Pre-construction financing - Posted by Nate-WI

Posted by Kristina on May 01, 2007 at 15:19:14:

Nate, this may seem a little odd to respond at this time being that your need was so long ago. However I was browsing through the postings and noticed yours. I would like to introduce my self to you so that I can be of service to help with any loan that you may need. I am currently with City Mortgage out of San Bernardino, however distance is not a problem. Should you need any kind of loan I hope you will give me the opportunity to help you get what you need. I understand a lot of time has passed and I appreciate any time you have given me.

Pre-construction financing - Posted by Nate-WI

Posted by Nate-WI on November 06, 2005 at 08:28:31:

Ok lenders and brokers help me out.

I’m looking to get into a pre-construction deal. I have not done a deal like this so any advice good or bad is welcomed.

The purchase price for the townhome is 589K. 10K deposit and then after a due dilligence period, 10% down would be required which would be $58,900. I can come up with the deposit and the downpayment with my lines of credit. But what about the financing part of the 90%? My intentions are to sell this home once its completed. What kind of rates would I be looking at for a 90% LTV on a pre-constrution deal? Do I go into a 1 yr arm, interest only payments, or what? My FICO is 700 if that helps any. Your thoughts are welcomed.


Re: Pre-construction financing - Posted by John Corey

Posted by John Corey on November 08, 2005 at 24:53:26:


Some obvious things that are missing.

  1. When the property is being constructed by the developer you do not have to finance anything. You have a deposit to hold your ‘order’. Until the developer can deliver the completed product you can not legally buy it so you will not be expected to finance it. They are not acting as your builder so you are not financing the construction.

  2. You intend to sell when it is done. The best idea is to set up the sale so you never have to complete on your purchase. You would sell your position but not actually take title to the property.

  3. You also need to factor into the equation what happens if the property will not sell when the time comes around. In that case you will have to complete the deal or risk losing your deposit. Know what your contract says.

Slightly worse is the situation where the property’s value has dropped slightly and the lender will only work from the sale price or the value, what ever is lower. In that case you might need more cash to close.

There was a guy on one of the forums who had a similar problem with a LV NV property. The units all hit the market at the same time and the price went down. He ended up closing with a paper loss and then could not rent the place. He was looking at an almost immediate default/foreclosure.

John Corey
Chelsea Private Equity, LLC

PS. I have purchased 6 properties off-plan or pre-construction (two labels for the same thing). In all 6 cases I intended close on the deals and did. One went up a lot, 3 more moderately and 2 were flat.

Re: Pre-construction financing - Posted by Don Dion

Posted by Don Dion on November 06, 2005 at 08:50:45:

Is this a single unit or a building with several townhomes in it?

Either way it’s a spec home and not subject to long term conventional financing. These are done by builders with commercial lines of credit. A typical loan will be based on the banks backing notes. For example a small regional bank might work off the 5yr t-bill notes and lend at a margin over the notes. They will quote these as 325 to 385 basis points over the t-bill which means 3.25% to 3.85% over the 5yr t-bill floating interest only paid monthly. Current 5yr 4.25% total rate 7.5% to 8.10. As far as the LTV is concerned you will have to ask the banker but in general they will be 70% to 80% of hard costs not potential market value.

Re: Pre-construction financing - Posted by renny sam

Posted by renny sam on November 08, 2005 at 12:41:38:

Please, we are into real estate developments, recently we are approached by some state governemnts to construct students’hostel for states’ universities on Build Operate & Transfer (BOT) basis,because most of state univeristies in Nigeria are without hostels hence we are looking for an investors partners with our available limited resources for these huge profitable investments. The students’ suffering is so much that some students are living 100kilometres away from school. Please advise asapo. Best Regards

Re: Pre-construction financing - Posted by Nate-Wi

Posted by Nate-Wi on November 06, 2005 at 08:57:30:

This is a in a complex of 72 homes. I’m not a builder and I don’t have commercial lines. I have my own. I don’t understand T-bill lingo and floating interest and all that stuff. Since I’m not a commercial guy do I just go to a financial institution and ask for a loan?

Re: Pre-construction financing - Posted by RMW(FL)

Posted by RMW(FL) on November 06, 2005 at 10:21:09:

Hi Nate,
Basically here is what you are doing. Correct me if I am wrong. You put 10% cash down to “control” the unit during the construction period. Upon issuance of the certificate of occupancy (CO) you will be required to come up with the remainder. At that time is when you will have to have your loan in place. If you plan to sell it right away get whatever financing is availabe to suit your LTV needs just no PPP. Any mortgage broker or lender can line up this financing. Not a big deal. Good luck with everything!

Re: Pre-construction financing - Posted by Nate-WI

Posted by Nate-WI on November 06, 2005 at 11:16:22:

You hit the nail on the head RMW. That’s exactly what I’m doing. Again thanks for the info and also the info on the private health insurance. I appreciate your advice.