Financing Spec/New Construction Homes for New Investors
I'm looking to have a discussion on how new investors can acquire financing to build a spec home. Here is what I have come up with:
1. Bank Financed. The bank informed me they need me to live in the home for 1 year before selling, which is not going to work. Has anyone out there worked with banks using personal qualifications (credit/income/down payment etc.) opposed to having the "relationship" to do a spec build? This seems to be the most affordable method.
2. Hard Money Lender. This is a readily available option, however the going rate here is 4 points and 15%.
3. Private Money. I would prefer to have a track record of success before pursuing this route. Without one I think raising funds would be very challenging
How are you financing your spec builds or how might you recommend a new investor jump into this type of investing?
Thanks for your input!
Sawyer
Find a portfolio lender. They lend a certain percentage (usually 60-80%) of the total land + construction costs.
#4 Off Topic Contributor
- Investor
- Round Rock, TX
Find a small regional bank that loans on specs. They are generally your cheapest source of construction lending and will generally loan up to 80% LTC. Some of the more aggressive lenders will loan up to 85% LTC in some cases. There is also a value constraint, but cost is generally the constraint you look at if your margins are adequate.
Thank you both for the feedback.
I'm going to get on the phone and find local lenders that will loan on specs. Thanks!
Originally posted by @Sawyer Lubke:
Thank you both for the feedback.
I'm going to get on the phone and find local lenders that will loan on specs. Thanks!
You should find banks willing to do this. Keep us updated.
Initially my local bank I keeps some funds with isn't interested since it's a lot of work without the residual income (since I would sell right away). I purposed the idea of higher points and/or IR rate and I'm waiting to hear back from them. I will keep you guys posted!
Call more banks, I am sure there are 30-40 small banks and credit unions in your area, call every single one of them and ask to speak to a lending officer.
That said- do you have any experience in new construction? How many rehabs have you successfully completed that were major renovations (do you have HUD1's to prove it?)?
If you dont have experience then finding a partner who has done it would go a long way.
IN our area there are a few local banks that do this and they go from 50% of ARV, to 70% of cost of rehab and construction. These loans are FULL DOC, meaning you need to qualify for it as well.
Also if you have a specific project in mind prepare something including comps, plans or at least a rendering of the finished product, and an LOI or contract on the property and youll have an easier time.
As a first time builder there are TONS of new legal, zoning, and construction issues that you do not deal with on a normal rehab.
Thanks for the reply Steve.
That's a good idea. I will shop around a see what's out there.
I do not have experience in new construction. I've done 1 major rehab, 1 minor and own 1 duplex. There is another investor that's actively doing this in our area that I've been talking to and I think partnering up is a good idea. He gets most of his funds from private investors.
I was shopping for financing before putting a deal together, however I can put an analysis together to present the data.
I've been researching the zoning rules in the areas I would like to build, however I'm sure many of the other learnings only come from actually doing a project.
Thanks for your input! I will keep you guys posted on my progress.
I think the easiest thing to do is find out where builders are currently under construction and look up what banks lent to them through your register of deeds. Then, cold call those banks if they're small and local. These banks already understand the spec model so there's no need to try and convince them of something they're unfamiliar with.
Good call Bryan. I will most definitely do this. Can't believe I didn't think about it!
I will keep you posted.
Thanks, Sawyer
@Sawyer Lubke call Bridgewater Bank. They are funding about 90% of the spec builds in SW Mpls and Edina these days.
We finance spec/new construction but not in MN unfortunately. Without a track record, I'm guessing you're going to have to go the private or hard money route. Maybe not.
We do these deals at roughly 85% LTC (55% land/lot + 100% construction) at 10/3 for 12 months.
More than happy to discuss what we look for when underwriting these types of deals. Send me pm if you want to discuss. Good luck!
@Account Closed
Thank you very much for the information!!
