80% of Purchase price or 75% of Appraisal - Applying for a Loan
Thought I would share a wonderful bank meeting I had today.
I live and invest in South West Florida. Real estate prices are escalating extremely fast and this is a wonderful time to have property.
I had a meeting with my banker today to present him with my loan application for a new development.
For the meeting I had:
1. Executive Summary of the project – basically a snapshot of all major factors
2. A feasibility study done by a third party
3. A study by the Urban Land Institute showing the need for what I was proposing
4. A review of the land complete with surveys, environmental study etc.
5. A review of the product – with prints, elevations etc.
6. Demographics and traffic counts for the area
7. Resumes of key personnel
8. Marketing Plan
9. Financial plan complete with two phases of A nd D and Four contruction phases.
10. Tax returns and financial statements.
11. Copy of contract to purchase
12. Resumes of architect and engineers and subs
I have written in many of my posts about development loans. With good credit you are able to borrow 80% of you A and D and 100% of construction costs.
A and D costs (acquisition and development) include the cost of the land, engineering, architects, amenities building, roads, development fees, infrastructure etc.
Construction costs are the actual vertical costs of the buildings. The bank will loan 100% of this if you have 50% pre-sales.
The good news is that in the A and D phase the bank will consider 80% of the purchase price of the land or 75% of the appraised value. For this particular property I will pay $5400 per living unit for the land when I close. BUT…. I tied it up one and a half years ago at this price, but will not close until March 1, 2004. The current appraisal is $8000 per unit. This means I can either borrow 80% of $5400 ($4320) or 75% of $8000 ($6000)!
I word of caution. You cannot order the appraisal yourself. You need to get the bank to do this for you.
What a great case for tying up property with options and contracts.
I love this county!
Gregg
Dear Gregg,
You have done a really masterful prep for submission for financing. Straight out of the book and letter perfect. I assume all of the persons who are resumed looked like the most successful of the area.
However, may I suggest that you look right and left at your future market and those other projects that may impact at the same time that you complete. I would also prepare for a worst case scenario. A sudden dump in demand caused by some large national event. A downturn in your states revenue and sudden increase in tax structure to compensate. I know it sounds like doom and gloom. But I was always taught to consider the best and worst and look for intrusions on the line of march. If the worst of things is considered and compensated then if nothing happens you are way ahead and if something pops why you are ready. You convert to an old age home. You modify for an army barracks or officers quarters as the need arises.
I wish you the best and you have indeed done everything possible in your drive to complete, but consider always the sudden jolt. I found it present in about 25% of my activities over the last 50 years.
The voice from the back of the Chariot. Lucius
Gregg,
How do you "tie" up property for so long without buying it?
Do sellers go for closings set years ahead like that??
Because of the length of time required for due diligence in raw land, it is not uncommon to close in a year, say. Of course, you will be greeted by the seller with open arms if you are prepared to close sooner.
Generally land investors understand that land is not very liquid and will work with buyers that need to do the engineering, site plans, etc before they can get their financing.
In one of my projects, I will have spent over $300,000 on a property without actually closing on the property. I am also pre-selling condos that will be built on that property ( on a reservation basis only) prior to my closing on the property.
I see,
I didnt know raw land was so hard to sell. So in your example the seller didnt realize the land would go up so much in that year and a half? Do most land owners that are being approached for their property, try to price it for what they "think" it will be worth at the far away closing??
In what way do you derive a price per unit? how would you estimate the construction cost per unit, contractors' estimates?
In the above article, what would your selling price per/unit be? And how would you arrive at that figure?
What have been your up-front out of pocket expenses? What do you expect to pay next?