Knock down rebuild valuation

Hi

I've got a property in Thornleigh NSW, it's a 2 bed fibro place that I bought a few years ago with the intention of knocking it down to rebuild. A 2 bed house in the suburb is unusual as most are 4-5. In addition we have a smaller lot of around 420sqm.

I've got a contract with a builder and the DA in with council for a 4 bed, 3 bath 2 storey house, circa $700k (thanks crazy construction prices atm). Naturally next step is financing, speaking to a broker income wise serviceability is not an issue. But they have come back with an interesting (desktop) valuation of the existing property of circa $800k. They then want to then subtract the value of the existing structure from that to estimate land value. Obviously cresting a valuation problem. I've already questioned the comps made as one is a unit, the others villas with no disclosed land size attached. As well as highlighted some interesting outcomes in using this approach.

My understanding is that this should be an as complete valuation. Essentially assessing land value and construction costs against the value of a similar 4 bed 3 bath house in the suburb. Which should give a conservative value of $1.8m+ given comps. Subtracting construction costs from this gives a land value of roughly $1m.

Is there something I'm missing here? Issue seems to be land valuation rather than the construction cost. Anyone had a similar issue that could share any advice?

Thanks

 

May I ask which bank

Generally we would do a full valuation "as if complete" to borrow against the end value of the property.

 

That's what I thought, but can't get the logic of working out the land value from the current state of the property particularly when there are more comps for the end state complete house. Seems a sure fire way to end up with a low valuation.

Loans with a non bank lender - origin.

 

Different bank different policy I suppose.

 

They will generally lend based on land Val and construction costs

 

As per above...... plus why a non-bank lender?

 

That's not the correct way to do it, why are they trying to base anything about it on a desktop valuation? Seems strange.
You need a Full Valuation an as-if-complete valuation is the go, definitely not a desktop or any other automated val.

 

No particular reason. Was best deal rate and structure wise at the time.

But but based on the comments I might just try another lender that'll do an as complete valuation.

 

They have asked to value the current property. My issue with that is they are then comparing to recent sales based on similar number of rooms etc. But none of those comps list a land size. In my mind they aren't relevant as we need the land value, but more importantly step 1 is ripping the current house down. It's collateral value is 0.

 

For sure, almost sounds like whoever you're talking to don't know how construction works (or maybe the lender does not have a construction product?)

 

Yeah you're not wrong, the auto val is irrelevant.
Some lenders want to ensure the land value can maintain an acceptable LVR with the existing debt secured by the property. Kind of like a worst-case-scenario eg. if you knock the existing house down and can no longer afford the loan to build, there won't be a negative equity situation with only the land held as security for the debt.
However even if that is the case a full valuation should be ordered (known as a short-form valuation)

Are you going to this lender directly or using a Mortgage Broker?
I think you need a decent broker who understands construction finance and can show you a range of lender options.