For the finance people,
My wife and I are preparing to undertake our first buy-renovate-sell project this year. We've spent months and months educating ourselves and do not plan to undertake the project until we've done further & extensive area research and due diligence. We've heard conflicting stories about how to secure finance. On one hand we've been told to deal directly with the banks, be up front with them about our plans to renovate and shop around for the best product. On the other hand we have spoken to a mortgage broker who advised that a bank would never lend us money if we told them it was to complete our first renovation project. He advised that the most successful way to secure finance (being our first project) would be to buy and live in the property for 12mths, renovate while living in it and sell after 12mths (avoiding CGT). This method is not ideal for us and we'd prefer to secure finance for the renovation as a stand alone project. We plan to purchase a $360,000 house, we have $140,000 of our own money ($40,000 cash, $100,000 borrowed equity) to cover costs (acquisition, renovation, 6mths holding,etc). I earn $170k.p.a., my wife does not work. My question: what is the likelihood we could get a loan approved directly with a bank for our renovation project?
PS. We would only go ahead with the purchase as well after securing an "as-if-complete" valuation from a valuer on the board of whichever bank we went with. (To confirm we are likely to achieve our required end sale price).
Any advice appreciated.
Jye and TahneeJamie MooreParticipant@jamie-mJoin Date: 2010Post Count: 5,069
The bank won't knock back a loan application because you intend to reno and sell.
Mortgage brokers receive a claw back on the commission the lender pays if you sell the property within the first 18 to 24 months. That may explain why you received the advice you did…..that's only speculation though.
Avoid shopping – it can cause more harm than good if each of the enquiries end up on your credit file.
Best of luck with your first property – it's an exciting time
JamieTheFinanceShopParticipant@thefinanceshopJoin Date: 2012Post Count: 1,271
What the broker has said doesnt make sense but im going to give the broker the benefit of the doubt. The only thing I can think of is that you are using the property as a rental property and thus the rental income and once the valuation comes back – they will say that it is unrentable or it is noted that there are detrimental impacts to the state of the property.
However going back on the figures you have provided its as strong as an application gets so you shouldn't even be required to use the rental on the proposed property.
Why did the broker tell you this? What is the reason he gave?
Just out of curiosity is your buy renovate and sell going to be organized by a license builder, with you guys managing the project . Or are you going to be renovating the property yourself ? I would have some points on both answers.
A couple reasons I could think of why he suggested making it your PPOR but it really comes back to your goals,
yes you get CGT free after 12 months but what are your plans after the first renovation. Do you want to do another? Are you happy working in your job because buying as your PPOR means none of the potential profits you make can flow into either business/company or self employed income on your tax return.
If you were buying to renovate and sell after 6 month time period your high income would mean any profits are taxed at your Tax rate which would be 46 cents. Make 50k on a Reno pay 23k tax prob not the smartest idea. Hence where the broker proberly got his idea to buy as PPOR. Make 50k and not pay any tax but depending on your goals this might be counter intuitive to what you want to achieve. Ie if you desired to quit your job some people do to go property fulltime- then that might not be the right strategy. If you desire to build up some equity/cash and experience. Yes it might be the right idea.
I would say that you were choosing a house that was unrentable ie termites, floors missing , bad smells, holes in exteriors walls etc. it would be important to look at what LVR you go for. Going for 80 percent LVR..- 99 % of the time a valuer won't even come out to inspect and you'll end up with a desk top. If they go for 95 percent the valuer will be coming to have a look through.
Few things to look out for that will make a property valued at land value as opposed to your purchase price if a valuer gets the chance to come investigate.
– holes in exterior walls as mentioned
– bad smells (urine etc)
– no oven/kitchen
– no showering or bathing area
– no lights
Had a friend who had the most worse timing of a valuation, he was completing a renovation on the front house /subdivide back block off. He sold the land off the back, about a month before settlement they came to revalue the original house which he was renovating. He had just ripped the kitchen out about 2 weeks prior to make way for the new kitchen coming in/ ordered and paid for already. Valuer came in looked at the property . Normal Val would be around 400k. But without the kitchen…. Oh no the valuer couldn't see past a 5k kitchen that needed to be installed. Bam house is not livable, it's only worth land value. – his land sold 1 month prior for 200k. So he thought ok it's at least going to be valued at 200k. To rub salt in the wounds They valued it at 190k because they said it would cost 10k In demolition haha some people. When a 400k house gets dropped to 190k value and your dont have sufficient equity/cash to keep the LVRs in track. He could of been in a bit of trouble.
Anyway You said you had 140k equity/cash
If your looking at properties in extremely poor condition. I would be considering 80 percent LVR If your in and out in 6-12 months its not a big deal really.
