Spec Home Financing

Just like any other type of real estate, there are a multitude of different avenues you can pursue for spec home financing. Some options are better than others, i.e. cost you less money in interest, but may not be as flexible or unavailable altogether.  There are four general avenues you can use to obtain financing, traditional bank, private money, lines of credit, and equity lines.

Bank Option

The most traditional type of spec loan that banks will consider is a 70-80% LTV.Most banks will let you treat the land as the equity in the deal.There are some banks that will offer non-recourse loans for spec building.Non-recourse loans typically cost more in upfront fees and higher interest rates, but the upside is they are lower risk for the builder.A lot of times in a Spec situation, if there has not been a lot of activity in the area you are going to have a hard time getting your values.On one occasion the big banks were not interested in the spec arena and another outlet that provided spec financing was nervous because of the amount of vacant land in the development, so the bank option was out.If you are just getting started, my experience is that traditional banks are either going to lend to you only on a very small project, require a lot more equity, require more experience, or not be interested at all.The banks are still very gun shy on anything spec because that was a big part of what hurt them during the crash.

Private money option

Most traditional hard money lenders are not going to do spec financing because they are looking to turn their dollars in less time than it would take to do a full build (typically over 6 months once you break ground).It comes down to building relationships with individuals to get your financing.I have a client that we are working with who had a special circumstance that wouldn’t allow for traditional financing. He owned a lot free and clear and wanted to build an $800,000 home.He had 50% equity but because of the way he wanted to structure the deal, the bank underwriters couldn’t make the deal work.The way the deal ended up getting done was through private investment holding, with the home owner writing a check to the title company and a title company doing the disbursement of the funds, first the homeowners, then that of the private holding. A great thing about private money is the draw schedule and terms can be developed between the lender and the investor.The private lender is going to put a lien on the property, just the same as the bank would.

Lines of Credit option

This is my personal favorite for someone who is new to the spec game.It requires an excellent personal credit history, and a great business credit history helps as well.In one instance I was able to secure over $300,000 in business lines of credit, and around $100,000 in personal lines.The rates on these are typically a lot less than you would pay on a construction loan from a bank and there is a lot less paperwork, etc. involved.

Equity Option

If you own real estate of any kind, investment, home, business etc. and have enough equity you can tap into a percentage of this equity.Your rate is going to be low, but your risk level very high as you are risking the equity in your asset.I would leverage investment or business property, but not my own home equity.My personal reason for not using home equity is because of the state that I live in. In Florida, your personal homesteaded residence is the ultimate asset protection.If your home is paid off, that money is safeguarded.For me that is a good reason not to leverage the equity in my home.