&L package we bought years ago. My two local bank mentioned it worked like this (NAB).

    Others have mentioned something along the lines of an ‘in one line’ valuation – which works out much better. Better still, one broker mentioned ‘end value’, but my reading is that this is for commercial deals.

    As a guide our ballpark costings are around:

    · Land: $500k (+ stamp duty)
    · Build Contract: $600k
    · Other: $300k (acquisition costs, project management, site costs, DA costs, interest, etc).
    · Total cost: $1.4mill
    · Total estimated end value: $1.7mill

    Assuming the land value is $500k, the total loan amount amount ends up being 80% of (600+500k) = $880k. That means we need to contribute a $520k as a minimum to the deal.

    The ‘in one line’ method the loan amount is around a loan amount of around $1.15m (assuming a 15% shading of the end value). This reduces our contribution required to about $250k.

    On an end value basis – our contribution is lower still, with a $1.36m loan amount at an 80% LVR and a $40k contribution.

    We have the funds in all scenarios, but want a clearer picture of the breakdown of what proportion of the total project cost can be 'funded by the banks vs funded by us'.

    Do different lenders lend differently on this? Are there some better than others?
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    How many townhouses are you building? This will determine to a large extent whether you can go resi or commercial, and with which lender.
     
  3. tobe

    tobe Well-Known Member

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    Different lenders do have different rules. Generally though the valuer will give a value of the property as presented. So if the land is yet to be subdivided or strata titled the value will be based on what a similar property might be sold for. This is more like a wholesale price. You can get a better valuation of the property is subdivided, but this doesn't always work with what the builder needs.


    The valuation is broken into land and building. Most banks will lend 80% of the land value. For the build value they will have a cost valuation and an end valuation. Most banks will lend 80% of the cost valuation. Just like they will lend against the valuation or purchase price whichever is the lower when buying an established property.

    I'll let some others comment on exceptions to these generalisations, but an important factor is how many townhouses you are building? Many lenders have a maximum number, usually 2,3 or 4 for their residential policy.
     
  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    A core underlying issue that doesnt come to light with many first time projects is end val.

    While GRV ( gross realisation value ) when separately titled might be say 2 mill, most valuers will apply a hair cut of between 15 to 30 % for the in "one line" value.

    Some lenders will lend up to 90/95 % of that lower value depending on a bunch of things.

    Typically though, the max lend will be round 65 % ofthe GRV or 80 % of the IOL value.

    ta

    rolf
     
  5. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Probably best to assume that you'd be able to borrow up to 80% of the property costs (land cost + build contract price) under residential lending policy.

    This tends to be the worst case scenario and types of deals are highly dependent on the valuation result. If you go into it assuming this scenario and the figures work, then a better valuation result is a bonus.

    There are also circumstances where you can borrow more than 80% (90% isn't out of the question), but this can be quite reliant on the circumstances. Best to plan conservatively and enjoy the bonus' that come your way.
     
  6. Rick Sorkin

    Rick Sorkin New Member

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    Thanks Tobe, Jess and Rolf - it's for 3 townhouses under resi lending hopefully.

    So based on this and the example provided above - does that mean a loan amount of 880k given the cost is lower than the end valuation?

    This number is different to the 'in one line' number thats been mentioned too?
     
  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    NABbroker will do this at 90% inclusive of LMI if the lending is under $1M.
     
  8. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    NABbroker would be a decent option for 3 dwellings.

    BOQ also will look at it with "end values" but will need a DA in place for them to consider.

    Bankwest will do it at 80% based on inline val for up to 4 dwellings on one title.
     
  9. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    DO you have a val to hand ?

    ta
    rolf
     
  10. albanga

    albanga Well-Known Member

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    I am all for over budgeting but 300k for other costs? Where did you get this number from

    Care to break out those costs?
    Just seems FAR too much if you ask me.