Stumped about how to finance deal - Posted by Mike

Posted by jasonrei on October 27, 2003 at 13:47:51:

My biz partner and I are rehabbers, looking at doing some new construction. I’ve run through everything pretty well, and it seems like the money skill will be in buying lots cheap enough to make building profitable. It hardly makes sense to me right now, seeing as how the time and effort required to find and close on cheap lots would be better spent finding and closing on rehabs.
I’m with you on this one.

Tell me, you say you built duplexes. Do you think you would have done better with 4plexes?

Stumped about how to finance deal - Posted by Mike

Posted by Mike on October 26, 2003 at 08:45:23:

I would appreciate some help on this. I have 4 lots in a upstate NY city . They are within 5 minutes of almost everything you could think of. However I can’t seem to find a bank that will give me a spec house construction loan. I wanted to ine up the end loan first but this broker said worry about that later. Now I find out that this is not a very prudent way to go about it. Weather is closing in and I need some type of way to get these homes going within the next two weeks. Any suggestions would be appreciated

Re: Stumped about how to finance deal - Posted by maggie

Posted by maggie on October 31, 2003 at 15:43:34:

I sell Real Estate in Michigan - I’ve seen a lot of builders who are glad to put a spec house up if you will let them build on it without their having to purchase the lot from you first - you just have to work out a deal with them on how you share the profit. They can get their own loan from the bank, they can put the spec home up at far less cost than they would charge you - look for someone you can partner with who might want to do something like this on all four lots. Make sure you have things the way you need them to be legally though - you could either consult an attorney or find a good Real Estate agent who is familiar with such things - then you could work out another deal if you want, for the agent to sell the homes, at a reduced commission for all four, and the headaches would be all the agent’s to make sure the deals are done correctly - or you could find an agent who has worked such deals in the past or knows how to and let him put the whole thing together for you, finding the builder, etc - some attorneys could put it together, too. Hope these options start you on your way to figuring out how to do it without your having to get a loan.

Re: Stumped about how to finance deal - Posted by JImmy

Posted by JImmy on October 26, 2003 at 16:07:01:

I built a couple of duplexes a year back. The big banks were not interested in me, so I found a local bank who would do the deal.

Construction lending was very different from permanent financing. I learned that pretty quickly. Some banks do not like construction, period. Other banks will do construction loans, but only with experienced builders with excellent track records.

If you have been rejected by banks who regularly do construction, maybe you are getting rejected for one of the following reasons:

  1. Your COnstruction experience

  2. Building plans together? foundation plans, trafic study, and whatever else is required in your location

  3. Do you have a detailed construction budget prepared? Is the budget based on prior deals you have done, or on your best guesses?

  4. Do you have a rock solid general contractor playing quarterback? The right contractor can help you with financing. Not bacause he can finance the deal, but because he will have a good reputation with one or more bankers.

  5. How much of your own money will be in the deal? What percentage of the construction budget do you need financed? Are you able to withstand construction delays? Will the project sink you if it goes sideways? How good is your credit? How liquid are you? What does your financial statement look like? You get the picture.

  6. Do you have builder’s risk insurance?

My bank did a construction loan which automaticaly became a permanent loan at the end of construction. The terms were not that great, and I refi’s soon after I finished.

Good Luck.

By the way, I will NEVER build another house. I positively hated construction. It takes too long. I was not in control. My budget was 15% low, because i was a rookie and could not anticipate some expenses. In my area, new construction costs $50-55 a foot for residential no-frills properties. But I can buy existing structures for $25-35 a foot, and fetch the same rent. and since rents are what I am after, forget new construction.