They say that life is too short to drink bad wine and/or bad coffee. So, when a potential client asked me to meet with him to discuss his financing needs, I was pleased he suggested we meet at Starbucks.
After settling in with our $5 lattes, I learned that this client was a custom home builder specializing in buying “dated” homes on the waterfront; he would then proceed to tear them down & put up either one massive luxury home, or, build a series of luxury townhomes. Each home sold at a profit of between 12 – 16% of the new sale price.
How the $5 Latte Turned Into a $3.5 Million Dollar Reverse Mortgage
Now, you may be wondering if HomeEquity Bank has gotten into pre-construction financing – we have not. So how did a reverse mortgage fit into the picture?
Many small to medium sized custom home builders will live in the luxury home they have built to avoid having to charge HST when the home is sold. Most buyers will factor 13% into the list price when making their decision to buy, and this means 13% less profit. When margins are between 12 – 16%, you can see how this will have a huge impact on the home builders bottom line.
This client was building a very nice home on Lake Ontario. It was almost 95% completed when we ordered the appraisal. The appraisal came in valued at $8M. The client was only 56 years old, but we managed to approve him for a $3.5M reverse mortgage.
Rules Can Change for Reverse Mortgages $1.5M+
If you use the calculator on https://www.chipadvisor.ca/calculator/you will notice the LTV in this particular instance is WAY HIGHER than we would normally entertain for someone only 56-years old. Why? Rules can change for mortgages $1.5M+.
I structured this deal very differently than a normal reverse mortgage. In this case, I asked HomeEquity Bank for a 3-year term, with no automatic renewal.Remember, with a normal reverse mortgage we automatically renew until the home is sold or the last survivor dies. There is much greater risk with automatic renewal as the estate is never responsible for more than the fair market value of the home at the time it is sold, even if the loan exceeds the home value (we would take the loss).
The other unique part of this deal was that it was 100% open after the 2ndyear. You may recall that clients will be charged with a penalty if they repay us within the first 5-years. But this penalty would have been a deal-killer in this case as the client fully intended to sell the luxury home after the 2ndyear. Year 2 onwards for a custom home builder trying to avoid charging HST is a very important milestone.
CRA will allow home builders to move into a home for 1-year, declare it their primary residence and avoid having to charge HST or report capital gains when the home is sold. However, if a home builder does this each and every year over a period of time, the CRA has been known to take builders to court and argue that the 1-year pattern is in fact simply a way to avoid charging HST. There have been numerous cases of massive fines & having to repay HST over many years. However, 2-years+ and you (at the time of writing) are good.
The client used the funds to payout an existing $1M private loan (used for pre-construction) and a $1.5M mortgage. No monthly payments on the reverse mortgage and $1Million dollars cash-in-hand to begin his next project.
If you would like to learn more about custom home builders, how to structure $1M+ reverse mortgage requests or how to target these niche clients, please don’t hesitate to get in touch.