I did have a search around but couldn't really find anything in the threads on this, if there is one please feel free to just throw the link in and Ill check it out.
My question is actually on behalf of a close friend but any answers would be of interest to me and I'm sure many others on the site.
How can one increase a valuation of a new build? Are there any tricks or tips for doing this?
My understanding is that valuations are one of the biggest hurdles that investors face when it comes to serviceability for bank loans.
My friend recently purchased his second block of land and is now ready to build however the valuation to service the build continues to come up short after multiple attempts. He has some equity in his first development but it still will not cover the shortfall which is now 44k.
Given that it is currently a empty plot capital improvement is not an option and they seem to have exhausted there efforts in getting different valuers in.
Is there anything else that can be done? Alternative financing options? multiple mortgages? Any tips for avoiding this situation in the future? or is the only real option to outlay the 44k and hope for capital growth?
Any help on this subject would be great.
Se7enJamie MooreParticipant@jamie-mJoin Date: 2010Post Count: 5,069
Valuations don't have anything to do with serviceability.
Serviceability is demonstrating to the lender that you can afford to make the repayments based on your income/liability situation.
What is it your friend is trying to build?
JamieJosh AthertonMember@josh-athertonJoin Date: 2011Post Count: 269
Hi Se7en, has your frind shoped around with builders? I would look at why the valuers are smashing it. The project could be loaded with features that the valuer is not placing value on, these items could eqaute to $15,000 – $20,000 in some build contracts as people get carried away with variations when the valuers miss them or dont place much value on them.
Shopping around with builders could save quite a bit too.
Sorry I was referring to his ability to draw on the valuation for his deposit in lieu of reaching into his savings which would impede his ability to provide a deposit for his next development.
He is building a residential house. Deposits seem to be the big issue as with a lot of other investors, do you have any pointers on how to overcome this?
Thank you for your reply.
My friend and I are both in the construction industry working for a head contractor with a pool of prequalified subcontractor builders to choose from, this ensures extremely competitive pricing and top notch quality so it would be hard to find another builder who could beat this, also the relationship is second to none.
In terms of features not being valued I will run it by him but my understanding is that they have squeezed everything out of the valuation so far which I'm assuming would include additional features.
Maybe a good way to look at it is by simply listing the ways of reducing deposit out of your pocket.
1. Value in equity – Done
2. Increase loan to value ratio (LMI) – Done
3. Revalue taking into account all features and looking at different comparable properties – Done/TBC
4. Capital improvement to existing – N/A
5. Reduce building costs – Done
Are there any others you can think of?
Also another interesting question that this raises is how much advantage is actually achieved through delaying the output of cash out of your pocket.. that is to say, if equity is used now and cash is saved for future investment, doesn't that just mean that there is less equity for the next investment and more cash to outlay? I can understand that value in equity is preferred in a rising market but if its just going to sit there isn't it comparable or maybe even worse than cash?
Also any structures or methods that can be used prior to investment which can increase valuation potential other than banking on a rising market?
I guess the key is increasing the 'preserved value' any specific techniques for this?
Thanks again for your help on this
Se7enJosh AthertonMember@josh-athertonJoin Date: 2011Post Count: 269
Just being a sceptic for a moment, if you have had several valuations and are in the middle of the building process yourselves which ensures bottom dollar build rates and the val is still $44k short, is it the best investment? maybe the land could be sold and your friend could research better areas to invest?
Out of interest what are you building? house, duplex etc?
My understanding is that he has not started the build, he is waiting for financing to be approved before works will start. He is building a house. The investment was targeting capital growth but structured to be positive cash flow as well but the issue is now that while the positive cash flow is still looking promising the capital has fallen through with the market dropping and thus can't secure the loan to commence the build. To sell the land now would likely result in a loss, worst case scenario he would fork out the 44k from his back pocket to get the build done and start producing an income but he wants to avoid this as much as possible. It may take a bit of creativity or simply be impossible but if there is a way it would be good to know as this seems like a common occurrence especially with the current market.