Financing a New Construction

[Max Johnson]

Hi Everyone, 

As you all may know the Denver market right now is crazy not only for investments but also for personal residences. I am looking for a new personal residence but i've realized for my budget there isn't anything interesting on the market. I have no experience in new construction nor funding large deals so I want to get everyone's take on this potential deal. 

I am looking at buying a nice sized lot in a high-end relatively dense neighborhood in Denver. On the lot I can develop up to 5 row homes. The idea would be to build 5 and keep 1 for myself while selling the other 4 as spec homes. 

The financials would look like this:

2.2M for Land

3M for Construction($200 per sqft)- I've heard from Denver developers that are doing relatively high end SFR for about $175 per sqft in infill areas so I think $200 is realistic.

7.2M sell out for all 5 but minus 1.5M for the row home I intend to keep i'd be left with around 5.7M as a net. 

500k gross profit + a personal residence. 

Realistically making a profit isn't so much of my goal as I want to build a residence for myself hopefully for $0 as the other 4 units would cover it. I've never sought financing for a deal this large in value and i'm wondering how much I would have to bring to the table. Max I could comfortably put in would be about 750k so about 14-15% of the cost of the project. I'm interested to hear if anyone thinks I could get a loan for this project and not have to bring much equity into it. 

Thanks!

[Gilbert Dominguez]

I have done several projects this size. However this kind of project seem to fit those who already have the cash there is very little need for borrowing money. You should not consider a situation for this project that would involve paying P&I. Even if you could finance the deal all the money would go toward paying of loan(S) and interest so you would not end up with one house 100% free and clear plus remember you will probably tie up your $750,000.00 as well. With these projects there is not telling how long they will take and what delays you will have to endure and experience. If there are not existing plans and permits then this becomes very very risky. 

First,can this project be serviced?

Are there sewer, water, electrical, and gas services at the location now that have the capacity to service the units you have in mind to build? If not you could be facing having to pay for all such service to be brought into the area of the project as well as roads and sidewalks possibly needed. 

If there are not approved plans for construction or existing permits you are looking at potentially years before the project is ready for construction if it even can get to that point.

Let us say for some reason you do get to the point of knowing the project can be serviced. If there are not approved plans for the project you will need a soils engineer, a structural engineer and an architect, all licensed and practicing in your area. They are not cheap and they may take a long time to provide you with needed reports and plans for submitting for approval review. You will also probably need title 24 or some similar energy report based on your plans. Be prepared to pay very handsomely for permits if you ever get to that point in the process. 

I would agree that typically you would need to own the land outright, fully paid with no encumbrances in order to obtain financing for the construction. Whether you get conventional construction loans or use private money or even get an equity partner whoever finances will probably get all the money you are figuring on that you will get to have your own residence paid off. Its a long drawn out process and a very costly one. 

Then you have no experience managing a project this size. 

These kind of projects are very easy to pencil out on paper but I can't tell you the number of small developers and contractors that have gotten themselves into a bind and even gone bankrupt doing projects like this and I am talking about people who have experience doing these projects already. These projects are not good for financing and those that can do them successfully usually have all the cash required to pay for the holding and development time required and they have the wherewithall to do the project themselves vs paying other independent contractors to do the construction for them. 

$750,000.00 is allot of money and there are many ways that you could safely double, triply and quadruple that money in the time it could take to do the project you are talking about. You might even do it without financing at all just using your money to work for you. it just depends on how you go about it.

From my many years experience doing projects of this magnitude I would not consider getting involved in doing a project like this unless I already have somewhere in the neighborhood of between $5M and $6M to begin with. 

Well that my .02c but I have spent years working on similar such projects so I am just putting out a word to the wise or at least that is my intention.