Bank Questions On Construction Loans

 
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Old 01-16-2018, 09:12 PM   #1
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Bank Questions On Construction Loans


Doing our first spec house (500k sales price range in MA), we have done mainly only interior renovations (gut renovations, etc) prior to this point. Already purchased the land, planning it out, surveyed, etc.

We will be the general, doing a decent amount of the work ourselves and subbing out other work.

Although I know it will be different depending on the bank, we are thinking about taking out a construction loan for this project.

On average:

* Do most banks ask for builder experience? What general items do they ask? (e.g. we have years of experience in interior work and smaller exterior projects, just not as house builders.)

* How picky are most banks about subs and their documentation? Just a 1099 and showing they either have their own workers comp or we add them to ours or..?

* General liability policies usually OK (what limits are "usual"?) or do banks require a bond?

* Anyone have any issues pulling construction loans for their own spec house (owned by the same company)? I know that paying for your own labor is a no-no, which I don't intend on doing. We are an LLC for whatever it matters.

I'm going to call around to some banks as well, but, trying to get a general idea first... Especially since in my experience someone trying to sell something (a loan) may not know or be up front with all the information I need.

Thanks!
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Old 01-17-2018, 06:51 AM   #2
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Re: Bank Questions On Construction Loans


Iíve done and still do quite a bit of spec building and dealing with lenders. Banks would prefer that you have experience and actually know how to build and sell a house and have some track record of having done it. But everyone has to start somewhere, so use your charm, persuasiveness, and eagerness to convince the bank that you can get it done. Not all lenders loan money for specs, in fact most donít. Find the ones that do (by asking), stay away from national banks. You most likely will be turned down initially, I had to go to about 15 banks to get my 1st loan in 1974.

I doubt a bank is going to be concerned about your subs and their documentation. They will want you to have proper insurance, general liability, probably work comp, and builderís risk for the house you will be building.

The big issue is your financial standing. They will want you to put 20%-30% hard cash into the deal, your loan will not cover 100% of costs. They will also want you to provide past tax returns and will run a credit check on you personally. Create a balance sheet showing your assets, liabilities, and net worth, they will need this. And you will have to personally guarantee the loan.

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Old 01-17-2018, 07:29 AM   #3
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Re: Bank Questions On Construction Loans


Don't do Any work on the project before you get a construction loan, it will make if difficult, if nor impossible, to get one.

I've only built one spec. Formed a new LLC for construction and had no problem getting a loan, but I dealt with my local bank that I've been using for years, and had enough money in the bank to cover the loan.
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Old 01-17-2018, 08:22 AM   #4
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Re: Bank Questions On Construction Loans


Yes, they will ask for experience.

You might need builder registration number if you building a new home (check with your state)

The bank never asked me to provide any sub-contractor information.

You need liability (usually 1m coverage) and you will need builder risk insurance.

You can do your own labor since the payments are broken up so the bank doesn't know who is doing the work they have nothing to do with it.

The payment is broken up into payments and you call them for inspection when you complete a certain phase and they will cut you a check i.e:

1st payment-foundation is completed.
2nd payment frame, the roof, and windows completed.
3d payment all the rough work.
etc
(In the old days they would give you all the money and you close on the loan after the closing, but after the banks went under they stopped doing that)

They will structure the payment schedule and usually, the payment amount is more than enough to cover what was done and to cover some of the next stage work so [B]it's important to know the amount you asking for and include overhead costs, your salary (if you want to draw) etc.
Also, try to arrange that all the interest will be paid at the closing. So they will give you a loan for 3 years, and interest payments over 3 years amount to 20k give or take and you sell the house in the first year, you will get a nice check from that also. If you don't sell the house and the loan timetable expires you can ask for an extension.

That's pretty much it.

Good luck
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Old 01-17-2018, 08:59 AM   #5
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Re: Bank Questions On Construction Loans


Make sure and get waivers signed from your subs. If you are using new subs I find that it is best to meet with them, give them their checks, and get the waivers signed.
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Old 01-24-2018, 07:47 AM   #6
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Re: Bank Questions On Construction Loans


Quote:
Originally Posted by greg24k View Post
Yes, they will ask for experience.

You might need builder registration number if you building a new home (check with your state)

The bank never asked me to provide any sub-contractor information.

You need liability (usually 1m coverage) and you will need builder risk insurance.

You can do your own labor since the payments are broken up so the bank doesn't know who is doing the work they have nothing to do with it.

The payment is broken up into payments and you call them for inspection when you complete a certain phase and they will cut you a check i.e:

1st payment-foundation is completed.
2nd payment frame, the roof, and windows completed.
3d payment all the rough work.
etc
(In the old days they would give you all the money and you close on the loan after the closing, but after the banks went under they stopped doing that)

They will structure the payment schedule and usually, the payment amount is more than enough to cover what was done and to cover some of the next stage work so [B]it's important to know the amount you asking for and include overhead costs, your salary (if you want to draw) etc.
Also, try to arrange that all the interest will be paid at the closing. So they will give you a loan for 3 years, and interest payments over 3 years amount to 20k give or take and you sell the house in the first year, you will get a nice check from that also. If you don't sell the house and the loan timetable expires you can ask for an extension.

That's pretty much it.

Good luck
good advice. This is what you really need to do op
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Old 01-24-2018, 08:23 AM   #7
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Re: Bank Questions On Construction Loans


A big chunk of your profit will be sucked up by the bank. I wouldn’t recommend a spec. if you can’t self finance. Either that or you are so damn good you can knock it out in under 3 months with all the best subs. around, who also love you for all the work you provide so they’ll do everything for at least 20% below their standard charge. Good luck.
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Old 01-24-2018, 09:29 AM   #8
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Re: Bank Questions On Construction Loans


We can self-finance, but, debating whether or not a construction (or equity loan) makes the best sense - we are just exploring all options. We got the land very inexpensively as well, so that helps.

Information has been very useful, since in my experience most bank reps don't tend to give you all of the information until late in the process.
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Old 01-24-2018, 12:14 PM   #9
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Re: Bank Questions On Construction Loans


Quote:
Originally Posted by quantumflux View Post
We can self-finance, but, debating whether or not a construction (or equity loan) makes the best sense - we are just exploring all options. We got the land very inexpensively as well, so that helps.

Information has been very useful, since in my experience most bank reps don't tend to give you all of the information until late in the process.
That's what I did on my last 2 projects, saved me so much money, i.e application fees, closing, attorney fees, inspection fees and the interest.

If you have the means to get the project going, that is the way to go.

Good luck

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