Case Study: Successful renovation application but oh what a bumpy ride...
IT’S A TOUGH GIG TO BE SELF-EMPLOYED.
I KNOW FROM THE OUTSIDE IN PEOPLE THINK IT WOULD BE AMAZING TO CHOOSE YOUR OWN HOURS, DEAL WITH WHO YOU WANT AND HAVE CONTROL ON WHERE YOU WANT TO TAKE YOUR BUSINESS STRATEGICALLY. BUT THE REALITY FOR MOST BUSINESS OWNERS IS THAT MONEY IS TOUGH FOR A LONG TIME, YOU END UP WORKING WAY MORE HOURS THAN WHEN YOU WERE EMPLOYED AND YOU’VE STILL GOT TO INTERACT WITH PEOPLE YOU DON’T WANT TO DEAL WITH.
When it comes to finance it unfortunately doesn’t get any easier…
You could be employed for one day at a new job and still get a 95% LVR home loan, but if you haven’t run your business for more than two years, options are limited.
Of course, the reason why banks ask for two years’ worth of financials for a self-employed applicant is because they presume that income varies each year so they want to see consistency across a number of years.
That also sucks because, well, income for a business owner is different every year!
Case in point, I recently completed an application for a client of mine who ran a business where her 2017 tax returns were much better than her 2016 returns and we also knew that her 2018 financials wouldn’t be as good as her 2017s as there were a number of expenses her accountant wanted to run through the business for that year.
For a self-employed applicant, the time of year you’re applying for a loan is very important. You see, we all know that the financial year runs from 1st July – 30th June. However, you don’t need to actually lodge your tax return until late March the following year.
Banks understand this and most have a cut-off point of 31st December of when they will no longer accept the previous year’s tax returns.
Back to my client, we were applying for a significant renovation to her owner-occupied property - around $800K. Application was lodged September 2018. This meant that the bank was still happy to take her 2017 tax returns but if the application dragged into January, they would require her 2018s.
Recapping, the accountant had done preliminary numbers for the 2018 tax year (which finished 30th June 2018) and we knew they weren’t going to be as strong as her 2017 returns due to the expenses he wanted to run through the business.
We were also aware that her 2016 returns weren’t as high as her 2017s so we took the application to a lender who could work off just the 2017s.
Of course, when it came to the construction application there were a number of delays. The DA approval took forever and the fixed price building contract did not have a funding schedule that the valuer was happy with.
I’ll deep dive into this another day but banks usually require a construction loan to be funded as follows:
1. 5% - deposit
2. 15% - slab
3. 30% - frames & trusses
4. 20% - brickwork
5. 20% - internal linings
6. 10% - practical completion
The above works perfect for a house & land package but for a renovation of an existing property, it just isn’t as simple for a builder to come up with a schedule as neat as that.
This meant that the valuer had a requirement for 10% of the build price ($80K in this case) to be held in trust for contingencies and a Quantity Surveyor Report to also be completed. As this was a fixed price building contract, the client was not happy about the first requirement and she didn’t have the coin anyway.
So this meant we had to challenge the valuation, which for any broker reading this understands it is nigh impossible. We were also heading into the last week of calendar year so the pressure of getting the application approved in time was mounting.
Of course, I wouldn’t be pumping this article out if I didn’t get the approval but my two take aways from this experience for readers are:
1. For self-employed people, there are many different ways to get the job done so always work with a finance professional who can find creative solutions for you.
2. If you’re self-employed doing a big renovation, give yourself heaps of time because there will always be unforeseen delays!
Hopefully that gives you some things to think about and remember, if you want to run a scenario past me, just reach out to firstname.lastname@example.org or call me on 0400 530 868.