Ground-Up Builders: How Much Are Lenders Requiring You To Bring In?

Question

For those currently doing ground-up construction:

How much cash are lenders requiring you to bring to the table?

Are you seeing:

• 10% equity?
• 15% equity?
• 20%+ equity?

I'm noticing requirements vary dramatically depending on experience, location, and project size.

What are you seeing on your current deals?

Jay Hinrichs · Answer

I dont really know the % I just pay cash for the dirt and in my markets that sufficed.

my 90 lot project I just completed I paid 5.5 mil cash and that worked I got roughly 6 mil in horizontal and then another 40 mil or so in vertical as I built it out.

last infill I did in Charleston SC I paid 250k for the lot and it sold for 810 paid cash and got a vertial loan for 350k.

the the ones I am building in NC I paid 60k cash for the lots and loan are 350k ish and that lender seemed fine.. I bought 3 at once. so 240k in cash up front.

I find trying to go for max leverage on new builds slows things down when you pay cash my loans go through loan committee in a very big hurry or my banker on the smaller ones does not even need to take me to loan committee. Now I only borrow from banks.

Simmy Ahluwalia · Answer

@Steve Garthe - so this is actually on a case-by-case loan scenario. There is no "exact" $$ contribution amount.

As a Commercial Mortgage Brokerage, we have a myriad of GUC debt/equity funding sources. This is mostly private bank debt, so a lot more forgiving than traditional banking requirements.

I have programs where we will finance strictly based on 70% of LTV (SE only). So, if you purchase the lot, get it rezoned (if needed), fully entitled, and your horizontal and vertical numbers (inclusive of IR and lender fees), fit within the 70% LTV model, then you are bringing nothing to the table. We do want to see at least 6 months of IR liquidity.

You would bring anything above the 70% LTV model.

I'm currently financing a subdivision, where the client purchased the land in cash, has it fully entitled and we're funding both the vertical and horizonal with no additional cash to the table (IR and fees built in). We UW this at 90% LTC.

All of this being said, a general rule for experienced SPEC builders is 85-90% LTC (again potentially higher with equity lift).

Brandi Williams · Answer

In North Texas the range I've seen consistently on ground-up residential is 20-25% equity on improved lots with utilities stubbed, and closer to 30% on raw or unimproved land where the lender is taking on more development risk. That said, it moves based on the borrower's track record — a first-time owner-builder is going to face tighter requirements than someone with a completed project on their record.

The number that catches people off guard more than the down payment percentage is the contingency reserve requirement. Most construction lenders want to see 10-15% of the total build budget held in reserve before they'll fund draws. That's on top of your equity contribution. First-time builders routinely undercount their actual cash need because they're focused on the land cost and the construction bid and not the full picture of what the lender actually wants to see in the deal before they're comfortable.

The other thing worth flagging — in a market like DFW where permit timelines vary significantly by city, your construction loan term matters as much as your equity requirement. If you're building in a municipality with a 90-120 day permit review backlog and your lender gave you a 12-month construction term, you may be 3-4 months in before you ever break ground. That timeline compression is real and it's something to negotiate upfront, not discover midway through.

What type of project are you building — custom residential, spec, or something else? That changes the lender conversation pretty significantly.

Melvin List · Answer

Just to clarify:

Primary Home 5%

Second Home 10%

Investment Property 15%

Mike Klarman · Answer

On these loans, you may get money at the closing table if you are refinancing some seasoned land as part of the scenario.

If not, you get nothing at closing and you only have to bring closing costs. But then the project needs to start off your dime and work off draws. Will they do a liquidity check to make sure you can get the project underway and far enough along.

You should have 50% of the budget in my opinion in reserves because you do not want to do the draws in drips and drabs. You want the work done in 3 - 4 big chunks and not little by little over 15 draws. Draws can run $300 each in fees.

Melvin List · Answer

On a conventional one time construction loan you will be required to have 5% into the deal. A VA one time construction deal is still 0%. As stated above most deals that I see the buyer has already bought the land and just needs the one time construction financed. Buying the land first usually means the Loan to Value ratio is way below the 5% requirement.

Ryan Arth · Answer

We own the dirt, which is counted towards our equity. We are seeing 25% equity requirements from regional lenders, but are also talking to a large hard money shop that loans 100% of everything other than the dirt. The rate is much higher, but the red tape is less.

Ground-Up Builders: How Much Are Lenders Requiring You To Bring In?

Ground-Up Builders: How Much Are Lenders Requiring You To Bring In?

Most Popular Reply

8 Replies