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Reno/small development to finance further development of the same site?

Discussion in 'Development' started by Steven Ryan, 3rd Oct, 2015.

  1. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    Curious if anyone's ever tried to pull this off to fast-track the development of a site by producing the required capital by renovating the existing dwelling, only to knock it down straight after.

    If so, did it work?

    Let say you have a run down 3 bed house on a large block. You have pretty good cashflow and a bit of equity at hand but not enough to develop the site immediately into what you'd like (lets say a triplex).

    What if you do a structural renovation on the property extending, adding bedrooms....spend $150k to create $375k equity.

    You then pull out $300k (double what you put in) which provides the seed to develop the triplex. You pretty much immediately knock the house down and develop the triplex.

    Sounds kind of silly to renovate a place and vaporise it soon after but I can't see a major hole in the idea yet. Anyone able to point out the problem?
     
  2. York

    York Finance Broker Business Member

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    1. What's it worth as is?
    2. Where are the funds coming from for reno?
    3. How confident are you you will get equity of 375k after 150k reno?
    4. Wouldn't the lender who holds security want to know about a demolition that would affect their valuation?
    5. What about the 150k you injected into it? What's happens to that after demo? Gone?
     
  3. bob shovel

    bob shovel Well-Known Member

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    Sounds interesting

    You wouldn't need to run plumbing or electrical just a shell, with switches and gpo's as normal for looks for the valuer

    But this may fall into a "fraud " category. So don't tell anyone ;)
     
  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    For it to be a viable change watch for the GST catch. A substantial reno could trigger the property becoming subject to GST on top of tax. If its not residential property capable of occupancy before the dev (a dump?) GST may apply to sale. Of course this applies to a sale.

    Without a sale i struggle to see how duty dev costs fees etc and the demo could turn a profit on a single dwelling. The devs who have attended our sydney sessions generally need to go bigger not smaller to generate returns on small lots. Ie 1 or 2 or even triplex. The free calc on bedevelopers website would indicate this
     
    Last edited: 3rd Oct, 2015
  5. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Unless I've completely misunderstood, it makes no sense - you're effectively paying $1 to borrow $2. I would liken it to getting a loan for $300k, with $150k worth of fees.

    You'd be better off using the $150k to stage the development and create some actual value.
     
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  6. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    I don't understand.
    Why would you throw away 150k ?
    Surely you could use that 150k, and have lots left over, to secure private funding to complete your project.

    In the example above, you've spent 150k to be able to borrow 300k from the bank.
    What's your financial position when the house gets knocked down?
    You've got 150k more in funds than you had when you had your original 150k, but you're behind already because you owe the bank 300k.

    So basically it will cost you 150k to generate 150k of borrowed funds?
    That's expensive finance.
     
  7. MTR

    MTR Well-Known Member Premium Member

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    I cant see how this could work as far as developing goes you need to pick up the land at the right price, if you are renovating a property to eventually demolish to access equity you are probably already paying too much for the land.

    You need to work the other way around to know whether it will stack up, how much are the end value of 3 units + land, holding costs?? and then tack on costs of your reno?? In current markets its hard enough to make 20-25% profits on developments and this is buying the land at the right price and not adding value.

    Then you have the old chestnut, the bank your partner???? you can not just demolish a property without bank approval, you need to source finance and then it needs to stack up. Already as I see it you have paid too much for the land due to reno.

    If you don't have the cash to develop then you are risking losing your shirt, from my personal experience, money flys out the door when you are developer due to holding costs etc etc etc.

    MTR:)
     
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  8. Random Username

    Random Username Well-Known Member

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    You'd do better renting the existing as a Cat House.
     
  9. DanW

    DanW Well-Known Member

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    Hi Steven

    My opinion is that equity isn't real, and the 150k comes off the profit in the feasibility calc. It might be more than half the profit.

    Also it's a big risk, since that kind of Reno you might not get the valuation you want.

    Also in the construction - that equity will no longer be there in the construction loan calculations.

    Why not instead:
    1. Buy the site for below valuation
    2. Do the DA
    3. Shop valuations with different lenders with the new DA and pull out equity from that increase?

    Might be a bit less equity, but your profit is safer.
     
  10. MTR

    MTR Well-Known Member Premium Member

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    How do banks value a DA??? Never been down this road.
    I thought banks have their own rules when it comes to this and not necessarily in developers favour?
     
  11. HD_ACE

    HD_ACE Game-Changer Premium Member

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    Your better off going with a lender that will lend on end product values and lend on a higher LVR and pay some lmi rather then throwing 150k away.

    Or look to subdivide first with cash/equity you have and then finance the builds on the new land values.
    Plenty of better options.
     
  12. DanW

    DanW Well-Known Member

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    You could be right, I've never done this it's just an idea.

    Would need some brokers opinion.

    I know being a dev site is a problem at acquisition lend, but not sure how it works for equity release refinances. The risk being the DA can expire unused so the bank probably ends up "computer says no"

    I like the idea from @HD_ACE better actually.

    Also - have you considered flipping before building?
    Either after DA or after subdivision + DA?
    What's the profit difference compared to doing the full build?
     
  13. MTR

    MTR Well-Known Member Premium Member

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    Flipping DA is good idea, however it is totally dependent on the market ie Melb, Syd, Perth, Bris etc. Not all DAs are equal if that makes sense.

    Also, no one will buy your DA if they can not see any fat in the deal, in other words the buyer needs to be making 20% profit otherwise why would they premium $ for the site???. I love this strategy, but you have to tick the boxes for it to work.



    MTR:)
     
  14. MTR

    MTR Well-Known Member Premium Member

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    Yep, this is what I just did with Melb 4 townhouse deve.

    What is really nice is its low doc and its resi, RAM product (excellent), no nasty commercial lending fees.

    However I needed to cough up 20%, this is pretty stock standard.

    In current climate it is getting harder to finance, however, there are always ways if you can look outside the square:)
     
  15. Be Developer

    Be Developer Property Developer Business Member

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    Y spend money to borrow money... Equity is funny money , not actual money..

    Best to wait!

    Rather spend money to get plans and permits approved.
    Get builders quotes, etc.

    Hope this helps, or feel free to call, we can discuss the topic over phone!
     
  16. DanW

    DanW Well-Known Member

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    @Be Developer

    I can't remember how did you get the money out for dev on that first site?

    Was it just from Sydney market increase?
    Or from the DA increase in value too?

    Thanks
     
    Last edited: 4th Oct, 2015
  17. Be Developer

    Be Developer Property Developer Business Member

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    + below market value purchase...similar assets were being sold around $450 -$480k

    We paid $285k!
     
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  18. Be Developer

    Be Developer Property Developer Business Member

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    That was discussed at last meet up by @Shahin_Afarin.

    Pre APRA lenders/valuer accounted for DA approved site.

    Post APRA, it is exactly opposite now!

    If you bought DA approved site at auction at premium, you may get low val for the purchase and that will also affect construction finance as well.

    Should make a visit to Sydney:)!

    How about after L'machi subdivision sale?
     
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  19. MTR

    MTR Well-Known Member Premium Member

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    Selling the L'machi subdivision at bargain price to you today only, buy 2 blocks for $450K get 1 free. Alternatively there is a nice pub/hotel, no money down, get in quick:)
     
  20. Be Developer

    Be Developer Property Developer Business Member

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    Hahhahah!!! Just fell of the chair.....:p:p

    Let me get back to my lemonchillo......signing off for the day now!;)
     
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