Real Finance Stories - Dwelling entitlements, large acreages & rural zonings

Australia is a big country and Australians love land. For so many of us, to own land, have land, harvest and use land is at the core of our sense of self. Not to mention, the sheer enjoyment of owning your space AND the views. 

Having worked as a mortgage broker in both Port Douglas and Bowral for ten years; 'acreage', 'rural zoning', 'dwelling entitlements' are words I hear and deal with regularly. Some lenders simply won't finance over five acres, or secure against rural zoning, so we really need to know our lenders policies. A recent case really highlighted this, and here is how we overcame it....
The land

An agent came to me experiencing difficulty in country NSW with a listing that wouldn't exchange due to the buyers having problems with lenders. The block was located outside part of a new development that was not close to any towns, so comparable sales were restricted. The clients had experienced difficulty in financing the blocks with not just one, but two local lenders, both of which had ended up declining the finance once the valuer sent their report in. This was not surprising, the zoning was rural, there were limited comparable sales, and the block was well over five acres. A trifecta of issues for most lenders, however, not insurmountable with the right lender and loan structure. 

The clients

The clients met with me to discuss a strategy. The blocks were clearly important to them and supported a dream to move and reside there happily, and  away from suburbia. We discussed the various hurdles lenders have and agreed on a strategy that met with their budget, covered all the fees, and fit well with cash flow. It was important that we took the equity out of their own home, so that the block could be purchased at 80% loan to value ratio or less, rather than financing it the other way around as many would do (load the debt more heavily against the property that was not their home). The strategy thus far was to:

1) Use a lender that was comfortable with large acreage's and rural zoning
2) Secure the debt at 80% LVR by using additional equity from the clients home
3) Finance some equipment required within the clients 'dream outcome', with equipment finance rather than equity so as to keep the LVR at 80%, rates low, fees low, and avoid discomfort from a mortgage insurer

Things got a little trickier...

In getting the application ready, and researching options, I uncovered that the blocks size would not allow for a dwelling entitlement within the local council's development control plans. Even a lender that accepts rural and larger blocks would have issues with this! If the clients wanted to truly retire on the land later, they were running the risk of council not allowing the land to be occupied or built on. I rang the agent immediately, and explained the situation. It's important that all parties work towards a common goal, and this was an agent I trusted. The agent said straight away if the bank wanted more land the vendors could could sell more land by adding more titles and revising the price. More land was added sufficient to meet the acreage required for council to grant dwelling entitlements. The clients, after considering that they wanted to legally occupy the land later, opted to take the offer. On the contract, we now had three titles for sale, all adjoining blocks, that once combined would meet the minimum size requirements of forty hectares for a dwelling entitlement. Upon ordering a valuation, I sent notes to the valuer to have this explicitly written in to the bank valuers comments. This did take extra time, but as both the clients and vendors agent understood, this was a necessary part of ensuring that we obtained approval.

Dealing with credit

Of course, once credit got the valuation and contract they questioned it, so we discussed providing the bank with comfort, by obtaining a letter from council explaining that the consolidation of the lots to one total area would give it dwelling entitlement. The council's town planners charged a small fee for this service and provided it in a couple of days. From there, we got stuck in the valuations department, as valuations weren't sure what to do with the comments. I rang the head of credit, and discussed the predicament. He requested a letter of undertaking from the clients that they would combine the lots through the Land Property Information office within twelve months, and a full approval was granted.

Of course this is not something that happens every day, but each property, or client has their own personal hurdles and simple negotiation is all that is often required to bring all the parties together.

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