It is no secret that banks have tightened up on all forms of Commercial projects being financed in Adelaide. Many large scale projects have excruciating bank covenants such as 80% of the development pre-sold or conservative valuations that do not accurately reflect market value.
Financing on smaller scaled projects in Adelaide is also difficult.
Your bank may be happy to give you financial advice and lend but require significant deposits, pre-sales or will only lend against two properties rather than the three you are actually constructing.
When seeking a bank partner you must utilise a mortgage broker with experience as the rules are forever changing and not all banks are the same.
An example of this has popped up at our Forestville development.
The 919 m2 of vacant land has cost $440,000 including GST and the valuation on the land is $440,000. As our contract is subject to finance we could advise the agent that our finance was approved. However, although the agent was informed he was also advised that if the bank could not fund the construction then we would not be in a position to proceed.
The valuer was clearly inexperienced and even though I provided the comparable sales it took him eight days to return the request. Here’s the interesting bit.
He allowed $610,000 for the construction costs but only $380,000 for the land. For those who have heard me on this subject they know that the sum of the parts is always worth more than the whole. The comparable sales provided demonstrate that land can achieve $825m2 for 460m2 allotments. So, on our smaller allotment the market rate is $850m2 and on the larger allotment $795m2.
As we are technically building two homes on one title and it takes 4-5 months for new titles to be created, the valuer is under instructions from the bank to value using a ridiculous, abstract formula.
Furthermore, the lender will only lend against 70% of the lower valuation.
So, if building costs $610,000 and we have borrowed 80% of the land purchase price ($352,000 is the loan amount) it means a borrower must fund the following amount: $394,000. This figure is 20% of the land value, the purchase costs, the sub-division costs and the balance of the construction costs.
The valuer was kind enough to include in very small print that the project once completed would achieve $1,175,000 which means the banks LVR is a paltry 59%.
Being aware that this was the case I could elect to use my own funds or alternatively, I could present the paperwork to the bank which confirms that I have commenced the sub-division process.
I spoke to my Credit Manager an hour ago so let’s she how’s she’s gone.
