Incomplete home purchase & build

Client Details

Single applicant living at home with parents paying no rent. Client works in healthcare making $130K including overtime & allowances. Client has 2 other investment properties with mortgages but plenty of equity. No credit open and living below HEMS.

Scenario

Client was looking to purchase an incomplete single dwelling build from a seller whose builder had gone bankrupt and was looking to sell. The land had a slab on in already. The client was to finish the project as an owner builder considering he had building experience. The client was looking for $400k for both the purchase of land with slab on it and to complete the build as an owner builder.

Why Client Approached Us

Client had gone to another broker who told him he could only achieve $200K for his next property & that additionally incomplete builds could not be funded.

Issues

The issues with this deal were

1. Many lenders will not take an incomplete build as security

2. Lender requirements for owner builder projects are stricter compared to registered builders

3. Client’s income struggled to achieve the asking amount of $400,000.

Resolution

When the client approached us there was a number of private lenders who were willing to take on funding the project. These lenders would fund the project as they do not consider income for servicing but rather project cost and end value. However client wanted to keep the property afterwards for the rental income and tax advantages thus we went with a non-development financier.

Looking at the clients situation we went with the path of taking the $400k in cash-out out of the clients existing properties through a refinance with a new lender. We completed valuations of the property at the beginning to know the numbers we were working with. As the new property purchased would be mortgage free, two issues were solved. Firstly not using the new property as security (1) and not having to having to satisfy lender owner builder requirements (2).

To satisfy the income serviceability requirements a number of steps were taken.

1. As the client worked in health care we were able to prove and utilise 100% of overtime and allowances. This meant that the income used for servicing was greater than his previous years NOA, yet we were able to get the lender to accept this income.

2. As the client was living with parents, we went with a lender who allowed us to omit the use of notional rent, saving the client $7,800 in notional rent expenses per year.

3. We were able to use tax deductions from the interest component of the loan to further increase serviceability.

4. One of the properties being rented was rented under market value and was due for a rental increase in the coming months. We worked with the client’s real estate management agency and the valuation firm to provide supporting documentation to satisfy lender requirements and work off FUTURE rental income in our servicing.

On-going Care

There were a few measures we put in place to protect the client to avoid financial stress should the worst was to happen.

1. We spoke to a private lender to ensure there would be additional funding available (typically available within 5 days) should the client run out of funds and need additional funds to complete the project. 

2. We are working with the client to further expand his portfolio.

Outcome

The outcome of this case was that the client was able to add another property with, at the beginning of the project, had a real estate valuation of a $630,000 and rental valuation of $480/week against essentially $400,000 in loans. This particular property ended up being mortgage free. The client did not use any cash as this project was completed within the cash-out amount.

Key take-home points of this deal

1. Not every property needs to be used as security. You can utilise your portfolio.

2. Go to a lender whose niche offerings support you. Every lender has a target market and typically a lender whose target market is you will work best for you. For this deal is was accepting no notional rent, accepting higher PAYG & market value rent.

3. Work with professionals not against them. In this case the real estate management agents were crucial in providing supporting documents.

4. You can amend the valuation report if you can provide support documents.

5. Always have plan B, C and D should the worse was to happen.