New construction financing - selling old house - experiences?

Hello,

we have finally found the right plot of land and will start construction in 6 weeks.

Basically, the money for the new house is available, the realtor estimates the proceeds from the existing house at at least 400,000 €,
the new construction costs are fully calculated, and equity for the difference "proceeds from existing property and new construction costs" is available. In the end, it can be a fully paid house again. So far, so good.

The existing property is now going on the market, so far I have considered solving the gap between proceeds and completion costs with bridge financing, but the costs for that are immense – with everything included, registration/cancellation of mortgage, bank discount, and interest, we are looking at over 15,000 € for an assumed 6 months duration of use for the 400,000 €. For a basically risk-free business for a bank, that's quite steep.

Now I am thinking about how this might be solved differently. The best situation would of course be (there are already preliminary viewing appointments) if someone wants our house promptly, pays for it immediately, and we can continue living there until completion. According to the realtor, this is an increasingly used approach.

But what if not? Then I can use the bridge financing, but I am a bit reluctant because of the costs.

We also have some approaches to maybe use 250,000 or 300,000 long-term over 10 years as an annuity loan with 10% repayment per year; at first glance, this will be more expensive, but if I consider the opportunity costs, on second thought, it is not – simply put, I can make the money work that I do not put into the construction, and the return will be relatively secure at least at the same level as the interest costs of a 10-year financing. We are offered, I think, 3.15%, and fixed deposit for 5 years is already higher, 10 years at the same level.

Are there perhaps tips or other suggestions? It could well be that I am not seeing even better ways yet.

Looking forward to experiences and feedback!

Best regards
Peter

Please bear in mind that the buyer only pays at the earliest upon the registration of the declaration of conveyance in the land register. For us, this took easily 8 weeks after the notary appointment, for example.

Now I am thinking about how this could possibly be solved differently. The best situation would of course be (there are already pre-inspection appointments), someone comes who wants our house promptly, pays immediately, and we continue to live in it until completion. According to the real estate agent, this is a way used more and more often.

Already done that twice myself. But for that, you pay a usage compensation until completion (as a rent replacement for staying in the house). That then costs five figures. Maybe even more expensive than the bridging finance.

Registration/deletion of land charge, bank discount fee and the interest, assuming a 6-month utilization period, we are above €15,000 for the €400,000.

The bank can’t do much about that. And discount fees basically don’t exist anymore nowadays.

For a business of a bank that is virtually risk-free, quite hefty.

Risk-free? You want €400k loan with a collateral value to the bank of €216k (roughly calculated). That involves a lot of risk (formally). So lots of equity backing, risk costs, etc.

But what if not... then I can use the bridging finance, but that bothers me a bit because of the costs.

I would be bothered the same way to pay the costs for using my own house after selling it, which might even be higher.

We also have some approaches to maybe use €250,000 or €300,000 long-term over 10 years as an annuity loan with 10% repayment p.a. At first glance, this will be more expensive in total, but if I consider opportunity costs, then on second glance, not really – simply put, I can make the money work that I don’t invest in the construction, and the return will be relatively safe at least at the same level as the interest costs of a 10-year financing. I think we are offered 3.15% and fixed deposit for 5 years is already higher, 10 years about the same level.

What does the return look like AFTER taxes? Is it still worthwhile then? Please compare including land charge registration and notary costs.

Borrowing money against a property that is actually paid off is a typical interest rate differential business. It was actually quite normal when interest rates were at 1%, now your investment simply has to yield significantly more after taxes. If you are solidly positioned and still have enough time, you can do something like this, but not with government bonds.

Please keep in mind that the buyer only pays at the earliest with the entry of the declaration of conveyance in the land register. For us, for example, that took easily 8 weeks after the notary appointment.

Yes, that's true, I am aware of that – the equity capital is sufficient well into next year, I know the construction schedule and am aware of the costs.

I have done that myself twice. However, you pay a usage compensation (as a rent substitute for staying in the house) until completion. That then costs five figures. Maybe even more expensive than the interim financing.

That's true, but the idea is to possibly negotiate it so that you have 6 months from the sale and only then start paying a usage compensation for further months, for example, and maybe concede a bit on the house price for that. That way, it should be financially viable for both sides. We priced the sale higher than the agent recommended and still already have two viewings in advance … the property was occupied at the end of ‘99 and is already completely energy-renovated, so the buyers should not be a problem here. I can imagine that this can be negotiated. The agent too. Otherwise, a quick preliminary sale makes no sense, considering our property, multiple interested buyers can quickly appear and a bidding process can arise. According to the agent, they have had all that in recent weeks, but only with this type of property; unrenovated properties sit like lead on the shelves because banks – when it comes to energy certificate classes E, F, etc. – impose requirements to finance houses only if an energy renovation concept is available. We have C and last year still had B (which was politically no longer desired).

The bank can’t do much about that. And there is basically no more discount (disagio) today.

Try explaining that to my bank, which demands 1% with the reasoning that they also have to "have fun" :D

Risk-free? You want €400k credit with a collateral value for the bank of €216k (roughly estimated). That involves a lot of risk (formally). So a lot of equity backing, risk costs, etc.

Formally you are right, but not in reality; collateral can easily be provided over the entire amount and the bank knows that: existing property, other properties, a large motorhome, 6 months old, list price €350,000 and a stock portfolio far above the intended amount. I had planned to arrange the bridging finance myself by selling stocks, but due to the high tax burden that’s not much fun, because afterwards I can buy back fewer shares, so in the long run that’s absolutely not a good idea.

What does the return look like AFTER taxes? Does it still pay off then? Please compare including mortgage registration and notary fees.

That, of course, weighs more heavily, I agree. But it also creates freedom for further conveniences in life for the coming decade, we are in our early 50s, fit and can still travel everywhere, have many crazy ideas, and maybe that will be different in 10 years. Capital needs do decrease significantly with age and I don’t intend to be the richest man in the cemetery.

This is nothing “off the rack” that I’m requesting here, that’s clear to me.

None of what I am asking for here is off the shelf, that is clear to me.

Yes, this "problem" is truly common.

someone comes, who wants our house promptly, pays immediately, and we stay living in it until completion. According to the realtor, an increasingly used method.

Not rare at all, because many are in this situation.

we have set a higher sales price than recommended by the realtor and still already have two viewings in advance

(Only) 2. That doesn’t say anything. Just as well, 20 might have come by, who then all had no further interest.

specifically pays a usage compensation for example for additional months, and in return possibly reduces the house price a bit.

But that is the mentioned five-figure amount you have to deduct from the sales price.

but that somewhat conflicts with me because of the costs.

Well, nothing comes for free. Especially when you want something yourself, you are in the position of having to make concessions.