Re: Subordination to build on vacant lots? - Posted by Ed Garcia
Posted by Ed Garcia on November 03, 2000 at 10:47:19:
Burt,
You’re on to something. You defiantly have the right idea. The first step is to find a good lot that’s in a marketable area and that you think could be an ideal location. Next you have to convince the seller to subordinate to a construction loan. My suggestion is to explain to the seller how you intend to build on the property and INCREASE the value of the asset about 50 to 100%. Remember, the lot will be cheaper than the house that you build on it. If done right, you should be between 70 and 75% LTV.
In most cases the bank will want to see at least 10% liquidity in your financial statement. What that means is that you have at least 10% of the project available in cash. The reason for that are overrides and in the event something should go wrong, you have the ability to cover it.
While I’m at it, let me ad what I just posted on the Main Newsgroup in regards to construction loans.
CONSTRUCTION LOANS:
You will need the following.
(1) LAND: Either free and clear, or 50% paid down for a land draw.
(Note) If you wanted, you could buy a lot with NO money down, have the seller subordinate their loan to a construction loan.
(2) PLANS: These plans have to be approved by the city your building in.
(3) PERMITS: As you know, sometimes the City can require you to build either conforming structures or off sites, that the City wants. The will also have building standard for your area.
(4) COST: The Bank will require a COST BREAKDOWN of all of your expenses. They will want to see a cash flow chart to pay you on a VOUCHER system. As each phase is down and signed off by city inspectors, the contractor will be paid for that phase. (Note) interesting enough, the bank will take your cost break down and analyze it with their computers. If the cost is more, that will concern them, and they will cut it back. If it’s less, that will also concern them because they will think you short changed yourself in building this project. So In essence, the bank can be instrumental in verifying your cost. However, don’t ever count on anyone but yourself. Do your own, do diligence. (Note) the bank will require at least 10% liquidity on you the borrower.
(5) CONTRACTOR: If you are a Contractor, the bank will want to see your resume and you contractors license. If you are not a Contractor, then the bank will want to have a resume on your contractor as well as a copy of his license, and financial statement.
There are other considerations, but this is enough to get you thinking in the right direction. If everything is done right, you should be in the deal about 70% to 75% LTV on a NEW property. In fact I have seen better depending on area, and size of the deal.
Ed Garcia
I now have a better understanding in how to set this up. The lots I’m interested in are in very good areas. Ed, to my understanding, you are a mortgage broker…correct?