What Kind Of Financing Works Best For Construction Of Several SFRs?
My partner and I have purchased six ½ acre lots on a cul-de-sac in Arizona. This is a higher end custom home development of approximately 250 lots. Prices for a lot are approximately 125k, custom homebuilders are building for around $70/sqft. We intend to build homes on all six lots 2500-3000 sqft. We will probably sell all of them. Maybe keep one. We will see how we feel when the time comes.
Never having undertaken a project of this size I could use some direction on the financing. Both of us have 770 FICOs and own two or three other homes.
What can I expect lenders to ask for on a down payment? 20%? Anyone familiar with programs out there that would work well with these parameters please share the info with me.
As always, thanks for the thoughtful and helpful responses. Brian
You could probably expect a commerical lendor, like the commercial department at a local bank to ask for 15-25% down depending on the risk. They would probaby view this as a risky loan. This type of deal would not float in my area. If there was a significant room for profit a general contractor would be doing the development, they can get 100% finanincing all day (viewed as 75-85% LTV from the 15-25% margin houses are built at). A banks would see it as buying at retail and holding a property that is not income producing. I assume your profit would be comming from cutting out re commission by selling yourself?, or talking down the builder a litte on there margin, maybe get them to take 12-15% instead of 15-20%?
I've found through brokers programs available in my state that generally either want 10% down or the possibility of nothing down if you own the lot outright and the equity in the lot is considered enough collateral for the beginning of the construction loan. It's important to have the house you are going to build, contracts from builder so the price is fixed, projected appraisal price, etc. for a complete package to present to the lender.
If you have all your lots financed now, perhaps you could find a way to release one lot, shifting the debt to the other lots. Or get a line of credit from the homes you own and "buy" one lot from your development to begin one spec house on so you have the collateral or the 10% down. Generally, if you structure your drawdowns properly, you can probably get your 10% back pretty quickly while still under construction if you are acting as your own contractor.
If you arrange your construction financing and take out financing together as optional, it may make your house more attractive to potential buyers who may have less hassel qualifying because they can assume the permenant (if they qualify). This also allows you a little more security if they have qualified through your lender if you allow them to make color/product choices while building. Hopefully you can sell it while still under construction. Another hint, if you do allow them to make choices, get a large, non-refundable deposit with your contract in case they default, financing falls through, etc., and you have to re-paint, etc. due to their non-standard design choices.
Good luck,
Terry
Well the way this is usually done is a rotating line of credit. You've got $750,000 worth of land (6 x $125 K) you set up an equity line for $750,000. As you begin construction (foundations on the first house or two) the bank funds directly to the contractors 80% of the price for each item completed. Generally you fund another 10% and hold back 10% until all the work is done.
As each house is completed and sold the money flows back to the bank and pays off the line of credit, at which point the money is available to do it again on the next house. Done correctly you can have three houses at various stages of construction on essentially the value of the land you already own.
All hail the king...
The revolving line will be your cheapest source of ready cash for dev. The key issue though may be your statement that this is the largest project you have undertaken. I would find a better way to discribe it, maybe you are now entering into the next planned phase of your business growth pattern. Lenders don't like to see inexperience they lend on confidence.
As you can see from our business plan dated x/y/2002 we are now entering "the custom house expansion phase" of our business plan. just some thought from a broker
construction lenders normally give about 75-85% completion value, which normally equates to 95% ltc
Lots of good responses. Thanks to all of you for taking the time to help!
Brian