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.
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 -
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.