Posted by Ed Garcia on March 01, 2001 at 10:05:51:
Klaus,
Here are a few tips I give the average investor who has never done a construction loan. Before you read it I’d like to tell you that you don’t need to go Hard Money. Your borrowers have as you stated, excellent credit, so you shouldn’t have any problem with a small local bank. What you folks need to do, is find a piece of property where the seller is motivated to sell, and then get them to subordinate into second position as I have indicated in the following manner.
I have done construction loans.
What you are attempting to do is not as complicated as it seems.
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 you’re 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.
Good luck Klaus, I hope this helps.
Ed Garcia