Land loan needed - a little out of the norm

Discussion in 'Loans & Mortgage Brokers' started by SubdivisionBankIssues, 1st Oct, 2019.

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

    SubdivisionBankIssues Member

    Joined:
    1st Oct, 2019
    Posts:
    18
    Location:
    Melbourne
    Hi all,

    I am new here but have enjoyed reading quite a few threads but its time to post my first one.

    So....where to start.....

    VERY long story short, my fiancee and I have purchased 17 acres in the North of Melbourne with 15 acres being zoned Green Wedge and 2 acres being zoned Low Density Residential.

    The idea is to subdivide the LDR into 3 x 2500m2 blocks to sell and keep the Green Wedge land to build on ourselves. We took a 9 month settlement to give us time to save up any extra funds we may need and also to give us time to get the subdivision approved by council.

    My company has many clients who subdivide etc themselves so I am lucky to have a better understanding than most of council DCPs, requirements etc.

    So....the agent from the start has been and continues to be...useless. Everything he told us has been wrong. The owners have been just as bad, providing the agent with quite a few innacuracies that will cost us tens of thousands of $. Therfore, my sympathy for either of them isnt that high.

    Because of this however, and after many many hours of due dilligence, we will profit. We had the land valued as a whole a week after purchase at $300,000 more than the purchase price and then individually as 4 blocks once subdivided at just under $1,200,000 above the purchase price.

    So, with that valuation in hand I thought banks would be falling at our feet to lend us $ to buy the block based on the valuation price. How wrong I was. So far the only lender willing to lend based on the valuation wants a $20k set up fee and 2.5% per month. Yes thats per month, not per annum! Every other lender says they will only lend on the purchase price. This was my first issue of contempt. Our situaiton is highly different to most yet no lender will take our purchase on face value whereby a price was paid in August and 9 months later at settlement the valuation will be ALOT more than the price it was purchased for. No lender wants to hear that actually got a bargain.

    I have a friend who is a branch manager at CBA and we will probably apply through them, our income is enough on paper to keep them happy as far a land and future construction loan is concerned, we've paid 5% deposit, we will have enough saved to cover the stamp duty and another 4% deposit. I am concerned though that the LMI company may reject the loan, no real sense as to why, just have that feeling.

    We will also still need to borrow a further approx. $200,000 to cover the subdivision costs.

    So, are there any lenders out there who would be willing to lend us on the fact that the valuation of the land is actually not what we paid for it. The valuation may in fact go up by a further $300,000 as we found out we can subdivide 3 blocks not 2 (when the land was valued we only assumed 2). Ideally we would wan to borrow the purchase price plus $200,000 more to cover subdivision costs and once subdivided we will have 4 titled blocks in total worth just under $2,000,000.

    Any suggestions/advice/powerball winners looking to invest please? :)
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    5,065
    Location:
    Melbourne, Nationwide
    Sorry, but mainstream lenders will only lend against 'what is' and not 'what it might or might not someday be'. That means they'll lend against the purchase price, not what you project the property to be after a subdivision. On top of this, you'd be doing very well to get a 90% lend, more likely you'd get a 70% - 80% LVR.

    The valuation you hold isn't relevant. Lenders do their own valuations and they lend against the lower of the purchase price or valuation, unless there's a really good reason otherwise. Future subdivision isn't one of these reasons. If anything, given its size, lenders are going to be rather conservative towards it.

    The other alternative is private lenders which you've already discovered charge massive interest rates.

    The only way you're going to make this happen is to provide additional security. Perhaps take on an equity partner to get this deal done? A percentage of something is better than 0% of nothing. It might give you the capital to do this sort of thing on your own the next time.
     
    sumterrence and tobe like this.
  3. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    935
    Location:
    Newcastle
    You should never trust the agent or the seller, they are biased towards their own interests, always do your due diligence, and sometimes don't even trust what council or townplanners tell you, going through this atm.

    In regards to lending. Are you tapped out for equity atm?
    Do you have a property you can borrow against?
    You may need to go into a JV to get the deal done.
     
  4. Richard Taylor

    Richard Taylor Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    351
    Location:
    Brisbane
    Assuming "As is" valuation is accurate post settlement you could always look for Private funding by way of a 2nd Mortgage but the rate of 2.5% is pretty standard.
     
    Last edited by a moderator: 2nd Oct, 2019
    SubdivisionBankIssues likes this.
  5. SubdivisionBankIssues

    SubdivisionBankIssues Member

    Joined:
    1st Oct, 2019
    Posts:
    18
    Location:
    Melbourne
    yeah i did alot of due diligence but stupidly took the advice of the agent regarding services, the ad for the block stated "ALL SERVICES AVAILABLE" AND "Approx 3 acres of Low Density Residential..." of which there is actually just under 2 acres so not sure if we have some legal recourse of false advertising against the agent.