Buying in at 360k
72k for 20 %
Mortgage for a year 20k plus some bills.
110k leaving 30k for you renovation costs. Plus what ever contributions you make with your own income.
Going straight through the bank to get your loan approved wouldn't be a problem with you income/ cash available. Your problem is how are you going to renovate it. Yourselves ? Or a registered third party ie builder.
Because if your looking at the bank funding the renovation budget you'll have to have a scope of works with a builder. If you have any builder mates that could certainly help. If so, you won't control the funds and the funds will be released to your builder as the value of the house increase ie certain stages.
Simple example is a extension on a house
Payment paid to builder after
Roof windows doors
2nd fix etc etc.
If you plan on doing the Reno yourself then you'll have to change your ideas out the bank paying out the renovation budget unless you had the appropriate licenses. Easy Finance ideas for the renovation would just be a personal loan. Take out personal loan. Instantly repay 90 percent of the loan leaving a bit to cover 1-2 months repayments (ie minimizing your interest repayments of your P/I repayments for the loan. Then when you require funds you just redraw it like a LOC but a personal LOC. At the end of the project you can get the project revalued pay off/down your personal loan and enjoy home lending rates until you sell. (You can keep your personal loan open if you want for other projects)
Just remember that your first Reno might not be the most profitable but you'll certainly learn a lot.
WilkoRichard TaylorParticipant@qlds007Join Date: 2003Post Count: 12,024
I have to say i can understand why some lenders would not consider the application under a residential lending policy as they would deem it more development in nature.
In saying this i have dozens of forum clients who do exactly this and we have never had an issue.
A couple of lenders we deal with are totally aware what we / client is trying to achieve and in fact work with us with such applications.
I have one forum client who has done 5 separate applications in 2012 and we have negotiated discounts on booth application, valuation fees etc.
Yours in FinanceJewel47Member@jewel47Join Date: 2012Post Count: 27
Hello Jye and Tahnee,
I came across your pot and it caught my interest because I have recently decided to buy/reno/sell as a property strategy. It is not where my thinking started. We (hubby and I) were thinking of a basic buy and hold strategy. Then we saw this unit that we liked, but it needed to be renoed so we were then thnking buy/reno/hold. Unfortunately we put in a offer on the unit and it was rejected but it got me to thinking about a buy/reno/sell strategy!
I too have started learning how to get into flipping. This is all new to me and I am learning everything from the ground up. We have never even bought a house before!
Since we are both embarking on the same journey, it would be great to have someone who is going through it as well so hopefully we can learn from each other. I am in Melbourne and I am sure that you will may have the same challenges as me. I actually had a real estate agent tell me that there is no money in renovations! He said there is nowhere in Australia where you make money doing renos. I was disheartened for 5 seconds then thought, you don't know what you what you are talking about!!
So if you are interested in sharing knowledge, send me an email and we can conquer the reno world together or at least not lose money .
JewelCatalystParticipant@catalystJoin Date: 2008Post Count: 1,404
You need to do your own research on an "as-if-complete" valuation. Most people don't have vision. Also how do they know the quality of your work, your fittings etc. I doubt that you will get a valuer to commit t a post reno valuation. Many people have difficulty getting a valuer to value a place just after a reno. They sometimes find it difficult to believe a property can go up by 10's of thousands in a few months.
That's part of your DD. Knowing what the in costs are, the reno costs, the holding costs, the out costs and estimated sale price. If you don't know all these things before you buy you should be buying.Jamie MooreParticipant@jamie-mJoin Date: 2010Post Count: 5,069Catalyst wrote:Many people have difficulty getting a valuer to value a place just after a reno. They sometimes find it difficult to believe a property can go up by 10's of thousands in a few months.
Yep, can be a massive pain.
We had one in a regional area recently where client renovated, arranged reval and the valuer simply valued it at purchase price stating "that's what you paid for it 6 months ago" – not sure if valuer was just lazy or incompetent – or a combination of both. Worse thing is it was a small, one valuer town with a lack of comparable sales to argue it up.
Thanks for your post Catalyst.
Didn't think it would be that difficult.
Seems what I am suggesting (i.e.an "as if complete" valuation) is an "ideal". I've also learnt that apparently even after having provided an "as if complete" valuation (if I can get them to commit to one) a valuer may still re-neg on it at the point where the reno is done and I want to go back and use that valuation to draw out the extra equity gained. It really is a case of waiting until the property sells before I could return any money to a "money partner" and put any profit into my bank.
So how would you propose to determine what the end selling price of the property would be after your renovation? Is it through viewing 100 open homes of houses that look like what you will create and base it off that?
