Posted by Ed Garcia on December 30, 2000 at 12:33:08:
Doug,
You start out by explaining how you want to help your dad who wants to build a house. Now your dad seems to already have a game plan of building a garage with an apartment over it, to live in until he completes his house. You’re asking us if it would be better for him to sell off an acre to you for, you to build and rent back to your dad.
Without knowing why you think it would be better I can’t answer your question. I don’t have enough information about your dad and his circumstances, or you and your circumstances, as far as who would best qualify for financing. If your dad is trying to build out of pocket because he has poor credit, then maybe you feel that you are more financable. Because I’m shooting in the dark anyway, I’m just going to give you a little information on how to go about doing a construction loan. So here is a little piece I wrote a while back, that might be useful to you.
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 Chuck; 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 Doug, I hope this helps.
Ed Garcia