New construction and financing

3 Replies

So I started to learn the new construction field and, of course , starting with the finance side of things(all start and finish in money!).
I spoke to a few lenders(private and banks) to check my option for funding new construction. All of the lender told me they won't lend money if I don't have most of the equity on the land I'm building on.
My question is if there's lenders that fund both land and construction or is there an angle or a creative solution for this situation?
My strain of thought is - when the big players buy lands in the millions and the construction go in the tens of millions I'm sure someone lend them money for both land and construction, is there any solution for a he little guy ?

Thank you :)

@Yiftach Ilyov   Our first project 20 years ago was a new construction single family home.  I would suggest keeping the financial summary clear and concise.  On all our proforma's we break it down to Sources and Uses.  The Uses are all the costs:  land, soft and hard costs.  Let's say $100,000.00.  The Sources are all the various places you are getting money to pay the Uses (Equity, Mezz, Debt, etc).  If the bank requires 25% equity (you find this out by asking the bank what they typically require), then show:  

Uses:

Land    $35,000.00

Soft     $10,000.00

Const  $55,000.00

Total   $100,000.00

Sources:

Equity:   $25,000.00

Debt      $75,000.00

Total      $100,000.00

Equity $25,000.00 and Debt $75,000.00.  It should not matter what equity for land and what equity for construction if you set it up correctly.  We have done loans for projects whose values are from $500,000 - $15,000,0000, and have not had to break it other than how I described it above.  If they fund the land, then they most likely want to fund the construction to avoid any lien conflicts.

In my experience, lenders want more equity in the land loan than the construction loan, percentage-wise.

Here is an example using @Scott Krone 's numbers.

The lender might want 40% down on your $35k land, so you need $14k for the down payment on the land. The construction loan *might* be done on ARV and you *might* need only 25% there, which while it's less percentage-wise, it's more money at $25k.

In Scott's example, the numbers seem to be a wash because your ratio of cost in land to build is only 35% (at 35k). In another market where land costs more than construction, your numbers can shift a little. Say your land is $50k and your build+soft costs are $25K.  In this case you would have to raise more than 25% of the total loan value to hit the 40% down payment on land.

Make a quick call to a lender in your area. They should be able to tell you what % they generally want down for the different portions of the loan. 

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