New Construction Loan and Building Process

[Jack Bauer]

Hi Everyone, my family has some land that I want to develop. I have started the process by reaching out to lenders. There is not much I could find about new construction loans, especially if you already own the land. I am thinking of getting a FHA construction loan but have read that those are rare. Any advice on a good way to finance the construction? I do have cash on hand, but not enough to pay for the whole home.

Would also love to know anything I should watch out for when selecting a home builder...I helped my parents buy a home before, but I know the due diligence process is slightly different and there are inherent risks with a new build. For example...when should I hire an inspector to perform QA checks on the construction? Again I am not sure how it works when it is a completely new construction. Does the lawyer hold the money from the bank in escrow and distribute the funds as an inspector gives the go ahead for the next phase of construction? Those builders have their tricks and have been doing it for a long time than I have been reading forum posts...

 

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[RMarques]

I almost got a construction loan when I built mine. I also owned the land. The bank is the one controlling the process. They're the one sending out an inspector. At least mine was. I ended up pulling equity out of other property to fund what I did because I just didn't want to deal with all the BS. You'll have enough BS to deal with when you're dealing with permits.

I wouldn't go to a home builder if you're building something that you'll be living in. Hiring a general contractor means you can work with them to design something that you want, instead of something out of a book that was built cheaply. More work.. but you choose everything. If you hire a general contractor you'll definitely want to do some due diligence. Make sure you have a good relationship with them.. and be able to put the brakes on them when they're trying to up sell you on stuff you don't need.

 

[Jack Bauer]

That is the big question, what sort of things would I need to put the brakes on?

I am leaning towards pulling the equity out of the existing property like you said after reading about how hard it is to get a construction loan.

Maybe I am mistaken, but are you saying that when you get a loan based on the equity from House A, the same mortgage lender for House A will perform the inspection for House B? I thought borrowing against your home was a more general loan type?

 

[RMarques]

Brakes meaning not blowing your budget out of the water. Which everyone does... because you will encounter costs you never expect!

If you get a construction loan you'll have an inspector come in after each "stage" of construction to approve of what you've done and then they'll give you another installment so you can continue onto the next stage of construction.
They determine when that is. (maybe when you need more money)

If you pull equity out of your own property, you eliminate all of that BS that has to do with the bank.
You're now working with your own money on tap.
It eliminates down time and you don't want to make your trades wait for payment.
You'll still have to get all the work inspected to meet building codes etc etc.

 

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[Jack Bauer]

Brakes meaning not blowing your budget out of the water. Which everyone does... because you will encounter costs you never expect!

If you get a construction loan you'll have an inspector come in after each "stage" of construction to approve of what you've done and then they'll give you another installment so you can continue onto the next stage of construction.
They determine when that is. (maybe when you need more money)

If you pull equity out of your own property, you eliminate all of that BS that has to do with the bank.
You're now working with your own money on tap.
It eliminates down time and you don't want to make your trades wait for payment.
You'll still have to get all the work inspected to meet building codes etc etc.

Makes sense, is there a term for a third party inspector that can oversee that different types of construction since I will probably be using equity? I have heard of instances where the GC may use materials that are cheaper than agreed upon and where they generally cut corners...tough to know all of these things since it is my first go at this. Though I'm sure it takes years to have an eye for what to look for. Thanks for your input!

 

[RMarques]

This is where your due diligence is important. You need to find a general contractor that you can trust and can build a quality home and depending on your budget, will only do one home at a time.
Generally they're supposed to handle all permits, blueprints, hiring trades, ordering materials, passing invoices off to you, bringing inspectors in, etc.
It's the general contractor's duty orchestrate when a certain job will be done and have an inspector come in to give the go ahead so that the next trade can come in.
For example.. GC hires carpenters and figures out when they'll be done framing, GC books framing inspector ahead of time so you aren't waiting two weeks to bring in your electricians.
If they're good, there won't be much down time during the build process.
You'll have to negotiate on how you deal with payment but typically it works on a percentage.
So for example he gets paid 10% of the total cost of the house.

When you're building.. it's in your best interest to try to be there every day and pay attention to what's going on.
And don't run out of funds.

 

[Jack Bauer]

Hmm I will look up resources on a "punch list" for residential construction. I can be there easily since I live close. Thanks RMarques

 

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[Jack Bauer]

This is where your due diligence is important. You need to find a general contractor that you can trust and can build a quality home and depending on your budget, will only do one home at a time.
Generally they're supposed to handle all permits, blueprints, hiring trades, ordering materials, passing invoices off to you, bringing inspectors in, etc.
It's the general contractor's duty orchestrate when a certain job will be done and have an inspector come in to give the go ahead so that the next trade can come in.
For example.. GC hires carpenters and figures out when they'll be done framing, GC books framing inspector ahead of time so you aren't waiting two weeks to bring in your electricians.
If they're good, there won't be much down time during the build process.
You'll have to negotiate on how you deal with payment but typically it works on a percentage.
So for example he gets paid 10% of the total cost of the house.

When you're building.. it's in your best interest to try to be there every day and pay attention to what's going on.
And don't run out of funds.

When you were done with construction, did you take out a traditional mortgage to pay the HELOC?

 

[RMarques]

Yup. I negotiated mortgage terms and then wrote a big check to pay off the heloc.
One thing to be aware of when the house is done is that you might have lag time for some of your invoices to show up.
I had gotten a mortgage and paid off my heloc and a couple months later my GC comes back with about 25k outstanding balance.
I wasn't happy.
You're going to get some big utility bills a couple months or even years after you finish.
You might not see property tax bills for 2 or 3 years until they finish assessing your home's value.
But they'll make sure to send you one huge invoice two weeks before Christmas just to make things interesting!