If you are purchasing in your own name with a money partner providing equity/cash and it is your incomes that are going to be looked at when getting the loan. Then they can do a top up on your loan. A good banker can do that anywhere between a day – week after the new valuation.. If you are purchasing through a trust or other entity then your are usually waiting for minimum 3 weeks for your equity to be released, I would allow 4 weeks.
This is still worth while doing as soon as your finish the Reno the valuer can be out there. You'll still get your money back quicker then waiting for the sale. Ie a revalue/refinance taking 3 weeks. Well sale period could be up 4-8 weeks and then you have settlement which at least is 4 weeks up to 8-12 weeks.
So your at least a minimum of 5 weeks maximum of 13 weeks with most of your equity/cash back. (Wich you can pay back to your partner). Perfect time to fit in another project
I dunno about 100 houses, I would say I look at maybe 10ish if I already know the area and just want to double check this street is better or worse then others. If i was new to the suburb i would get your real estate agent to print you off a cppy of at least a years sale on rp data or the like. Go through and type the addresses in google have a look etc. With your valuation i would even go to valuer and ask them to give you a sample valuation that they give to the banks. I'm not saying they will. But actually looking at a valuation document ( the one the give to banks) for residential usually around 10 pages long. You can see how they arrive what they believe is their valuation. Just remember they have a 10 percent window. 5 percent either side of their "valuation," they might think that it is valued between 230/250k based on like sales in the area.. But they have to give a single figure to the banks. Some valuers might go 230k and some might go 250k but the majority would say the middle. By looking at the valuers document you can see how they rate inferior externally/internally and superior etc.
they would usually try find 4 similar sales. That means compared units with units and houses with houses etc. they would rather them be within 3 months and not more then 6 months.
If you can find 4 properties similar to yours that are renovated list them 1-4 in superior to inferior in comparison to yours. Try to be objective. Take the average of the 4 properties. Ie 200,210,220,230 (sold prices in last 6 months) average 220. Now is yours worse then house number 1 well then then you prob won't get valued 230k but if its better then number 4 well you should be above 200k and your valuation somewhere between 210-220k.
This does get harder when you have unique propeties and also when no like sales avaloable. Ie only unit block in amongst houses. Hope that helpsJewel47Member@jewel47Join Date: 2012Post Count: 27
Great advice Wilko, you are helping me to learn as well! I have to add my 2 cents worth on top up loans. Be sure you are clear on your lending institution policy on top up loans before you get the loan. I say this because we recently refinanced our home and then shortly after decided we wanted to get a top up loan. We found out that our lender requires 3 months of payments to them before they would give a top up loan. So just a sneaky fact that could bite you in the butt if you aren't aware of it.Daneo79Participant@daneo79Join Date: 2012Post Count: 31
Something that might help you 'sell' the as if complete valuation would be an interior design program that can give you a visual representation of what you intend to achieve.
A lot of people lack the vision to see a finished product from a scope of works, cost summaries or detailed descriptions.
that's where a colour picture can help!
I am in project management and the more detail you can provide the easier the sell.
Hope this helps.
Also I am just entering the Property game in Perth and value adding is going to be a large part of my strategy.
I am in a similar position to you, been educating myself for 18 months and ready to take the first bite!
Appreciate the response.
Interesting to know about the claw back issue.
Is that like an industry standard / the same with all lenders?
Jye and Tahnee
Brokers reasoning behind why he said banks would never lend funds for a 1st time renovation were just that he said they'd perceive me as too high a risk. Unsure of whether he was driving me to make a decision that would benefit him more than me? Will never know I guess.
Jye and TahneeDerekMember@derekJoin Date: 2004Post Count: 3,544Jewel47 wrote:I actually had a real estate agent tell me that there is no money in renovations! He said there is nowhere in Australia where you make money doing renos.
Don't you just love it how broad sweeping statements can be become law. This agent needs a reality check. Was this agent trying to sell you a newish house or unit?
Sure there is money to be made in all forms of real estate investing. At the same not every investment is a certain winner.
The difference between making a profit, or not, is the amount of due diligence you do and your practical & financial skill set.
Thanks for the advice mate.
We have realestateinvestar.com access, so will pull our recent sales data (within 6mths) from that for the comparative sales of renovated properties in the suburb that we're looking. What we'll do is look at probably starting with a search for comparable renovated houses within a 2km radius (from the house we are looking to renovate) and then tighten that up to 1km and 500m and then on the actual street. This should give us a pretty good feel for what end value is realistically achieveable.
Jye and Tahnee.
That's a good idea.
Do you use any "easy to use" interior design software like this in your project management work?
If there is cost efficient option out there, we'd be interested to have a look.
Jye and Tahnee