Why Securing Bank Finance Remains a Challenge for Property Renovators

In this article, we take a look at the challenges property renovators and house-flippers face when trying to secure bank finance, and what possible options you may have to access the funding you need for your projects.

Challenge no. 1: Uncertain valuation

Unlike turn-key properties, the value of renovation projects is often uncertain. Banks rely on property valuations to determine the loan amount and assess the risk associated with lending making borrowers jump though numerous hoops to obtain approval. Not to mention, the value of a property under renovation can fluctuate depending on several factors such as the quality of the renovation, market conditions, and unforeseen issues that may be uncovered the moment the renovation project has begun.

This uncertainty is one of the main reasons why traditional finance institutions like banks are extremely cautious approving loans to renovators and house flippers, particularly those without an extensive track record.

Challenge no. 2: Risk of cost overruns

Aside from the challenges in valuing a renovation property, banks are also extremely cautious with the possibility of the renovator exceeding the allotted budget of the project. Issues like structural problems, code violations, or delays in construction can significantly increase renovation costs and hence, affect the borrower's ability to complete the project on time and repay the loan.

Challenge no. 3: Track record

Banks tend to favour borrowers with a proven track record. But if a renovator is just starting out their business it becomes that much more difficult to prove their credibility to a bank and meet their serviceability requirements.

Challenge no 4: Servicing

Even though the purpose of a reno/flip project is to upgrade and sell the property for a profit as quickly as possible, banks will often require the borrower to be able to demonstrate servicing. Even an experienced property developer may have difficultly meeting bank criteria in this regard with only irregular income from property sales to show the banks.

How can renovators access funding for their flip-projects?

If bank finance is difficult to attain, then there are alternative sources of financing offered by private lenders. The difference between traditional finance institutions like banks and private lenders is that private lenders don’t use standard serviceability requirements to qualify borrowers looking to take out a loan. Instead, the primary focus of private lenders is more on a borrowers’ exit strategy.

In the case of renovations and house-flips, the most common exit strategy is the sale of the property after it has been developed. If the due diligence checks out and the exit strategy is deemed feasible, then being granted funding is very much possible.

Other advantages of private finance:

Unlike banks that follow a standard checklist when qualifying borrowers, private lenders are able to work more closely with the borrower. Loan-terms can be negotiated around the unique situation of the renovator seeking finance, often including capitalised interest, making private finance far more flexible than a traditional bank loan.

And because the qualification process is less rigid, the approval process is also faster than the approval process of traditional finance institutions.

Case Study: How PMA helped kick-start a project after the bank said “no”

• Location: Longwood, SA
• Loan Amount: $975,000 (First Mortgage) and $455,834 (Second Mortgage behind ANZ) 
• Security Property Value: $2,950,000 
• LVR: 75.00% 
• Term: 6 months prepaid plus 6 monthly extensions

The borrowers are experienced in property renovations and shopfitting. However, the bank declined their loan application because the client’s financials weren’t up to date. 

PMA devised a personalised financial plan using first and second mortgages on security properties. This allowed the borrower to acquire their desired property and initiate their renovation project.

The renovation has since been completed and the borrower has successfully paid back their loan via their exit strategy. 

For more information on the other finance solutions PMA provides, be sure to visit our product page.

If you have a business lending scenario you would like to discuss, or, if you have queries on any of PMA’s commercial finance products, feel free to contact us or you can complete our Quick App form here (< 10 mins).