The scenario
Initially we were approached by an existing long-term client who wanted to expand their investment portfolio. We had helped them finance their investment property purchases in the past, so we were confident we could assist them with their next step up the property ladder.
In this case the client had bought a property at auction. We were told on the day of the auction that they were bidding on a property that was quite unusual. Firstly, it came with three income sources – the main house and two granny flats, which each generated a rental return.
However, the main dwelling had extensive fire damage, which required substantial repair and meant the rental income would be reduced. Furthermore, the two granny flats were rented out, but they were in poor condition.
The extensive damage to the main house presented a unique challenge in that the home was uninsurable.
We were advised that after the renovation work on the whole property, including the two granny flats, the combined property would be able to return a yield of more than 15%, which, based on the $1.3m purchase price, would amount to $3,750 per week in rental income.
However, the damaged condition of the property meant that the client could not obtain adequate insurance. Without insurance, lending would be impossible as no lender would be able to take the property as security.
As the client only discovered the property and became interested in it on the actual auction day, they were unable to confirm other details with the local council, such as whether the current granny flat approval was still relevant, and whether acquiring an Occupation Certificate for a fire-damaged property would be possible.
The solution
This was quite a complicated deal with many different aspects to consider, so we consulted with the client’s lawyer and came up with a few workable options to ensure funding could be achieved. The options we presented were to:
The vendor ultimately agreed with these conditions and the sale was able to proceed.
The property was purchased under auction conditions in section 66W, without the cooling-off period, after the auction had been passed in. Although our client had made the highest bid, the vendor chose not to sell at the auction.
On the same day that the auction was passed in, our client and the vendor agreed to proceed with the sale with a number of conditions, including delayed settlement for three months, the right of our client to access the property prior to settlement to complete the renovation work, and permission to liaise with the authorities (such as fire engineers, council certifiers and builders) on behalf of the vendor.
The damaged condition of the property meant that the client could not obtain adequate insurance. Without insurance, lending would be impossible
By structuring the deal in this way, getting building insurance was achievable as the delayed settlement made it possible for the property to be fully renovated and receive occupational certification prior to our client officially taking ownership.
The risk with this type of arrangement was that the client could have invested money in repairs and renovations and then been unable to secure finance. This made this arrangement low-risk for the vendor but higher-risk for our client. However, as our client was confident they could see the real value of the property, they were happy to proceed.
The big advantage was that after the renovation the valuation came in $300,000 higher than the original purchase price, which made securing finance far easier.
With the above strategy we were able to get the property renovated and updated to code requirements well before settlement, which allowed us to secure finance for our client with a traditional bank.
The takeaways
Thinking outside the box is crucial when looking for lending solutions. As a broker, we are the client’s trusted ally, so we cannot be afraid of speaking to other associates and service providers of the client to gain an in-depth understanding of their situation, and their rights and responsibilities, when the scenario is challenging.
We should also never hold back on negotiating in the client’s best interest when things seem impossible. It’s always worth being honest and speaking to your BDMs about any tricky scenario you may have, as solutions may present themselves in ways you haven’t considered.
Vishal Gupta
Principal broker,
Unique Finance Services
