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The scenario
Only about 10% of our deals are what I call complex, and I actually really enjoy them! They’re a welcome change from standard loan applications. This particular deal certainly falls into the complex category.
We were approached by a new client, who came to us after noticing our shopfront. They gave us a call last September, and we began working with them then. It’s still ongoing eight months later, in April.
This client has five properties in his portfolio and was seeking finance to fund a new development. Two of his properties are next door to each other, and the client wants to do a subdivision that will essentially combine these two properties and then split them into three. On the newly created block of land, the client plans to build his new family home.
In working through the situation with him, we discovered that he didn’t qualify for finance to build the new property and keep all of his existing properties – so he needed to sell one of the existing properties to make this possible. The council also required a significant payment for ‘Open Space Contribution’ before work could begin.
The nature of this deal involves liaising extensively with council on the subdivision, which means it has dragged out quite a bit. A lot of prework had to be completed before we even got to the loan application stage.
The solution
The first step was to restructure the borrower’s entire portfolio to eliminate cross-security, maintain tax advantages based on his accountant’s advice, and improve cash flow and borrowing capacity.
In simple terms, it was a mess! In building his property portfolio the client had gone to his local branch and requested a loan – and they take the easy way out in most cases. This meant we had to untangle everything and separate all of his loans, while still ensuring that we were meeting his accountant’s requirements for tax deductible status on the investment loans.
One of our challenges as brokers is getting our clients to realise how difficult their loan is, while at the same time letting them know they’re in good hands
To get our client to the point where he was good to go for finance on the new construction, we advised that he wouldn’t be able to hold all of his properties. He needed to sell an asset to make it work.
This is a lot of responsibility to take on as a broker. We are very cautious when providing this sort of information to a client, as we need to ensure that the information is relevant today and will continue to be relevant down the track.
Initially the client was resistant to selling any of his assets, but there was no way to move forward without liquidating at least one property. We suggested he decide which one he would be most comfortable selling. We would then run the numbers to see if it worked. Fortunately, with the property he chose, it did work.
But the property hasn’t sold yet. So, for now, we have executed in two stages.
We have ticked off stage one: we have completed the refinance and restructure of the client’s existing loans and extracted enough cash to cover the council and subdivision fees. We managed to keep him with one bank for all of his loans, but his properties are no longer cross-securitised and his loans are no longer tied together.
We are now finalising stage two: securing a construction loan for the new family home, with a bridging loan component to allow the client up to 12 months to sell one of his properties. He has been pre-approved for finance and the deal has been signed off by the bank; we are just waiting for the subdivision approval to come through from council.
The takeaways
This deal reinforced for me the importance of taking detailed notes. All deals should have meticulous notes, but this is especially important for complex deals, as they generally take longer to complete. So, when you’re jumping back into a file after a few months, having waited for council decisions or building contracts, it’s good for the broker and client to know exactly where you left off – and what you’re working towards.
Also, one of our challenges as brokers is getting our clients to realise how difficult their loan is, while at the same time letting them know they’re in good hands. Clients don’t need to understand the minutiae, but when they know that a deal is complex and why it’s complex, they become more understanding about the time it takes to approve these loans, and more accommodating about the extra information the lenders will no doubt ask for.
David Thurmond
Owner-manager of
Mortgage Choice,
Berwick
