New construction financing...

[hatterasguy]

I'm going to give this a try either later this year or next, probably next but I'll see how this year plays out.

Anyway here is the trick, first you need to get the dirt cheap which I do. I'll use my 2nd deal for an example, we paid $58k for the lot. The bank will give you either 70%, or 80% of the lots appraised value, I forget, but lets say 70%. This lot is worth $100k on the market, so thats $70k. Now you tell them its going to cost you a buck fifty to build the house, in reality its only about a buck twenty. See where I'm going?

I guess if you work it right you can actualy get some money back at the closing, and there is a bank around here still doing this. I was standing in a house Friday that was financed this way.

The catch is you need some good credit and some assets. For my first one I plan on going in with my usual partner who has a very strong business, and I'll have some cash on hand from the first few. I need to pump my balance sheet up so I can do this.

Has anyone used construction loans like this before? I don't really know if I even want to consider using bank money in this market, I'll have to see how the economy is doing.

 

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[reipro]

We have a builder here in town that I am good friends with who has done this a lot. He has over 350 rentals that he has built himself over the last 15 years and has none of his own money in them. He has actually started paying some of them off this year. He put a lot of sweat equity into the deal, but it worked for him.

 

[MattThomas]

I'm guessing the contractor would have to be willing to...ahem...exaggerate the price to the banks so the bank can lend out more money than otherwise needed.

I suppose as long as the contractor is willing to exaggerate the price, it is probably difficult to prove that any dishonesty even took place.

 

[hatterasguy]

There is no contractor, we run the show. Overestimation is a commen mistake, happens in turbulant markets you know?:coffee: Besides the land is worth what the bank says its worth, who cares if I paid full market or got it for 50% off.

Doing it this way does take a lot of sweat equity, you have to find the killer deals and run them. But the profits are very attractive.

 

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[EasyMoney_in_NC]

Thats exactly how I did what I've done over the years (obtain financing that paid for construction costs and $$ in my pocket at closing). I would guess that things are a bit different these days. Used to be I could get 80% of appraised value, but with values going down, I would suspect appraisals are useless to achieve what you're trying to do and construction cost are high, not a good combo.
If however, your costs are reined in, then you'll just need to find someone to give you an appraisal (@120%) that makes your 80% LTV , 100% + of construction costs, that way you'll either have money to pull out or to float the project with.

 

[hatterasguy]

Leverage is cool though, insted of doing 2-3 deals a year with cash...with something like this I can do as many as I want/can sell.