Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

We will take the work
out of finding you
the right home loan
Facebook
Handy tools
Sign up for our Newsletters
 
MFAA
 
Powered by Finance Tools
 

Renovating/Construction

Renovating and construction have similar common denominators. If you start with a block of land, building a house will add value to the block, similarly renovating an existing home should also add value. According to lenders, this is not always the case. What is considered valuable to the person adding an extension or building may not necessarily be considered valuable to the lender providing the funds to complete.

In both cases,  the cost of the improvement needs to be added to the existing value of the property and an end value will be assumed. With renovating the sums may be something like this; you have a two bedroom home valued at $300,000 and a builder provides a quote of $40,000 to add another bedroom, you would like to know that the end value will be at least $340,000 (but preferably more since having to put up with renovations surely must be worth something!)...

If that home is on a steep block or the site has poor access the quote may come in at $60,000, and yet recent similar property sales indicate that three bedroom homes in similar areas on similar blocks are selling at only $340,000. This is a case of overcapitalising, (spending more on the property than it's worth) . When asking a bank for the money, if the existing debt against the property is low, the bank may overlook the overspending and consider that the equity position will improve over time, therefore finance required is low risk and they are happy to provide it. If on the other hand the debt value against the property is high, the bank may refuse to provide the finances, since they are the ones risking a low value sale in the worst-case scenario.

Building faces a similar problem. The way lenders assess risk on construction finance is to add the value of the land to the value of the quote to build. They then compare this figure to recent sales of similar properties in the area. If the purchase price of a block of land is $200,000 and the quote to build a $350,000 the end value would be assumed to be at least $550,000. The bank however will also look at recent sales in the area and if for whatever reason several properties of similar quality have been sold at $450,000 the bank will assess the debt level against the lower amount and base the risk according to that. Interestingly enough if recent sales indicate that properties have sold at $650,000 the bank will still assess based on the $550,000 value.

Knowing the current value of any home or block of land as well as the value of similar properties after renovating or building is crucial to knowing what financial options you have.

RP Data provides information regarding actual sale prices. Real estate agents and the land titles office have access to this online service. They update information regularly and since Blue Mountains Mortgage Brokers subscribe we also have access to these statistics. For a free property report or information on the correct financial structure for your situation, simply contact the office.

 

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player