Lending for subdivision development

Hello all,

Currently considering my first JV with friend to subdivide land (in Victoria). Not wanting to build any dwellings, just want to sell the new land.

Long story short, the following is a rough guide as to the budget:-

Land: $540k
Stamp duty: $30k
Demolition, subdivision, services, drainage, legal costs: $120k
Selling costs, GST, CGT, council levies, etc: $70k
Sale price: $860k
Profit: $100k

We have $575k in cash, so can buy the site not subject to finance.

However financing the actual development will require finance. While I have well and truly his the serviceability wall, my friend has not. He spoke with ANZ, and is able to borrow $290k. However as the property will be in both names, we will both need to be on the loan. Very strangely this has reduced the amount which can be borrowed down to $220k, which has well and truly confused me (I thought my liabilities wouldn't have effected his serviceability that much, if at all).

I have heard that a smaller lender may be able to help more, or even that a commercial loan could be the way to go. Would appreciate some input from those in the know, or even from a good broker...

Thanks in advance!

 

Why not start off with a loan and use the cash to fund the costs?

 

Terry, happy to either obtain the loan at the start, or obtain finance later - titles office fees would be saved doing it right from the start. What I was meaning was we would have sufficient funds to buy without conditions (for making the offer to purchase)

 

It would be very hard to get it later so easier up front. You could still make an unconditional offer - just be quick with the finance and if it doesn't come in time you could settle with cash and mortgage it after settlement (note there are tax issues).

 

Any other thoughts from anyone? Any recommendations for a good broker for this transaction?

 

If you are in Melbourne and want a local I have met Pete Tersteeg @Peter_Tersteeg at various catch ups there and always found him to be knowledgeable and great with his broking knowledge.

One solution might be to buy the block unconditionally then get a Line of Credit (LOC) agains the block to cover the additional expenses of $150k. I haven't included the $70k of GST and CGT as that is post sale expenses and you don't need to borrow it.

I will now say my usual drivel - is $100k enough profit for this venture? Are you absolutely sure you know your figures, every $10k that is unaccounted for in your feasibility erodes that $100k and can lead you into very dangerous territory.

 

how much do you need for the subdivision?

 

Westminster - thanks for your advice.

I suppose what I'm trying to achieve is a bit like an LOC as I'd like to borrow as much as possible so as there's no headaches if the costs blow out a bit. Any unused money I'd like to park in the redraw.

Re the $100k profit...yes it's definitely a consideration - it's a bit of risk, but I'm quietly confident in our figures...

 

I always have a Plan B, its called a private lender,just in case things go pear shaped.

 

Terry, difficult to give an exact answer. The whole project needs $760k, and we have $575k in savings, meaning a loan of only $185k...but of course that's with no breathing space whatsoever... Ideally, we would each like to maintain $40k each away from the project, plus a contingency fund of about $40k just in case it's required. Total borrowings of about $300k would be perfect

 

Well if you can borrow $220k from ANZ, you will be able to borrow quite a bit more from other lenders as ANZ borrowing capacity is very conservative.

Without knowing your finances, the fact ANZ apply 75% rental income, mandatory credit card, higher basic living expenses and weak negative gearing add back means I would expect other banks calculators to outperform ANZ significantly.

I cant think of many scenarios where ANZ could outperform other lenders borrowing capacity based on using the same variables.

 

Thanks very much Watson. The only reason he approached ANZ is he's actually an ANZ employee (not in lending). Do you have any suggestions of what non-Liberty-esque lender would be a good one to approach? I currently have loans with CBA, Bendigo Bank and AMP Bank, and use NAB for every day banking.

 

Just see a broker and borrow as much as you can against the land initially and that is all you will need. Very simple

 

I too question why you would do all of this...(It will take about 18 months?) for $100K. Better opportunities out there with your cash reserves combined with some financing.

 

To be honest, we haven't seen any better than this in the last six months...perhaps we looking at the wrong investments?

 

I wouldn't jump to Liberty yet. Being able to borrow something from ANZ is a good sign as they are one of the most conservative lenders. Check out Bank of Melbourne as the negative gearing is strong and when I do modelling, they are one of the most generous lenders.

When most banks apply negative gearing, they look at your actual interest rate and return whilst BoM use the assessment rate so it works out much better.