Construction loans - Posted by Donna R.

Posted by Donna on January 09, 2001 at 22:01:12:

Ed, thank you for that excellent answer. I really appreciate it.

Construction loans - Posted by Donna R.

Posted by Donna R. on January 09, 2001 at 19:53:43:

I recently purchased a property with a home on one side that is actually platted as two separate lots. I was able to use seller financing. Since the area is appreciating rapidly and has high potential value, I would like to look at building a home on the other lot and selling it. How difficult is it to obtain funding for this type of project? Are there any special considerations?


Re: Construction loans - Posted by Ed Garcia

Posted by Ed Garcia on January 09, 2001 at 20:22:14:

Construction Loan


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. I know that you already have your lot Donna; I just wanted to mention that for the benefit of others who might be reading my post.

(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.

Good luck Donna, I hope this helps.

Ed Garcia