Preconstruction Strategy with no BS

[Scott Allan]

Hello everyone,
I have had a lot of experience buying and selling preconstruction real estate. My firm is owned by the largest construction lender on the east coast and our niche is putting together preconstruction opportunity for our clients. Because we are owned by the bank, it gives us leverage to work with builders and get true deals in emerging markets, using the builders who have built a repore with us in the past. The problem I have with preconstruction is that depending on lender guidelines, it is so easy to get sold on the idea to buy one with low money down. Sounds great, but there are certain things that you should know. 1) Exit Strategy...although you will likely put a small deposit down and make no payments during construction, you still have to know your intentions and think a year ahead with what you are going to do...ie: rent or sell.
2) What if it is built and it is temporarily vacant until it rents or sells. Can you absorb the mortgage payment?
3) Don't take your realtors word for it. Do your own due diligence. Take a trip to wherever your real estate deal is and check it out yourself. Feel comfortable when you buy something.
Here is what we do in FL, GA, NC, SC
The loan product is a 90% CP Loan which means the bank finances 90% of the appraised value on a Construction to Perm loan.
All of our product is negotiated with a builder who also owns land where we purchase the lot and house for 75% of the appraised value. Now we have an additional 15% to add what we want before we get to 90%. With this cushion, we roll in ALL closing costs, construction interest reserve which gives you the benefit of making no payments during construction, and also a $10,000 home equity line of credit that you have full access to at completion in case of any potential negative cash flow from renting or temporary vacancy before it sells or rents. So now when the home is built, our options are everywhere. Whatever the market has appreciated during the course of construction, this is in addition to your 10% up front equity position. So in our targeted "moderate" appreciating markets where we like to see 7-9%, we are in a 17%-19% equity position at completion. If you take into consideration the HELOC, that gives you another $10,000. I feel that without an equity line at completion, it makes it much harder to sleep at night when you know something is being built and once it does, someone has to make payments. We only do this with our direct customers. We do not wholesale this product. After rolling in all closing costs, interest, and the HELOC, we are still in a 10% equity position before it is even started. Again, this opens up your options and alleviates the potential "what if" headaches that you will have when buying preconstruction real estate.