Bankrolling relocatable homes
Financing a relocatable house is a challenge, especially compared with buying an existing home or building the standard way, but it’s not impossible, writes Peter Norris.
1 May 2023
Relocatable houses have become increasingly popular amongst owner-occupiers and investors. In fact, on the day I wrote this article two clients randomly came to me and asked about financing relocatables. I figured that was a sign, so I kept writing.
The main reason for their growing popularity is largely because they are considered more affordable than building from scratch. With the surge in construction inflation and the overall cost of building over the last few years, clients have looked for alternatives.
However, financing these types of homes can be challenging for several reasons.
WHAT IS A RELOCATABLE?
If you’ve ever been driving at normal speed (within the limits, of course), only to come to a grinding halt because there’s a truck carrying a house that’s trying to get around a tight corner, then you know what a relocatable house is. The definition really is in the name. These are full houses that exist off-site and need to be transported on-site.
Historically, these would have been old houses that people removed to build new, so someone else would buy the house and put it on their land. One man’s trash is another man’s treasure.
However, these days more companies are building new houses off-site and then transporting them to a section. This is proving to be a cost-effective way of getting a new house.
Once the house is on-site it is connected to the main services, renovated (if it’s an old house) and prepped for its new owners.
This is where the difficulty comes in. I can almost guarantee that if you ask a bank how to finance a relocatable home, they will say you can’t. And in a lot of ways they’d be right. Financing a relocatable house is a challenge, especially compared with buying an existing home or building the standard way.
But it’s not impossible. The trouble is a bank won’t fund against the building until the house is on the new land and connected to services. This is because there is every chance the house will fall off the truck on the way, and the bank doesn’t want to have lent on something that’s now lying in the road broken.
It’s also very difficult to get insurance cover.
So, what the bank will do is lend to you to buy the land. In most cases, they’ll lend up to 80 per cent of the value of the land. So, if you buy the land for $500,000, they’ll lend you $400,000.
Then, they will give you a pre-approval for up to 80 per cent of the property’s value on completion. The reason for 80 per cent is that it is considered a new build and therefore exempt from LVR rules.
This value will be determined by a registered valuer going to your land and assessing what the value is now (with no house) and what it will be worth on completion (with a house). This pre-approval will be conditional on the house making it to the land and being connected to services. Once that’s done and the house has CCC, the bank will release the funds.
The benefit of this could be that the value of the property on completion is a lot higher than the actual cost of the project, and therefore, in the end, you may not need to put a lot of money in. For example, let’s say the land price is $500,000, and the cost to put a relocatable house on it is $200,000. That’s a total cost of $700,000. But, on completion, the value may be $850,000, and you could get an approval for 80 per cent of that end value, which is $680,000.
If you’re going through a new build company that builds off-site (often known as a prefab house), then chances are funding will be a lot easier. This is because that company will be used to the bank finance issues, and so have created payment terms which work for what the bank need. Often this will mean you pay a small deposit upfront and then nothing until the house is on-site and connected.
However, if you’re transporting an old house to your land, you’ll need to have the cash available to cover the cost of everything until it is connected to the site and the bank will lend. If the land is $500,000 and the cost of the relocatable is $200,000, then you’ll need the 20 per cent deposit for the land plus the full cost of the house. So, a total of $300,000.
This is where it becomes harder for most people to make it work. Typically, this lending would be done through the main banks rather than going to alternative lenders. Most of the near banks won’t do this type of lending, so you’re either dealing with a main bank or a far more expensive non-bank. This does mean you’ll need to fit bank criteria for servicing as well as having the funds.
In summary, while relocatable houses or prefabs are typically harder to fund, they most definitely aren’t impossible. You just need to make sure you’re talking to
someone who knows the ins and outs.