Why is it Difficult to Get Loans for an Owner Builder Project?
Say what you like about Banks and Bank Managers, there is one simple and inescapable fact.
They are in business to make money.
As a result, they assess loans on the basis of profit and risk.
Banks and other financial institutions have 50 years experience worth with Owner Builders and over that time they have discovered three main issues that cause problems.
- Many owner builders don’t know what they are doing. Unlike professional builders, owner builders aren’t working on construction projects every day and aren’t used to dealing with contractors and suppliers.
- Many owner builders don’t know how to price the job properly and underestimate costs.
- Many owner builders don’t understand timing and the need for tools like Gant Charts.
These 3 issues are critical because any of them could mean that if things go wrong and the bank is forced to sell it won’t get the value back on its investment.
The bank might agree for example that when it is finished the property will be worth $1million dollars but if the project isn’t finished or runs out of money, the bank’s security (the property) will be worth nothing like that amount. It is much more difficult to sell a property with wires hanging out of the wall and unfinished paneling.
In addition, banks also have no guarantee that the job was performed poorly or with qualified contractors.
As a consequence of these risks, banks either won’t lend or will only lend a very low LVR (Loan to Value Ratio) – traditionally 50 – 60 %.
Unless you know how to present your project in a way that puts their minds at ease.
