Construction Loans: Talk to me like I am a three year old….

The finished Hersey Project from Season 1.

When I started this business I did what all house “flippers” do.  I 100% lied to my bank and got my “first home” mortgage. Was I living there full time?  Of Course! Was it my permanent residence? Of Course! But then, all of a sudden, I happened to get an offer to magically sell my first home about 6 months after I purchased it, so why would I not take the offer?  Just coincidence right? Ha!

The issue is: banks have caught on to this and after you do it once or twice they start to raise red flags and call you out.  I remember the day when my broker Pat Tobin called me and said, “You know what PJ? I think you need to get a commercial loan now.”  

What he really meant was it was time to make my business official. This meant construction loans.

MountainOne has been my lender for years, financing my projects.

MountainOne has been my lender for years, financing my projects.

How do these things work?  At first it was daunting and hard for me to figure out.  This is when the power of community banking comes into play.  Thats right. I spoke to a bunch of big banks and it was super frustrating and hard to navigate.  Then I talked to my local community bank, Mountain One. Yes they are now a sponsor, but they are a sponsor for us because I have built a great relationship over many years.  The benefit of working with a community bank is that they will walk you through the whole process seamlessly and act as an advisor throughout the process. It’s just part of their job.  

Construction loans are simple.  Many people think they are just the capital you need to build out the house but they are a bundle loan.  It is a two part process. Typically there is a 25% downpayment on the acquisition price and then they reserve the cash needed to do the build.  For example if you buy it for 400K and the build is 250K then you put down 100,000 at signing and take a mortgage out for $550K. BUT you only pay interest on what you draw out of that $550K.  So right after closing you are paying interest on 300K. Then as you draw money out of the construction portion of the funds your payment goes up since the monthly payment is based on how much you draw out of the total loan.  

Two other details -

Putting the designs for Squirrel Hill into action.

  • There is always some sort of points to be paid up front.  For example many loans require 1.5-2 points. (depending on track record and credit score) For a total loan of $550K at 1.5 points you would pay an additional $8250.  Many banks will negotiate splitting this so half gets paid on the back end. Usually that doesn’t happen until you have a relationship and track record.

  • ITS ALL INTEREST!  Thats right construction loans are interest only.  So get it done as quick as you can because every day means money spent.  Let’s use $550K as the total being paid on. If you have a great rate at 5.7% then that’s 31,625 a year.  Also $86 a day. Thats $86 bucks a day that you might as well drop in the porta potty on the job site. You never see it back.  So every day costs REAL money. You won’t hear that on a modern home show…

Now get back to work and get that project done and sold.

Front Doors Sell Houses

To me the front door of any of our homes is always a big focus. Before the show, we flipped a house on Cape Cod with an awesome view of the nearby pond which we appropriately referred to as our Pond View Flip. The reaction we got on the front door was outstanding: many people asked about the door, the color and accessories as well as the rest of the finishes on the front of the house.  The front door is the first true interaction a buyer has, the first thing they touch and the first thing they experience as they enter the space.  To me it is THE most important thing to nail with the design of a home if you are selling it.

The Pond View Flip Door

The Pond View Flip Door

The Pond View Flip door is a solid Hemlock 6 lite slab made by Jeld-Wen.  This model is called the Craftsman.  I Surprisingly found this door at Home Depot during an unrelated trip for other materials.  Even at full price it is a bargain at $189 but I found this on clearance due to a customer return.  You can find it on their site HERE.  If you buy it in the store it is most likely a special order.

The tricky part of the slab is that you have to fit it to a jam.  We custom ordered a Bosco jam from a local lumber yard since any over the counter jam we found had an crappy aluminum threshold.  We really wanted to have the quality look and feel of an Oak threshold so we paid for it with a $350 pre assembled jam.  After installation we cut the door down to fit, cut in the hinges and 3 hours later had a swinging door.  

Painted and ready to cut.

Painted and ready to cut.

The lockset we chose is made by Baldwin.  Although you can find Baldwin in many big box stores it still holds a great reputation for quality and it also has a solid look and feel.  Again we want to make a first impression so it was important for us to have the first contact of the house reflect quality.  We went with the classic look of the Baldwin Bethpage in a satin nickel finish.  

Now the knocker...  Since this house is so close to the water on the Cape we wanted to bring the local culture into the home right off the bat.  We chose to go with a custom knocker by Michael Healy.  He has several nautical theme options.  We thought about a scallop or clam but ultimately the Humpback Whale Knocker in the chrome finish stood out to us as a classic option that reflected the cape perfectly.  It also fit the style of door since it was a bit more bulky while not crazy expensive at about $130.

Lizzy decided to go with the Benjamin Moore Harbor Haze for the color (2136-60). Many designers on the cape go with a deep red or darker colors for the front door.  We wanted to stand out and look a bit more modern and fresh.  The Harbor Haze absolutely did it!


