Private Lending & Conventional Mortgage Advice

User Stats

704
Posts
691
Votes
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
691
Votes |
704
Posts

Construction Loan Required?

David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
Posted Jan 23 2011, 11:20

I am currently looking at several properties that are REO or HUD listings to flip that have varying remodel requirements. A couple of the properties with the most potential are not eligible for a conventional loan because the properties are not "move-in ready". These homes will require a new kitchen, HVAC system, and finishes.

I'm assuming on these properties I will be required to get a construction loan. I have the following questions:

How are construction loans structured? If I buy a house at $50k and estimate the repairs to be around $30k would my loan be for $80k? I'm assuming I would still have to put down 20% or more?

Is there a time restraint on when I have to get all of the repairs completed by?

Do I have to involve the bank in collecting bids and selecting subcontractors for scopes of work? Would it be an issue if I was self-performing a majority of the work myself besides MEP systems?

What are the pros and cons of using a construction loan for a flip?

What other options do I have to finance the project? Could I offer $80k for the home with $30k in repair escrow? Or is this essentially the same thing as a construction loan?

With a conventional loan I was planning on financing the purchase and using cash to finance the improvements. The construction loan seems somewhat advantageous because it requires less cash investment and maximizes the ROI and leverage.

Any input is much appreciated.

Thanks.

User Stats

704
Posts
691
Votes
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
691
Votes |
704
Posts
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
Replied Jan 24 2011, 01:21

Is a construction loan a practical way of financing a rehab project? Have any of you had any luck using a construction loan?

Thanks again.

User Stats

22,059
Posts
14,054
Votes
Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
14,054
Votes |
22,059
Posts
Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
ModeratorReplied Jan 24 2011, 01:23

Yes, its a better way (i.e., cheaper) than hard money or private money. It may be a challenge to find a bank that will do one, though.

User Stats

704
Posts
691
Votes
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
691
Votes |
704
Posts
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
Replied Jan 24 2011, 01:27
Originally posted by Jon Holdman:
Yes, its a better way (i.e., cheaper) than hard money or private money. It may be a challenge to find a bank that will do one, though.

Do banks typically not give construction loans for investment properties?

If I do get approved for a construction loan are down payments and interest rates typically higher than conventional loans?

Are the banks involved in selecting subcontractors and overall renovation schedule?

User Stats

8,773
Posts
4,339
Votes
Bryan Hancock
  • Investor
  • Round Rock, TX
4,339
Votes |
8,773
Posts
Bryan Hancock
  • Investor
  • Round Rock, TX
Replied Jan 24 2011, 01:29

Construction loans are very *risky* right now to banks. I hear that lending is opening up a bit so this may be changing.

User Stats

704
Posts
691
Votes
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
691
Votes |
704
Posts
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
Replied Jan 24 2011, 01:37
Originally posted by Bryan Hancock:
Construction loans are very *risky* right now to banks. I hear that lending is opening up a bit so this may be changing.

For a bank, what risks apply to construction loans that do not apply to conventional loans? What makes a construction loan riskier than a conventional loan? How are construction loans typically structured?

Loan value is purchase price + repair costs- down payment, correct?

User Stats

8,773
Posts
4,339
Votes
Bryan Hancock
  • Investor
  • Round Rock, TX
4,339
Votes |
8,773
Posts
Bryan Hancock
  • Investor
  • Round Rock, TX
Replied Jan 24 2011, 01:42

I'm not a banker David...it is what it is. Banks likely view these loans as "speculation" and want pre-sales or leases in place. I don't use construction loans for this purpose so perhaps someone can give a better answer.

What I can tell you is that banks think these loans are risky right now.

User Stats

22,059
Posts
14,054
Votes
Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
14,054
Votes |
22,059
Posts
Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
ModeratorReplied Jan 24 2011, 01:54

Have you tried calling banks and asking about this sort of loan? Credit unions might also be an option. I suspect if you call 10 random, smaller banks (i.e., not Chase, WF, etc.) you might find one who would be willing to do investor real estate loans. That is, loans for buy and hold type properties. Most are not interested in that business.

