Construction Loans
Loan Fees: 3.00-3.75% (Minimum fee $2000)
Processing Fee: $965
Construction Escrow Fees: Set-Up fee $450.00, $100.00 draw fee, (limit one per month), Site inspection fee $100.00 to $200.00 depending on location.
Interest Rates: Very Competitive
Loan to Value: Not Greater Than 65% (based off of finished appraised project value. The builder must have some of his own funds/equity in the project.)
Overview:
Private Lending/Hard Money Construction loans are designed for professional builders. Generally professional builders will use Hard Money for spec. construction. Many times a builder might have a buyer for the finished product, but needs a loan to get the home built. In times past, a solid builder would go to his or her local bank for the loan or a line of credit, but as with everything all other types of lending, that has become almost impossible to do.
Even with Private Lending/Hard Money, getting a construction loan is not as easy as it used to be. Investors, who have been burned on construction loans in the recession, are hesitant to make this type of loan. In days past, a builder could borrower almost the entire amount needed to purchase the lot and build the home. Today, however, most investors are going to want to see the builder with “skin in the game”. The investors want to know that if the project does not work out as planned, their loan is still protected because the builder at the very least owns the lot free and clear and often will need to put another 10% to 20% of their own money up.
This disqualifies all but the most successful and experienced contractors. These individuals usually know how Private Lending/Hard Money works, and understand that it is an expensive way to finance a project. Expect to pay a higher interest rate on rehab loans. Unless you get a loan from a family member, the interest rate will probably be just breaking the double digits. The client MUST make sure he/she add the cost of interest and loan fees to their project, with a reasonable holding time, and then calculate your profit. Those costs sometimes will simply make the project NOT pencil.
DO NOT expect the investor is going to hand the client a check and trust that the monies will be spent as planned. Project management is a big issue. Some title companies used to have construction escrow services. These services would escrow the funds, inspect the invoices presented and inspect the project to insure that the work was actually completed as stated. Most if not all of them got out of the market, however we have just found a very reliable construction escrow service to fill that huge market void. Figure into your budget about $2,250.00 for construction escrow services. We have surveyed companies that used to offer that service and the fees are very competitive. Although there are private lenders who will perform the construction escrow themselves, it is rare.
If your client, as a professional builder, wants to consider this financing option, be prepared to present the following information at minimum.
1. 2 years tax returns for both personal and business (if applicable).
2. W-2’s and current paystubs (if applicable).
3. A current financial statement, both personal and business.
4. A YTD profit and loss statement.
5. A YTD income statement.
6. Credit Report.
7. Professional Resume
8. Business and personal bank statements.
9. Earnest money agreement
10. Building plans
11. Cost Breakdown
12. Building Materials Specification Details.
A lender is also going to want to see a preliminary title report and a history of the property taxes, zoning and permits. You will also need to pay for an appraisal, showing the finished value of your project.
Even with all of this being said, Private Lending/Hard Money is still an option for many, especially if the project is “Pre-Sold”. Give us a call and we can determine if Private Lending is an appropriate option.