The finished product accomplishes exactly what we wanted.  It helps the entrance stand out and shows a high level of quality and detail for the first impression.  The Clappord siding on the front ended up getting painted an off white cream color called Sea Pearl by Benjamin Moore (961).  The last two accessories on the front where the shutters and the light.  We ended up going the extra mile on the shutters and went with the solid wood option instead of Vynl.  Although expensive (about $1200 more) they really do pull the entire house together while keeping the classic Cape Cod look.  We painted these ourselves and went with a Pewter Gray Krylon spray paint believe it or not. (Gloss - 51606)  It worked perfectly and went on super quick.  Finally the light is a classic onion light made by Norwell.  You can get crazy on this subject as far as cost.  These things can run as much as $1000+ per fixture if you wanted to go nuts.  We chose to go with Norwell since it is a great quality light and affordable at about $127 for the small version.  We used the larger version on the other two exterior doors.  We found them at Granite City Electric.  

Are you a house flipper or do you renovate future homes?

Whenever I start to explain to someone what we do it’s almost a guarantee that the following comment is, “So you’re a flipper…” and there is always a strange connotation with that comment.  Some may think that it is a generalization, but I actually feel that even if they don’t realize it, the comment has a negative feel to it. But its not their fault! They have been conditioned that way!


I think that the modern “fix and flip” home show has created this strange perception of house flipping.  What exactly is the definition of house flipping? I guess you could consider any house that you buy, repair and sell a flip.  But that's not really the case in today's consumer’s eye. I believe that the term “House Flipping” has become a household term for people who buy a property and strive to keep their expenses as low as they can.  They do it as fast as possible, pick predictable finishes that are inexpensive and unload it to the highest bidder.


They also do their best to leave as much as possible and work within the perimeters of the current house. Let's be honest: this is what most home shows do.  The production bids out all the work and picks the cheapest bid. They create drama around one partner in the business trying to spend a lot of money on finishes, then the other argues that its too much and they settle on the cheaper decision to help the bottom line.  They leave old wiring, they don't touch hvac systems, they keep most the plumbing in the walls. You get the drift. 


I like to think we do the exact opposite.  Yes we still buy as low as we can because let's face it our business is only as good as the buy.  With that said, once we start to dig into a property we always have aspirations of not going “too far” but inevitably end up doing exactly that…  If we touch a room we end up gutting it to the studs. Everything gets updated. Yes we like to save what we can in the house, mainly to avoid being wasteful, but if its a better choice for our future buyer to just rip it out and replace it that's what we do.  We care about our reputation, our customers, and most of all our product.

To me every profession comes down to one thing.  Customer Service. We are all in the business of customer service whether you like it or not.  Are you a doctor? Then you have a customer. Are you a teacher? Then your customer is just 3 years old instead of an adult.  It all comes down to taking care of your customer even if you don’t even know them yet. Think ahead and create a home. Don’t just flip it - instead lets flip the consumer mindset one home at a time by renovating them.

Budget vs. Reality

PJ reviews the final project plans.

PJ reviews the final project plans.

The name of the game is to be prepared.  You can budget as much your heart desires but you are NEVER going to think of everything or get everything perfectly right.  With that said, challenge yourself to get as close as you can, prepare for the worst and get a little more accurate every time.  I make it a game to see how close I can get and recently I have made 3% my benchmark. If I am 3% off the mark from my original estimate based on the ORIGINAL scope of work then I am pumped.  

Why do I say original scope of work?  Because changes happen. Decisions have to be made that are going to change the budget.  Do we go for the $4000 professional range in the kitchen or stick with the original plan to spend $1200 on the standard range?  

I have to say the thing I feel everyone neglects is taking time to really nail down a true budget.  It takes a TON of time and there are always items in the budget that are still “unknowns” so it can be nerve racking.  Are we sure there is no termite damage? Is that septic going to be a standard gravity system or do I need to pay for a chamber system?  (difference of about $25,000!)

PJ and Jarrah discuss different directions to go should a house take longer to sell.

PJ and Jarrah discuss different directions to go should a house take longer to sell.

Hersey Mid Framing

Hersey Mid Framing

The point is you have to be flexible and more importantly you have to set the budget at the beginning to give yourself enough margin to go either way.  If the market gets soft you will be fine because you gave yourself enough cushion and didn’t go nuts on finishes. If the market gets hot you will now have the funds in your budget to pay for some of those upgrades and take a calculated risk with a higher price point.  

The market may change - Real estate value is a constant moving target.  The way I approach it is to start the project with a reasonable finish and a realistic level of potential changes.  This way if the market is good and you want to push the envelope on price you can make some more expensive decisions on finishes or maybe even layout of the home.  Maybe you end up reframing the roof instead of working within the current frame in order to get that higher dollar. Who knows?!

Hersey’s completed kitchen.

Hersey’s completed kitchen.

Hersey SOLD!!

Hersey SOLD!!

Don’t skimp on budgeting.  Take the time. Do it over several days and keep walking away to come back to it.  I find when I do that I always find things I missed or think to myself, “What was I thinking with that number???”  Get estimates if you can so that you are not guessing and don’t be afraid to ask around. Guys in our industry love talking about their businesses and most are happy to lend a hand figuring out some costs if you are not in direct competition with them.  They may even share some insight on sub contractors for you to check out.

A continuing education teacher we sat with recently nailed it.  He lives by this quote… “Control The Process Or Accept The Outcome” - Shawn McCadden. Budgets get blown on jobs that people don’t spend the time to prepare a proper budget.  In my mind it's possible to be on budget, you just need to control the process or accept the outcome…