Valuation dispute on duplex construction loan

Hi all

I’m Brand new to PC.

We have approvals in place for the construction of two townhouses in inner Melb. We have just received the lenders independent valuations which are significantly below anticipated.

As is typical, lenders have advised the max security is 80% of the existing ‘as-is’ property value plus the fixed price building contract.

We anticipated the valuation of the existing property to be below ‘market’, but the valuer has stated the construction contract is inflated, and subsequently ‘valued’ the construction contract based security component at 85% of the builders tender. On this basis we haven’t signed the contract with the builder as of yet.

We have had four independent quotes for our scope, of which our preferred builder was the second lowest. This suggests to me that the quotes are a reasonable indication of current commercial rates.

How and why could the valuer question this element and justify such a reduction in construction cost ‘value’? Wouldn’t market rates dictate this? The valuer has not visited the site, nor would I presume they are a builder or undertaken a full take off of the drawings via a quantity surveyor.

We have asked for a review, but I would be interested to hear if any members have encountered this scenario, and what advice they may have in overcoming this hurdle?

Alternatively, does anyone have a spare $200k?

Look forward to your replies.

Thanks in advance

Ben

 

Hi Ben

You’ve got a couple of options.

Try to contest it - but you’ll need comparable sales which might be hard to find. I don’t think you’ll have much luck going down this path.

The other option is to have your broker order an upfront val with a different lender that’s ok with 2 on 1 construction. You might land a different valuer and obtain a different result.

Cheers

Jamie

 

Hey Jamie

Cheers for the reply. Appreciated.

It’s not so much an issue with comparable sales to uplift the existing property valuation. My post is more related to the construction contract price which is more significant in its affect on the total security available.

If four builders are, for arguments sake, pricing a particular job at $1m then presumably this is an accurate reflection the commercial market rate for the build?

How can the valuer subsequently then value the construction component at $800k if four tenders are all at the $1m? It’s this element tha is a point of contention for us.

I’ve asked our broker for an upfront valuation sourced from a different lender already.

Cheers

 

Why would the construction contact price be more important than the value of the actual completed product?

 

Perhaps the valuers are correct, you might be paying too much, see what the 3rd one says, and perhaps a 4th.

 

The loan security is based on 80% of the combined value of the existing property plus the construction contract. Lenders won’t provide security against the end value.

 

What Jamie is saying is get your broker to order another valuation with a different lender - it’s likely you’ll get a different valuer and a different result.

 

Hi Terry. Maybe. The spread across all four tenders was only 10%, full trade breakdowns provided also so it’s pretty unlikely all four would be $250k over (in my humble opinion). We’ve only received the initial valuation so far. Waiting on the others. Cheers.

 

Hey Jess. Thanks. I mentioned we were onto that already. Waiting on the outcome.

 

Ah sorry - I missed that!

 

Use the valuation to get the Builder to justify their price. You may be getting overcharged.
Just curious why the valuer is focusing on the build price when he/she should be focusing on the value on completion.
Cheers

 

They do come in lower than end values, so a noticeable shortfall to this figure is to be expected.

Re this type of project, smaller multi-dwelling constructions, its not uncommon to run into issues if playing with relatively thin funding margins (shortfalls in vals, cost overruns, etc). Having relatively large buffers or contingencies in place helps manage some of the funding risks associated with this.

Options:

- Try different upfront vals, usually the best first option. Already onto it, double check its not the same valuer (it happens).

- Send valuer multiple construction quotes that you obtained, showing that tender process for build has been completed and costing of build is accurate. This is usually far more uncertain and less likely to yield results than having a new person entirely do it.

- Find equity/funds elsewhere to cover shortfall - if you have other properties, may be worth running vals and seeing whats possible here.

- Use it to negotiate with builder (my experience with builders tells me this is dreamland though)

 

Couple of questions/issues

- is it possible that you are over capitilising on the deal. Is that what the bank is implying when they say the construction is too high for the val?
- did you load up the construction contract with soft costs? Soft costs like architect fees, subdividion fees etc are tolerated and not tolerated by some banks and depends on how high they push the loan. The banks really only want to pay for the actual construction component but you can put some in some of the time
- why is the deal 80% land plus construction costs? Perhaps it's the way you're explaining it but normally I would be expecting valuation to be 80% of end value - and the site plus construction to be no more than that - you then contribute anything under that.

 

This is not the case with residential finance.

 

Thanks Everyone!

Looks like this has been read a couple of different ways, so I'll try to quickly clarify.

Its not a question of loan approval (we have this) but the final loan amount - which is subject to the valuation.

Without getting sidetracked on structures and the like, we are replacing our PPR with a dual occ and essentially using a residential bridging facility (which pays down existing mortgage and provides funds for construction), not a commercial type construction loan or similar development facility to achieve this. As such, the final loan (dollar) amount will be a maximum 80% of the combined value for the land and the construction price.

In response to the received valuation (which effectively leaves us with a $250k shortfall in construction funds) we have requested consideration amount be based on the end values instead, however has since been denied by credit.

Existing property value aside, the valuer has concluded the fixed price building contract alone (excluding all soft costs, fees, subdivision etc) is inflated. Its this component of the valuation which is adversely affecting the final loan amount. This valuation could perhaps be interpreted two ways:

1. That the valuer thinks the contract price is inaccurate and that the four independent tenderers that submitted quotes are grossly overpriced and therefore an equivalent product can realistically be built for 25% less than the quotes received - in which case I'd love to be put in touch with his network of builders (although i'd be concerned about their margins at such a cheap price), or

2. Its a question of overcapitalizing - and our end values wont be realized. Interestingly though, the valuer's completed values actually reflect ours. If we were overcapitalizing, then presumably the valuer's predicted end values would reflect this (i.e. be lower than ours) and this is not the case. Similarly, if the build contract was significantly cheaper than the ones we have received, then the completed product would also not be of an equivalent end value - the end product obviously being a function of the building specifications, inclusions, finish etc.

Hope this makes sense!

We'll wait and see what the subsequent valuations (different valuer) bring.

Cheers!

 

Banks value for the amount they can recoup if they have to sell if you renege on the mortgage.

This has nothing to do with the cost of construction.

In a banks construction valuation the valuer will also note the ‘check cost’. This is where they estimate if the build cost is reasonable. If there is much variation they will make comment further in the report.

 

Not uncommon for some devs esp for people working on the former home. esp with dial occs. Its hard to make a profit in reality - Both you and the builder. Its a bit like the vals for a new home - The bank will lend 80% but none of the duties and other costs. In this case there are loads of costs in the build that arent really translated into value. eg demo, site, council, kerbing and civils and refencing and reworks costs as well as interior fitout perhaps if you have gone up in spec. These dilute when you build 3-4 or more on the site. A dual occ typically has that issue and people who havent repaid the land can fall short.

Lenders usually ask for a QS report for larger devs to ensure they lend on reliable building cost estimates rather than tender / contract amounts

 

Thanks everyone! appreciate your respective comments.

cheers

 

I noticed around 12-18 months ago, the construction price of a duplex in my area went up by around 150-200k. The only reason I could see is that builders saw how much profit the owners/developers were making so the builder wanted a piece of the pie too. Pretty much every builder did this, so to the outsider it would seem that it was the standard price for that product. Un fortunately the valuers had long memories and were not valuing the proposed product as desired. Perhaps the same is happening down your way.