If you keep calling, you might find one that's interested in doing construction loans for rehabbing properties. Don't know if you would need to call 20 or 50, but I think you will have to do some serious searching to find this sort of deal. You're also probably going to need to establish a relationship with that bank by moving some of your personal and business accounts there. I think you're going to need to show strong personal financials and experience in the business.

User Stats

55
Posts
21
Votes
Brad P.
  • Real Estate Investor
  • West Des Moines, IA
21
Votes |
55
Posts
Brad P.
  • Real Estate Investor
  • West Des Moines, IA
Replied Jan 24 2011, 02:55

In early 2010, we closed on a construction loan from a small, local bank.

It was a 1 year, interest only loan, 6.5% interest, 25% down required on a $35k purchase price plus $20k in renovations. They allowed us to do the work ourselves (we subbed the HVAC work and carpeting installation). We submitted receipts/invoices biweekly and never had any issues with getting paid. We had issues selling it and they gave us a 6-month extension without any hassle. We are currently in the process of a refi using a conventional loan.

We had similar issues with WF on a conventional loan (we didn't know any better at the time) and eventually went through a broker who hooked us up with this bank.

Maybe things have changed but it is definitely worth calling as many local banks as possible and explaining to them what you want to do. We saved a bunch of money by using a construction loan over a HML.

User Stats

189
Posts
75
Votes
Mike V.
  • Rental Property Investor
  • St. Louis, MO
75
Votes |
189
Posts
Mike V.
  • Rental Property Investor
  • St. Louis, MO
Replied Jan 24 2011, 03:05

Hey David,
I have used construction loans on 5 flips that I have done over the last 18 months. I believe if you can find a bank to do one its a great way to go. Here is my latest example: Purchase price 24K, rehab cost 56K. I had to have ~5K down on the purchase price (20% of 24K) and the bank lent the rest. My bank did not require any formal quotes from contractors - just an excel spreadsheet listing what I planned to do to the property. The appraisal is done based on my completion of the listed items and the bank loans up to 75% of the appraisal.
6.5% interest only payments with a balloon payment at 9mo. I usually pay anywhere from $500-$800 in additional fees to the title company but they handle all payments and 1099s to contractors.

User Stats

704
Posts
691
Votes
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
691
Votes |
704
Posts
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
Replied Jan 24 2011, 03:19
Originally posted by Mike V:
Hey David,
I have used construction loans on 5 flips that I have done over the last 18 months. I believe if you can find a bank to do one its a great way to go. Here is my latest example: Purchase price 24K, rehab cost 56K. I had to have ~5K down on the purchase price (20% of 24K) and the bank lent the rest. My bank did not require any formal quotes from contractors - just an excel spreadsheet listing what I planned to do to the property. The appraisal is done based on my completion of the listed items and the bank loans up to 75% of the appraisal.
6.5% interest only payments with a balloon payment at 9mo. I usually pay anywhere from $500-$800 in additional fees to the title company but they handle all payments and 1099s to contractors.

Are construction loans typically structured with balloon payments? Seems risky if the property doesn't sell by the time the balloon payment is due.

User Stats

189
Posts
75
Votes
Mike V.
  • Rental Property Investor
  • St. Louis, MO
75
Votes |
189
Posts
Mike V.
  • Rental Property Investor
  • St. Louis, MO
Replied Jan 24 2011, 03:50

Yes, balloon is very typical. My bank allows for another 9mo extension or they will refi in-house at 5.5% with a 3 year balloon amortized over 20 years.

User Stats

22,059
Posts
14,054
Votes
Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
14,054
Votes |
22,059
Posts
Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
ModeratorReplied Jan 24 2011, 03:52

Like hard money loans, a construction loan is intended as a bridge to get to some goal. That could be selling or could be refinancing into a permanent loan. So, yes, a balloon after a fairly short time is common. If you can't pay off the loan or work something out with the bank, they will take the property.

And that's how Deutsche Bank ended owning the new Cosmopolitan casino in Las Vegas.

