I have a buddy who is a great architect. We are exploring a partnership and he said that banks will often accept architect drawings as equity when considering lending on a fix/flip or new construction deal.
Is anyone familiar with this at all? The hard money folks didn't seem to know what I was talking about when I asked.
Seth, yes, they normally have value if they are approved.
Partnering with an architect is a great way to build value FAST!
Thanks for the reply! So if the city approves the drawings, banks will assign a value to them as part of any down payment requirement?
For example, if the down payment would normally be 20K and the drawings are worth 10K, they’d only require 10K down?
Does the bank determine the value of the drawings?
It is based on a bill the architect spent $10,000 got a plan submitted and approved very recently it may have an tangible value if you are going forward with it. Needless to say the lender will nickel and dime you.... On older drawings dated never submitted or not approved it is up to the lender if they have any value on it.
On a fix/flip I would guess no equity value whatsoever.
I would find it hard to believe banks would use drawings as equity in a down payment. If someone has done this please share! I’m building my own house right now and I had a very hard time finding a bank to use my land as equity that was purchased with cash.
I could see the value in this on a commercial project. People often take land and get all of the entitlement approvals completed with drawings and flip the project to a developer.
Yes this is definitely a tool used by architects to break into the development side of the business, but it may take some education to convince a lender of this concept. It's simple: if you are not an architect, you have to pay an architect to create the plans, but if you are the architect then its just your time. Check out this website for a lot of good info and interviews on the subject:
As an architect I have tried this twice for new homes on vacant lots for construction loans. Once in California about 10 years ago and once in Virginia 3 years ago. Both times I was told no and between the two I called over 40 banks. Big and small they all said they only cover construction costs. Soft cost are on the owner. They would not count my fee as equity or a percentage of any down payment. Same goes with all the other consultant fees to get a permit.
Their response was that a permit has no value to them. If the project doesn’t get built the bank is left holding a set of plans with no owner. Who knows what the new owner will want to do? Actually before you get a loan all banks require you to have a permit for a construction loan. Especially on vacant land.
A few banks said I could be reimbursed if my construction cost were under the LTV. For example if my LTV was 80% and my construction cost was only at 70% they said I could ask for more to cover soft cost and be part of the first bank disbursement. Both my experiences had construction cost that were the full LTV so I did not get any reimbursement.
There are lots of different loans out there, lots of forms of construction and relationships always help so I would ask. It hasn’t worked for me so far but I still ask every time I speak to a new bank. It doesn’t hurt to ask.
@Sean Walton can input as well..
I've done this successfully. Lender limited me to 10% of total development cost to be treated as equity. There are many banks in my area that do this and I have many colleagues that do this regularly. We're all using institutional financing. It's a part of every proforma I put together.
If you're attempting to do this before permit issuance the issue for the bank is if you get hit by a bus who completes the drawings? Having an entitled project offsets that risk
Nice! Which banks have you done this with? Hoping they lend here in Indiana.
@Seth Crowder try local banks first. Work your network and try to get an introduction w/ the right poeple working on commercial and/or construction loans.