Lenders, Let's Talk Shop: What Are Your Biggest Challenges in Financing New Construct

Lender · Member since 2024 · 106 posts · 17 votes

As fellow lenders in the real estate space, we know how critical it is to support our clients in turning their construction projects from dreams into reality. But let’s be honest, the process isn’t always straightforward.

What’s the most common challenge you face when offering construction loans?

Let’s connect and discuss how we can collaborate or simply share knowledge to improve our industry!

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Connor Hibbs

Lender · Ellington, CT · Member since 2024 · 210 posts · 103 votes

The biggest killers that I've found for GUC loans to qualify have been:

1. Lack of exp or no exp. There are few lenders that can work with GC's that don't have any projects where they are on title even though they have been the ones building the property. I've noticed some lenders using heavy rehab experience recently though to help qualify a borrower.

2. Lack of liquidity from the borrower. There is no way around this one.

3. Projects not hitting minimum value requirements for land. There are lots of lenders looking for a min of 50k or 75k for the purchase of the land.

4. Lack of comps can be difficult. This doesn't occur as often but has killed deals before.

The last thing isn't as much of a deal killer as it is something that doesn't get brough up often enough, especially with borrowers who are newer to GUC specifically, but the time it takes to for GUC. Too many borrowers get plans from an architect then assume that the loan will only take a month to close. These can close quick with a lender, but only if the due diligence has been done in advance. Permits, Plans, Entitlements, Drawings, Rehab Budgets form the GC, should all be done in advance prior to reaching out to the lender if a borrower wants it to close quick.

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
2y
1. lack of actual capacity IE money
2. lack of experience

cost of capital to high for the project to pencil.
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Connor Hibbs
Lender · Ellington, CT · Member since 2024 · 210 posts · 103 votes
2y
The biggest killers that I've found for GUC loans to qualify have been:
1. Lack of exp or no exp. There are few lenders that can work with GC's that don't have any projects where they are on title even though they have been the ones building the property. I've noticed some lenders using heavy rehab experience recently though to help qualify a borrower.
2. Lack of liquidity from the borrower. There is no way around this one.
3. Projects not hitting minimum value requirements for land. There are lots of lenders looking for a min of 50k or 75k for the purchase of the land.
4. Lack of comps can be difficult. This doesn't occur as often but has killed deals before.
The last thing isn't as much of a deal killer as it is something that doesn't get brough up often enough, especially with borrowers who are newer to GUC specifically, but the time it takes to for GUC. Too many borrowers get plans from an architect then assume that the loan will only take a month to close. These can close quick with a lender, but only if the due diligence has been done in advance. Permits, Plans, Entitlements, Drawings, Rehab Budgets form the GC, should all be done in advance prior to reaching out to the lender if a borrower wants it to close quick.
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Jared RineBusiness Member
Lender · Sacramento, CA · Member since 2009 · 1k+ posts · 277 votes
2y
I agree with @Jay Hinrichs as an active broker for construction loans. Lack of financial capacity/not having enough money to actually do the project. Most people completely underestimate and have no idea what it actually takes to get a construction project done. And when they factor in all costs, sometimes projects also don't make sense to do, depending on exit. And lack of experience is a huge one, although that can be overcome with mitigating factors as long as the client is willing to play ball and flexible (higher liquidity, great completion LTV, location, experienced GC, own the land and have gotten to permits out of pocket, etc.). Just my $0.02

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
2y
Quote from @Jared Rine:

I agree with @Jay Hinrichs as an active broker for construction loans. Lack of financial capacity/not having enough money to actually do the project. Most people completely underestimate and have no idea what it actually takes to get a construction project done. And when they factor in all costs, sometimes projects also don't make sense to do, depending on exit. And lack of experience is a huge one, although that can be overcome with mitigating factors as long as the client is willing to play ball and flexible (higher liquidity, great completion LTV, location, experienced GC, own the land and have gotten to permits out of pocket, etc.). Just my $0.02

Jared its also very location specific.. when you take a west coast project Mexico to Canada and the client says they own the land free and clear .. that can mean a lot in Palo Alto worth 2 to 3 mil or a lot in Portland Oregon value 150 to 500k or Seattle 500k to 1 mil or more etc etc.. then you take a borrower who wants to build lower end housing in the mid west or deep south or parts of FLA and the lot values are 5k to 30k .. ya they own them free and clear but that is simply not enough true equity to float most loans they then need substantial amount of liquid cash on top of it.. My project I am doing in Oregon we paid 7.2 million cash for the dirt and that allowed us to get bank debt on the horizontal and vertical.. thats True equity.. so Location location location makes a huge difference if a project is a go.
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Jared RineBusiness Member
Lender · Sacramento, CA · Member since 2009 · 1k+ posts · 277 votes
2y
I agree completely with you, @Jay Hinrichs =)
Location is such a key for most construction projects. The ones I seem to do more of these days are in Southern CA in areas that have high land/lot value and my clients either have owned the property for a long while and/or have purchased cash at market value. Then bring in the soft costs out of pocket and typically there seems to be enough equity.
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Erik EstradaBusiness Member
Lender · Member since 2022 · 6k+ posts · 1k+ votes
2y
Quote from @Charlice Arnold:

As fellow lenders in the real estate space, we know how critical it is to support our clients in turning their construction projects from dreams into reality. But let’s be honest, the process isn’t always straightforward.

What’s the most common challenge you face when offering construction loans?
Let’s connect and discuss how we can collaborate or simply share knowledge to improve our industry!

Lack of experience and lack of funds. Most Ground-Up Construction lenders want to see you have at least 25-30% skin in the game and have cash reserves for the construction hold back. They also want to verify your ground up experience.
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