Under Valuation for PPOR

Hello all,

This is a hypothetical worst case scenario for an OTP H&L package I have decided to go forward with.

Only one contract for land and building and bank has told me there would be 2 valuations.
One before the the build and one after the build.
If bank values my payment is too high pre-build then the contracts finance clause gives me an easy out without much to lose.
If bank values my payment exactly pre-build and valuation turns up say 20k short post-build then I want to know my options.
From what I have researched I have:-

Take money from family/friends and make up the 20k difference
Take a personal loan which I am assuming would be harder in itself.
Crash the contract,lose my 10% deposit paid to the developer and maybe more based on the contract T&Cs

Are there anymore options available to me as my LVR is already 95% so no flexibility with that.

How often does an OTP H&L package change valuations amounts pre and post builds assuming the developer has executed the work exactly according to plan.
Also the house is due to completion in around August so I am hoping 3 months is short for the market to change.

I am a FHB with very little to no buffer which I know is a risk but I want to get in the Brisbane market before it moves/lending gets tighter/also need a PPOR


Thanks.

 

+1 from me. Taking risk is OK if you have an acceptable fallback position. You do not.

 

OTP at the moment is risky in the current environment.

I've seen this many many times recently where vals just don't stack up. Even though 3 months isn't a long time, all it takes is one poor sale in your area and because of the relevance (time wise) it will bring the value of your property down.

And your analysis is correct, you need to come up with the cash to fund the shortfall or exit the contract.

 

Risk management 101. Never knowingly put yourself in a position where the worst case scenario is not acceptable to you .

 

Your contract structure sounds a bit confusing.

Is it an OTP, or is it a H&L Package, or is it a H&L package that settles at some future point?

You can manage this risk if its just a H&L package. For H&L packages, just do one valuation with the build & land together upfront. Obtain an unconditional finance approval. Have your build contract fully ready now. This may be difficult to obtain with builders, but it is your best way of managing this risk. The 'val' the bank does at the final progress payment is less about the actual material value of the asset, and more about confirming that what was on the contract has actually been built. I.e. there's little/no val risk here as long as you build what your saying your going to (marke movements etc are not risks).

But yes, this is risky and approval is tricky as others have said. If its OTP and you plan on going 95, then take advice and don't do it.

 

To add to @Redom s excellent post. As it’s one contract it’s OTP. Or ‘pay on completion’. Its unusual to get a val prior to site start, usually they would only use the end val, after completion.

Get a few upfront vals done when the build contract is ready, and the valuer can have access to the site (difficult with new subdivision). If those vals stack up, it’s highly unusual for the same valuer to give a diferent result on completion. They would have to have compelling and widespread evidence to support that sort of change.

What might happen is you get a diferent valuer or a diferent company. Then there’s more of a risk. Better to control that risk and use a broker. A broker that can get upfront vals and knows what the issues are with H&L and OTP.

 

Thanks all for your advise.
It is an OTP...Its from a major developer(Villa World) who bought out a large parcel of land and is building houses on it.
As they decide on the interior and exterior and all the other stuff I dont know if its a traditional H&L package.Although there is just one contract.

The sales agent told me there are very few comparables in the area for valuation but based on the recent sales I have seen on RE website in the same estate they seem to be selling for around the same asking price .
Talked to a mortgage broker and valuations he had done in the last month have matched up.

So what I am wondering is am I panicking for no reason...

 

Often hard to see good value in H & L packages.

Have you had a good look around at comparable houses for sale, where you can actually see what you are buying?
Marg

 

Trouble is valuers only use ‘resales’ in their comparables. They cant use developer sales or recently built house. Only when those new owners actual sell can they use their price as comparable. And the only people selling in new estates have issues with death divorce or debank and accept low ball offers.

It’s worthwhile being a little concerned. Set up some things to manage risk. More deposit. Using a broker, upfront vals with the completed building contract etc.

 

Didnt know that actually.I was under the impression that a new OTP house was asked for 500k and bank agreed it is 500k so all is well.

 

I dont see any new stock actually to compare.

 

The valuation report would’ve used resale’s as comparable. Cheaper resale’s would be not as ‘inferior’ because of size, age of Home amenity etc.

It’s rare for new builds to be undervalued. But it’s much more common than established purchases. Usually it’s because there’s a rebate in the land contract or the clients are building a 4 car garage or a jacuzzi on the balcony in an area that doesn’t have many other mansions around.

 

I meant to look at established houses up to a few years old.
These are often much better value.
Marg

 

Sounds like its a single contract, where you buy the house and land on a 10% deposit and pay the balance at the end. Handy for an SMSF as it avoids a problem with the SIS Act, but not the way to do it for anyone other than an SMSF

1. It means you have valuation risk. Even thoiugh its a house, you are buying it on a OTP basis and that means the finance is not done before you exchange.
2. It means paying full freight on stamp duty rather than on the land component.

You are far better off asking the builder to do a construction loan. This would mean 2 contracts. 1 for the land. 1 for the build. Get the finance approved upfront based on the end cost . The land settles first, and the bank retains the construction funds and pays the builder via progress drawdowns. You save a buckletload on stamp duty because you only pay it6 on the land.

Its very unusual the builder isnt asking for progress payments... very unusual. My guess is that the site hasnt been subdivided yet. I cant see any other reason why they would want to build these off balance sheet and get paid later on, following completion. House and land isnt normally done this way . Builders normally get paid after each stage is completed. It de-risks their cash flow issues for starters...but as I said earlier, it also allows the bank to control the construction funds and it allows you to get the funding approved up front

 

I’d say they are doing it as one contract as they are planning to build them all in one line, shared eves or whatever.

Which is hard/impossible to finance on two contracts.

 

Sounds like a roller coaster ride ahead.

 

My conveyancer has advised me to get a subject to finance clause until after the completion of property..If they agree to it well and good if not I lose my 1k and be done with it...

 

Good luck with that If they need x number of pre sales to trigger commercial funding, the funder wont consider a contract with that clause to be watertight.

If they dont need funding, they may agree. Unlikely though..but you never know.

I still dont understand why they arent being sold with 2 contracts. Have you had a look at the plans? Are the dwellings sharing eaves or walls? Or are they completely stand alone? What is the title? Strata? Community?

 

I had a look at the plans.Its standalone.Titles yet to be registered.No strata...