Valuations when buying land

Buying land with the intention of building down the track? If you're tight on funds and borrowing a high percentage of the funds to build you should be aware of how valuers occasionally work.

When you buy a new property (house, vacant land, unit) a valuer will value the property using the Contract of Sale (namely the price you agreed to pay), existing data for recent sales and projected market movements among other things. Commonly, though not always, the valuation of the property will come in at the exact price you agree to pay. However, when there is no contract of sale the valuer has to come up with a number all of their own and they're not usually generous without reason and will err on the side of caution often resulting in a lower value than expected.

What does this have to do with land and construction? 

If you don't have a fixed price contract to build at the time you settle on the land purchase the valuer will revalue the land without the contract of sale and add the costs of construction. This could result in the land being devalued. If you're borrowing 80% of the total for land and construction, a shortfall on the land valuation could put you in to LMI territory. If you're already deep in to LMI territory this could potentially kill your application.

You have a deposit of $80,000

Land Cost - $400,000
Build Cost - $400,000
Total Loan - $720,000 
LVR 90% LMI costs between $10k-$15k

2 months later once you know construction costs

Land Value - $360,000
Build Cost - $400,000
Total Value - $760,000

Total Loan - $720,000
LVR 94.74% LMI $20K+

I know of two lenders that may consider lending over 95% for construction. If you didn't meet their eligibility requirements though this could be a dead end until you save more of a deposit.

If this doesn't make sense please ask questions. If you're working with a banker or broker that isn't preparing you properly or you leave appointments with unanswered questions get another opinion.