As construction for single family homes continues to increase more and more, small builders are looking for funding sources. These builders are finding it difficult to find spec construction loan programs. There are a handful of traditional banks that have begun to fund these types of construction loans. However, it is still very difficult to qualify for these loans.
The private lending world has really stepped up to lend on these spec construction projects. Spec construction loans are simply loans made to builders, developers, and investors who are building projects to sell for profit without an end buyer.
Hard money spec construction loans are funded by individual trust deed investors, brokers, and private money funds. Bow some institutional funds have started to move into the construction arena. Hard money lenders will lend off of the approved plans. Typically, a third party appraiser will get a full set of plans and give a value based on the project being completed.
Here is an example:
A real estate developer buys a lot and works with an architect to design a home that fits the neighborhood characteristics. Let's assume a 2,000 square foot home with 4 bedrooms and 3 bathrooms best fits the neighborhood demographics. The appraiser would value the property off the plans.
The appraisal comes in with a future value of $1,000,000. This would mean you could potentially get a spec construction loan of 65%-70% of that one million dollar value. This is one formula that hard money lenders will base their loan amounts on.
Another common construction loan program would be based on loan-to-cost. This is where a lender may have a guideline of lending 75% of cost. If the lot purchase is $500,000 and the construction budget is $500,000 you could potentially get a loan amount of $750,000.
Construction loans are always funded off a draw schedule so the builder would not get all the money at once. Once the line item construction budget is received by the lender, the lender has an internal construction manager/inspector review the budget. Sometimes the budget is sufficient and meets the underwriting guidelines. Often the budget is low and lacking a construction loan contingency.
A contingency is always set up for overages and shortages that are not in the line-item budget. This construction contingency protects the lender a well as the borrower. A good budget is the foundation for a well thought out development project. Construction loan contingencies are usually 3%-10% of the construction budget.
Traditionally banks lend off of loan to cost so usually this leads to lower loan amounts as opposed to construction hard money lenders who lend off of future value. By now you are starting to probably realize the many pros of hard money loans. Hard money loans do cost more than a bank loan. However, getting your project started sooner, without the red tape and without all the hurdles to overcome, have made the private money world a top choice of many of the local builders.
Another typical loan request happens when a builder has acquired the land thinking that he can easily get a bank loan for the infrastructure of the lot. That is a big mistake. Banks that are loaning on spec construction loan projects are making it extremely difficult to get the money for the infrastructure. They may lend if the project is ready to go.
If you would like to discuss your loan request please call Beau Eckstein direct at 925.852.8261 or please visit http://reiloanpro.com.