This question is on behalf of my Dad
Scenario: Regional NSW. House on land purchased with intent of removing house and constructing 4 units. Mortgage Broker cross secured with family farm. Initial loan application to CBA stated approximate cost of construction thus total loan would be about $1.2M. Loan to purchase property approved and additional funds to pay DAs etc deposited into a savings account (not offset). Paying interest on total amount from day 1 even though there is still $55K not drawn down. Now has gone back to finalise final loan (building contracts signed and builder waiting to start), house has been removed and block cleared. Bank now says that the mortage insurer will not insure over $1M on a loan doc loan. No details have changed from the original application. Total amount CBA willing to lend will leave my Dad about $150K short. Many, many phone calls, frustrations to hear CBA so "that is just how it is", MB says that most developments have pre sales in order to get the loan and suggests to "just bodgy up a sales agreement".
I have put him in touch with a more professional MB who thinks he can sort the problem out but my questions are:
1. If the Mortgage Insurer was not able to insure a lodoc loan in excess of $1M, then surely CBA or the MB have advised my Dad of this in the begining?
2. If the original application to CBA (12 months ago) stated the required funds to purchase and develop were $1.2M then where is the ethics in now saying they wont? As they have moved the house, a forced sale would see them in excess of $100K worse off then before.
3. I question the ethics of the original MB who suggest submitting dummy sales agreements in order to secure the building loan (isnt this fraud?)
4. If the new MB is not able to sort out the CBA and un cross securitise (thus development loan less than $1M) then is there another bank that will lend 80% on lodoc for a development?
5. Any suggestions?
I have suggested a money partner as the deal offers a good return but my Dad is unsure how to proceed on this front. He thought offering a title to one of the units would be attractive. That is, basically offer one to a money partner at a reduced cost in return for accessing the funds now as opposed to a presale where the funds are tied up until settlement. Any thoughts?
I feel that the bank and the MB should share responsibility for the predicament. If the loan was never going to be possible then my parents would not have purchased the property to begin with, and should they have found out after purchase then they would certainly not have removed the house. Is there any recourse? Is there a regulatory body that controls MB and keeps them accountable?
I would appreciate any thoughts or suggestions from those that have experience. This is his first such venture and it is based on good solid numbers. I would hate to see them do all the work and have to walk away and watch someone else collect a tidy profit because the bank cant sort things out.
Thank you
Tammy
Hi Tammy
I can't answer for the bank's about face but you are correct in that the Mortgage Broker has suggested a fraudulent method of getting a pre-sale.
Having said that, I know that it is a pretty common practice amongst developers. If the bank only wants a signed contract as evidence of a pre-sale then you, for example could sign a contract to buy. Once your Dad has finished the units and you "decide" you don't want to proceed with the purchase you would then terminate the contract and your Dad, being a generous soul, doesn't charge you anything or keep your deposit for terminating. In 12 months time he could probably get a higher price than he sold it to you anyway.
Signing a contract with the intention to buy the property and then later terminating it because of unforeseen events (and the vendor not keeping your deposit) is not fraudulent. What is fraudulent is the vendor (your Dad) getting someone to sign a contract who has no intention of buying the unit.
Cheers
K
Tammy
I am not saying what your original MB did was ethical and indeed correct but with the current crisis in the Sub Prime market and the issues with Mortgage Insurance the policies change regularly and what may have been able to be done 6 or indeed 2 months ago may have changed to current policy.
In saying this it does not look that difficult to sort out now so your new MB should be able to do so.
Alternative is to look for private funding for the balance 150K.
Certainly would be a little more expensive but at least it gets you moving.Richard Taylor | Australia's leading private lender
Hi, I share roughly the same experience with the same bank. The collateral your Dad has put up will be worth far more than the loan that he's been approved, if i know anything about the bank.
I wouldn't waste any emotional energy trying to get MB to be accountable for the situation.
You seem really confident about the numbers. The most important is speed. A money partner would probably mean less profit for your dad but that might be the best as the end result may be the same. He will be less stressed as well.
If you can get going by buying a unit from him initially, why not go for it?
The other point is that for a sale to go through, you probably need the sub-division to be complete. In my case, that really held up any intended sale.
Delays will really blitz the profit margin as the interest costs mount.
Some people might be interested in the project if the numbers are OK. I put up a project that hasn't started for sale & have an offer on it already.
Let us know how your dad gets on with the project & good luck.
KYThank you for the comments.
I am not intending to purchase any, I have my own development projects running. And I dont feel "right" about a dummy sales agreement.
ANy thoughts on another bank that will run 80% on a lodoc for developments?
Cheers
Tammy
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