    Nope, no other property but able to save a decent amount per week to put toward more of a deposit if needed.
     
  6. SubdivisionBankIssues

    SubdivisionBankIssues Member

    Joined:
    1st Oct, 2019
    Posts:
    18
    Location:
    Melbourne
    Hi Peter, thanks for the response, CBA are actually offering a 95% lend and like you i was worried about the size of the land with them but they arent. I'm concerned the LMI company wont agree to the loan but I guess I'll apply with CBA and see how we go then once the subdivision is approved maybe try a private lender for the subdivision cost.
     
  7. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    935
    Location:
    Newcastle
    It's really buyer beware with property, I've found that out during my current instance, even council giving me the wrong info before purchase...

    Sounds like you may need a JV partner for costs, as it seems the lending will be the issue, unless you're willing to save up and spend the money on the subdivision as needed.
     
  8. SubdivisionBankIssues

    SubdivisionBankIssues Member

    Joined:
    1st Oct, 2019
    Posts:
    18
    Location:
    Melbourne
    thanks for your response by the way :)
     
  9. SubdivisionBankIssues

    SubdivisionBankIssues Member

    Joined:
    1st Oct, 2019
    Posts:
    18
    Location:
    Melbourne
    I deal will Councils daily with my business, you arent the first person to be told the wrong thing by them, they really are useless!
     
  10. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    10,590
    Location:
    Sydney
    I have seen a number of seemingly fantastic opportunities fail due to lack of access to finance. Worst of all is signing a contract or bidding without finance plans approved. Some of the worst are those who assume finance works on land like it does for a home eg 80% LVR etc... That is NOT how it works. And when they delve into calculations and taxes they will get worried. eg How will GST impact this etc.

    A JV financier may be a solution. They will take a share of the project and finance it. But it wont be cheap. Maybe 50% as a equal partner.
     
    lixas4 likes this.
  11. SubdivisionBankIssues

    SubdivisionBankIssues Member

    Joined:
    1st Oct, 2019
    Posts:
    18
    Location:
    Melbourne
    Hi Paul,
    I knew I was taking a risk by not signing subject to finance but due to the opportunity available believed it was worth it and still do, worst case we can get finance thorugh the private finance and CBA are still a fairly good chance to say yes.
    CBA are looking after us by lending the 95% LVR as we have shown we have the income for a construction loan so that was very lucky.
    Yes GST will come into it as will tax but even after all of that we will be left with 15 acres that will have cost us between $150,000 to $400,000 (depending on all of the tax factors etc) so still believe it is worth doing.
    Just a few sleepless nights lately :)

    If the only option is a JV financier where do I find those?
     
  12. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    935
    Location:
    Newcastle
    Not sure tbh, would come down to how connected you are etc (networking).

    What will private finance be, $5k a month? Will you be able to service that?
     
    Last edited by a moderator: 2nd Oct, 2019
  13. SubdivisionBankIssues

    SubdivisionBankIssues Member

    Joined:
    1st Oct, 2019
    Posts:
    18
    Location:
    Melbourne
    If it was just on the $200,000 to subdivide then might be that. It its on the entire $980,000 then the interest alone is nearly $6000 a week, yes we could manage that but only for a few months. it really is a last resort, will see how it pans out with CBA.
     
  14. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    935
    Location:
    Newcastle
    If you are getting finance for the costs of the subdivision, then the loan would be on that is my guess, I don't think you would borrow on potential profits as well.
     
  15. SubdivisionBankIssues

    SubdivisionBankIssues Member

    Joined:
    1st Oct, 2019
    Posts:
    18
    Location:
    Melbourne
    the private lender i mentioned initially offered us the full $980,000 yesterday but at 2.5% per month, hence my thread on here, was seeing if there may be any better options :)
     
  16. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    935
    Location:
    Newcastle
    He may've miss interpreted what you were asking, but yeah, I'd only borrow what you need at those rates, and pay it back as fast as possible.
     
  17. SubdivisionBankIssues

    SubdivisionBankIssues Member

    Joined:
    1st Oct, 2019
    Posts:
    18
    Location:
    Melbourne
    id explained the situation pretty clearly im pretty sure he understood what we want to do.
    but yes for sure, IF as a last resort we had to borrow from him it would be after the subdivision was approved by council then we'd subdivide asap and approach CBA with 4 titled blocks and try to borrow against those.

    Its all good fun............
     
    Archaon likes this.
  18. Beano

    Beano Well-Known Member

    Joined:
    7th Apr, 2016
    Posts:
    1,739
    Location:
    Brisbane
    "$6000 a week, yes we could manage that but only for a few months"
    Banks like to see the interest covered at least 1.75 with sustainable income.
    They don't really like to loan an extra amount to the borrower for them to return as a interest payment.