Finance for Do-Up and Sell

[cube]

Hi,

Just some idle musings on a hot summer's evening....

Do the traditional banks mind if you do 'do-up and sell', or even trade un-renovated properties? I imagine that after a few times of signing up for a 20 year mortgage only to cash it in a few weeks or months later, they would start to spot a pattern and stop supporting the activity.

Do mortgage brokers (good, investment focussed ones at least) have access to short term funds, or would I be better off going to a lawyer or accountant?

cube

[krispedersen]

Hi Cube,

A big topic from a lenders point of view, the main banks lose money if they let you trade regularly(they have to pay brokerage, marketing, large other operational costs etc) under normal rates. As I understand it they don't make money until the loans been on the books for a year or two

For Brokers it's getting harders as lenders are introducing clawbacks because of last years changes to the finance act (CCCFA) which means that brokers can lose their commissions if the loan gets paid off/ settled by another lender within a predetermined period of time.

As I see it you have four main options, a really good relationship with a main bank or a prime rate lender (see Daniel Feller from Financial Pictures about this one), a big LOC, private financing (see Chris Ashenden's post about the main ways to go about this or bridging finance.
If you want e-mail me on [email protected]
with your contact details and we can discuss it

Cheers

[Chemill]

At the moment I'm doing up a place to sell off in a few months. While deciding on a fixed rate vs floating etc the Bank manager mentioned that I could take the mortgage with me - eg same mortgage, different security.

You'd want to confirm this with bank though.

Chemill

[cube]

While deciding on a fixed rate vs floating etc the Bank manager mentioned that I could take the mortgage with me - eg same mortgage, different security.

Now there's an interesting plan - has anyone else tried this?

[Gerrard]

Bank has told me the same thing, but I guess the risk with do-ups is whether you have another property to transfer it across to at the right time.

Also been wondering how the lenders view servicability on this. They probably don't like the idea of lending when there is no income coming in to cover the additional lending. Perhaps you need to tell them it's a rental, and here is my rental assesment for $X?

Gerrard

[captaincrab]

May I suggest you try the commercial arm of the bank. I've just done something similar. They charged me a higher rate and a fee but...they also capiatlised the interest so I didnt have to pay out of cash flow while the renovation was done and the property sold

[captaincrab]

forgot to say, Chemill that type of feature where you take the mortgage to your new property is called "portability". Some Banks will allow you a gap between houses if you put the funds received from the sale on deposit. The "mortgage" just carries on until you replace the deposit with a mortgage on your new purchase. This way you dont have to worry about breaking the fixed rate(if its a good one worth keeping)

[roseneath_rat]

Probably best to contact the Private Banking section of the major banks if you will be doing serious borrowing & earning. "Private bank" is usually for high value clients, criteria usually along the lines of those who earn over $250k or investment assets over $1M. Typically they have better staff & have more discretion to discount rates & terms outside of the vanilla products you get from walking into your closest branch.

Banks performance targets for their staff are usually around "volumes" of sales & "size of book." The volume of sales is a clear & easy one to identify, and relationship managers will love people who take large borrowings regularly. However the 'size of book' measurement takes into account the churn of these kinds of loans.

[Wezz]

Do the traditional banks mind if you do 'do-up and sell', or even trade un-renovated properties? I imagine that after a few times of signing up for a 20 year mortgage only to cash it in a few weeks or months later, they would start to spot a pattern and stop supporting the activity.

Hi Cube - They do mind and I found myself in a similar position. It depends on how many houses you do up at once I guess, but the way I eliminated the problem with the bank, was to set up a revolving credit account. A very basic technique but one that works for both myself and the bank. Cheers - Pete.

[SuperDad]

Hi Cube,

I've just briefly investigated, through my mortgage broker, the prospects of finance for trades.

My broker told me that banks treat finance for buy-and-holds and trades quite differently. As krispedersen noted, a broker's commission will be clawed back if a mortgage is settled quickly after drawing down. I was told that banks will also lose money in this case, due to the costs they incur in setting up finance. So here's what happens, according to what I have been told by my broker (who is more than happy to help me get such finance), who has recently had experience raising such finance for a client:

The loan will be treated as a short-term loan by the bank. They will do things such as

(i) apply a loading (e.g., 0.6%) to the finance rate over the term of the loan (say 8.1% rather than 7.5%)
(ii) charge a discharge fee on repaying the loan (e.g., 0.8% of the loan ammount)
(iii) charge the client for all documentation fees and other fees associated with administrating the loan, and
(iv) charge the broker's commission (e.g., 0.6% of loan ammount) back to the client.

Personally, I'll be happy taking these costs as being part of doing business, at least until I have enough cash to finance myself (perhaps in a revolving credit facility, as Wezz suggests). Even then, I might want to risk the bank's money rather than my own.

The dishonest alternative is to take out a regular loan, and pay it off quickly. I would not do this, for three reasons. 1. I'll only get away with it once with each bank, so I'll soon run out of banks. 2. I'll pretty quickly lose my broker, once his commission is clawed back. Neither of these two scenarios appeals to me. 3. Most importantly, its dishonest.

Paul.

[jim34]

An alternative to funding

Hi Cube, I meet you at roger Hamiltons wealth Dynamics 2 weeks ago my name is jim (dealmaker). Another alternative to your situation is to find an investor like myself to do a join venture on a do up house. I can arrange all the finance and you do the do up. We split 50/50. You can build your cash up until you have enough to go it alone and fund your own do ups. Just a suggestion to add to your wealth creating journey.

jim

[cube]

Thanks Jim,

I'm still sorting out in my head what strategy is best for me and my family - it will probably involve property, but we are not quite sure in what capacity as yet.

Don't worry, though, I promise I'll bug the hell out of you when we know what we are doing.

cube

[JohnL]

You can try some of the smaller lenders. Some of the building societies may be able to help, particularly once you get a track record. Their rates are very competitive as well and the fees are small. For trades, I wouldn't necessarily go through a broker as the relationship you establish is critical as well (I do regularly use a broker for longer term loans).

John

[SuperDad]

JohnL,

Would you be able to explain in more detail what you meant when you wrote:

For trades, I wouldn't necessarily go through a broker as the relationship you establish is critical as well (I do regularly use a broker for longer term loans).

John

The mortgage broker I am working with is more than happy to assist me in securing finance for trades. I have explained from the outset what I am doing (looking at both buy-and-holds and trades), and he has explained the differences between the two from the banks' perspective and from a mortgage broker's perspective. As long as I'm honest, everyone will get their slice of the pie I am baking.

I am keen to foster my relationship with this particular broker. Is there some other danger (that will harm my brkoer relationship) in seeking trading finance that I'm not aware of?

Or have I misunderstood your post, and you were rather talking about a trader's relationship with the lender? (If this is the case, why would one be better to deal directly with a bank when raising trading finance?)

Paul.

[Oopsick]

For Brokers it's getting harders as lenders are introducing clawbacks because of last years changes to the finance act (CCCFA) which means that brokers can lose their commissions if the loan gets paid off/ settled by another lender within a predetermined period of time.

Has that clawback thing started yet?

(iv) charge the broker's commission (e.g., 0.6% of loan ammount) back to the client.

this sound too much
How much is the average Mbroking commission?

thnx