The Construction Loan 101 blog site provides updated information on Construction Loans and Construction Permanent Loans that are used to finance Custom Homes. Bob Mowrey, shares his experience with Construction Lending to those seeking information on Construction Loans and Construction Permanent Loans with those looking to build custom homes.
HOME BUILDERS HAVE BEEN VERY BUSY OVER THE PAST FEW YEARS. MORE OFTEN HOME BUYERS ARE SEEKING MORE CUSTOM AND SEMI-CUSTOM OPTIONS VS. WHAT IS AVAILABLE VIA THE TRADITIONAL TRACT HOME. BUILDER LINES OF CREDIT ARE EXPENSIVE AND HAVE BEEN DIFFICULT TO OBTAIN IF NOT TOTALLY OUT OF REACH FOR MOST PROVIDING THESE OPTIONS.
Having your clients obtain a Construction Permanent Loan to purchase their lot and finance their new home offers many benefits to both you and your clients. It can also simplify the way you do business and can allow you to focus on what you do best, design and build great homes for your clients!
There are many other benefits as well, but here at the top 6 according to my Builder Partners.
Cost Savings - There is only one closing and it is for your client. Builders no longer need to put up capital to purchase lots, pay closing costs and pay the interest carry to build a home. This not only saves you money, but it can make you more competitive as you no longer have these fixed and soft costs to build into your pricing and new home delivery. Your clients will save as well, not only in the reduction of the overall price, but the closing costs can be significantly cheaper as well, especially if your builder in a State that charges transfer taxes only on what is conveyed the day of closing.
Better Cash Flow - Unlike the typical builder line, with a Construction Permanent Loan every draw disbursement you receive is based on the total sales price. Builder lines are based on costs and do not include your profit so the cash flow is significantly lower. Most Construction Permanent Loans will allow you as the builder to receive up to 10% of the construction costs up front, prior to obtaining a permit. This goes a long way when you have Realtors looking to receive a commission at closing, expensive permit and impact fees as well as site work and soft costs. Cash flow is the heart of your business and is one of the most important aspects of a healthy business, without it, it can be very tough to grow.
Elimination of the "Walk-a-way" - Walk-a-way is a broad term builders use to describe the deals where for some reason, the borrowers choose not to or cannot perform. There is nothing worse than building a custom or semi-custom home, suited to your clients specific tastes and when the house is finished, they can't or won't close. It doesn't matter what the reason, they lost their job, are getting transferred, missed a credit card payment and their credit score dropped, they can't sell their existing home. The end result to you the builder, you have a spec home to sell that was designed to someone's unique taste and that means you may need to discount it just to get out whole. You built a house for practice. With a Construction Permanent Loan, the client owns the home and has the financing Day One! You are guaranteed to get paid they full sales price. Even if the borrower should default on the loan, the Bank wants the home completed and will keep paying you until it is.
A Lot Less Risk - In addition to the elimination of the walk-a-way as described above, you also no longer have personal liability for the loan. When your clients obtain a Construction Permanent Loan, they assume the risk for the loan from day one, not you the builder. You get to focus on building the house and can sleep good a night knowing you have no risk or responsibility other than to build a great home for your client.
Less Paper Work - You no longer need to apply for or renew your builder line of credit. That means a lot less paperwork. No longer having to provide tax returns, personal financing statements and make applications at year end or provide status reports to the bank. Let's be honest, your highest and best use of time is designing and building homes as well as growing your business, not drowning in paperwork or having to hire someone to do it for you. When you refer your client to a Construction Permanent Lender you trust, all you need to do is wait for the initial startup advance, build the house and get paid. In many cases you can even work with your preferred lender to customize the draw schedule based on your building style and cash flow needs. Accounting for funds can become much easier to manage.
Professional Sales Support - Your trusted lending partner can not only assist you by providing the Construction Permanent Financing, but also by explaining the many benefits your clients receive in the process of building their new custom home with you vs. the traditional Tract Builder. Benefits like locking their rate at time of application, a huge reduction in closing costs, staged down payment options and the simplicity of being able to move right in at time of completion to enjoy their without having the additional stress of applying for or settling on a loan while preparing for the move.
There are many more benefits of using Construction Permanent Financing in lieu of traditional end loan financing. The bottom line always comes down to just that, the bottom line. Construction Permanent Financing may be one of the best tools you have to reduce expenses, your financial exposure and increase your net profit while providing your client with an excellent means to finance their new home and meet their financial needs. More profit, less risk and happier clients, that's a Win-Win situation everyone can appreciate.
