Lenders and ‘Favourable Sales’

When looking to a purchase property, everybody loves a bargain! Buying a home that is priced below market value is an attractive option for those who do not have a large deposit.

Instead of entering the real estate market, property is purchased through private sale. These ‘favourable sales’ usually involve parties that have previously known each other.

Favourable sales are quite rare and most people looking to buy have to enter the real estate market through the regular channels.
However, getting finance to fund the purchase of ‘below market value’ homes can be quite difficult. Banks view these purchases differently and may be reluctant to lend. But a ‘favourable sale’ shouldn’t mean that you can’t borrow. Some lenders can still help.

‘Favourable sale’: what do the banks mean?

A favourable sale is the name given by the banks to a property that is priced below market value. Often individuals encounter the opportunity to purchase such a property in one of two scenarios:

• Children buying a property off their parents who agree to sell it for a cheaper price: some parents may do this to help their children get established through home ownership.
• In lieu of a debt: some people are offered the chance to buy a property for a reduced priced, as consideration for money borrowed.
  Although you may be getting a great deal, the biggest issue is getting finance to buy the property. The banks do not view these sales as they do the sale of regular homes.

What do the banks think?

Most favourable sales are made between two parties with an established relationship. Accordingly, most people do not feel the need to involve a real estate agent, as this is generally seen as an unnecessary cost.

However, without a real estate agent, there is a higher chance that the valuation of the property could be altered and the bank may end up lending more than the property is worth. As a result, some banks may decline your loan outright. Although, there are some banks that will ensure the valuation is correct and then on that basis, approve your loan.

How much can I borrow?

Generally, most lenders will only allow you to borrow 80% of the property value. This is because of strict Lenders Mortgage Insurance policies. However, there are other lenders that may approve you for a much higher amount, especially where there are no issues with the valuation. Whilst almost all banks require that you provide 5% genuine savings, some may approve your loan even where you have no savings. It all depends on the circumstances of the sale and the strength of your finances.
Banks prefer borrowers that have a stable income and job, as they pose less risk of defaulting on the loan.

Are there any other extra costs?

It is important to remember other costs such as LMI and stamp duty. However, LMI will only apply where you are borrowing over 80% of the purchase price. There are some lenders that will waive the requirement for loans over 85%, but this will be assessed on a case by case basis. Stamp duty is assessed independently, but can be quite a large amount. It is important to bear this mind before committing yourself to a loan.

Getting approval

If you know someone who is offering their property to you for a price that is below market value, then it is best to speak to an expert mortgage broker who can help you apply for a loan. Their help will ensure that the process is as smooth as possible and that you get approval.