User Stats

17,813
Posts
16,853
Votes
J Scott
  • Investor
  • Sarasota, FL
16,853
Votes |
17,813
Posts
J Scott
  • Investor
  • Sarasota, FL
ModeratorReplied Jan 24 2011, 04:03

I've used construction loans for about a dozen properties. Typical rates are 6.75%, one-year interest only, 1.25 points upfront, with a 25% downpayment.

There is only one bank in my area who currently does these types of loans, and they're actually not doing them anymore (I have a contract with them, so I can get them for a couple more months, then I'm cut off as well).

Call the really small commercial banks in your area, and ask to speak with the VP of commercial lending...they're the ones who are most likely to help you.

Even if they can't do purchase + rehab loans, there are a number of banks (including mine) that are happy to do purchase only loans for flips -- mine is 80% LTV and same terms as above.

User Stats

8,773
Posts
4,339
Votes
Bryan Hancock
  • Investor
  • Round Rock, TX
4,339
Votes |
8,773
Posts
Bryan Hancock
  • Investor
  • Round Rock, TX
Replied Jan 24 2011, 04:05

You may also call some of the best title companies in the area and ask who is doing these types of loans. They will generally be happy to tell you to help develop a relationship for writing some title policies on down the line.

I had lunch with Independence Title and they were happy to let me know which banks in Austin are doing loans for portfolio product. I can't imagine construction loans would be much different.

User Stats

704
Posts
691
Votes
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
691
Votes |
704
Posts
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
Replied Jan 24 2011, 04:17
Originally posted by Jon Holdman:
Like hard money loans, a construction loan is intended as a bridge to get to some goal. That could be selling or could be refinancing into a permanent loan. So, yes, a balloon after a fairly short time is common. If you can't pay off the loan or work something out with the bank, they will take the property.

And that's how Deutsche Bank ended owning the new Cosmopolitan casino in Las Vegas.

So refinancing the loan is common if the property doesn't sell? It sounds like it would be important to structure the deal to ensure enough time for repairs and adequate time for listing. I would not want to assume or hope the bank will refinance into a permanent loan structure.

User Stats

17,813
Posts
16,853
Votes
J Scott
  • Investor
  • Sarasota, FL
16,853
Votes |
17,813
Posts
J Scott
  • Investor
  • Sarasota, FL
ModeratorReplied Jan 24 2011, 04:24
Originally posted by David Robertson:
So refinancing the loan is common if the property doesn't sell? It sounds like it would be important to structure the deal to ensure enough time for repairs and adequate time for listing. I would not want to assume or hope the bank will refinance into a permanent loan structure.

A renewal clause is pretty typical in the contract, so you know what your options are to renew if necessary.

That said, most of these loans are 12 months, which should be enough time to rehab and resell a residential property -- if it's not, you should rethink your strategy...

User Stats

704
Posts
691
Votes
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
691
Votes |
704
Posts
David Robertson
  • Flipper/Rehabber
  • Kansas City, MO
Replied Jan 25 2011, 23:42

I spoke to my lender about a purchase and renovation loan and he gave me some surprisingly good news. He said that I could get a 30-year fixed conventional renovation loan at 6.5% for the purchase price+repair value.

I like this option much better than the short term/balloon payment option that was discussed here; much less risk of default.

Originally, I was going to use cash to finance the improvements which would include the 20% down payment + repairs + holding costs. With a renovation loan I will only need the 20% down payment + holding costs.

This option minimizes my cash investment and maximizes my ROI. I will also be able to finance homes that are not "move in ready" which will expand the amount of potential homes to look at.

However, it sounds like there are some inconveniences from the bank's oversight/involvement of the renovation: paperwork, bank manages cash disbursement, a contractor may have to be involved (although I may qualify because I have a construction background).

User Stats

8
Posts
1
Votes
Account Closed
  • Real Estate Investor
  • Dallas, TX
1
Votes |
8
Posts
Account Closed
  • Real Estate Investor
  • Dallas, TX
Replied Jun 13 2017, 07:07

Hello All,

I can help you get New Construction loan for building Hotels, Multifamily apartments for single family home flips.

This loan would be Private money loan with rate of interest 6 percent with no interest for 2 years.

Its an Asset based loan.

Thanks