Hi all,
I was wondering if someone may be able to help with a couple of questions?
We have been offered to buy two very run-down properties in Sydney for $420k ($210k each). We are thinking of buying them, knocking them down and building brand new houses on each (zoning only allows single detached house). Then selling. Past sale prices indicate that brand new 4×2's in and around that street should get a minimum of $500k.
We would be purchasing with 95% loans (approx $199.5k loan for each house).
We have never dealt with construction before, so I would really appreciate some views on:
1. Typical construction costs (all up) for a 4×2 in Sydney. Is $200k per house reasonable?
2. The valuations and construction LVRs. I understand what would happen is the bank will send the plans to the valuer, who will then provide a "future value" val. Lets say it comes back at $500k per house on completion. $500k x .95% = $475k, we actually don't need that much, we would need approx $400k (199.5k purchase + 200k build) which is 80%. But worst case scenario, if the val comes back a little short of $500k, how easy is it to get >80% construction loans? (Our servicing is pretty strong).
3. Do you have any recommendations for brokers/architects/builders/other professionals we might need?
Many thanks to anyone who can offer some insight.
Cheers,
GregI believe the bank would allow you to borrow the constructions costs (400K) but not the potential value ie 500K.
I could be wrong
Hi Greg,
I just got my construction loan approved two weeks ago. They valued the land and house separately. The value of the house/building was the construction cost that the builder put down in the contract (so basically what it cost me to build the house). I had to send the bank/valuer the building contract, council approved plans, all the specifications and the inclusion list.
So if your houses were going to cost $200K each to build, the bank's valuer is not going to value the building more than that. You should check how much these blocks of land are really worth. If you are paying $210K with a house on it now, once you knock the house down (which is not cheap by the way) the bank might value the land only at a lower price?
Before I buy anything I always get an independent valuation done. It costs $440 (including GST) but well worth it in my opinion. It gives me more confidence that I am doing the right thing (but that's because I don't know a lot about the property market).
Good luck
I would want to be a bit more sure than "should get a minimum $500K". As the figures could be close.
Purchase = $210 + purchase costs $7K + demolish $15K? + interest for a year $13K + rates etc $2K + build $200K = $447K
Landscaping? I'd want a close figure for the build. You only need to go over 10% overall and there's not much margin in it.
If you sell for $500K that's $53K gross. Not bad if the figures are right. I'd be really sure of your sale price too. Are they advertised at that or selling at that?
Mind mentioning where they are? If houses are selling for over $500K then $210K would be land value. I have RP data if you need end sales data and how long properties are taking to sell..
Good luck.
One of the major factors influencing cost of a new construction is location, which can account for a significant variance in the cost of new construction, or home improvment projects. Generally speaking, places with booming economy will have higher cost of new construction, and higher prices are to be expected for remodeling and home improvement projects in places with high dynamic pace, and demand for new construction.
Hi Greg
Hate to say funding the deal is not that easy and i have done 1 or two or a couple of hundred.
Firstly getting standalone 95% lvr on single dwelling isnt going to be easy as the mortgage insurer will go through you with a fine tooth comb. The loan will be fully credit scored so you would want to stack up real good.
Secondly you would want to make sure you are only paying land value because remember as soon as you demolish the house that is all you would have and the lender is going to be very cautious. Angel 13 hit the nail on the head with his comment. If you pay $210K and the land is only valued at $200K you will only be borrowing against this figure.
Thirdly you are really on going to be borrowing against cost as in the current climate the valuer is going to value the land and then place a dollar figure on the construction which is likely to be exactly the same as the Fixed Price Contract + any other fixed price quotes for landscaping etc etcYou are going to have to fund the Soft costs yourself and cover the interest.
Many lenders will not take the potential rent into consideration so you need to be able to demonstrate that you can service the loan during construction and meet the interest repayments.
All in all can be done but i doubt you will get 95% lvr across the board. If you dont score well 90% could even be a push.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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