First Time Private Lending....Good Idea??

Question

Hello,

I have a 3 acre lot in a very well upcomming and popular area in Fenton Michigan. I want to build a home and then sell it when completed. I have been building homes for 20 years and have my Michigan Residential Builders License along with a Florida Commercial Builders License. I build for a living and have done so for 20 years. I want to find a private lender who can lend me the money up front for the cost to build. I will then sell the home and pay back lender the entire amount plus costs etc. Would this be the best way to go and if so, are there people/companies who would do this? I understand this is a pretty broad question, but this is the first time I would be doing this.

Thank you for any feedback.

Edwin Epperson · Answer

@Michael Voltner I agree with @Rick Pozos.  As a private lender in Tampa FL, I structure my new construction loans where the property must be owned by the builder, and then construction costs are provided in arrears, meaning you have to put your money to work in the project first and then I reimburse you.  For more seasoned, well-capitalized builders, who I have done multiple builds, I'll refi up to 50% of the land costs at the origination of my loan, but I still require the builder to put their money into the first phase of work and once its completed I reimburse them for that first phase.  Several issues with builders make this unattractive, and thus I don't do too many new build loans.

Pro - Using Bank Financing:#1: A Bank will provide the money upfront to start the construction (from my understanding) plus reimburse/ provide some if not all of the purchase price.#2: A Bank will offer a much longer loan than I am willing to.  In this market, if the new build cannot be completed in 6 or 9 months I won't lend on it.  Too much exposure right now to the coming market correction the longer I leave my money on the street.#3: A Bank's rates are typically going to be MUCH lower than mine.  I'm lending out my capital, so I want a solid return on my portfolio (my loans). I don't lend to those who are rate shopping, I choose to lend to those looking for a long-term relationship and the benefits that come with loyalty and trust (read better rates and JV options).  So better rates come but after doing business together.  Most investors are too near-sighted to be willing to jump through the hoops to establish that long-term relationship.#4:  Banks may offer "No-Payment" loan options, like what you mentioned above.  Myself, as well as most HML DO NOT offer "No Payment" or "Accrued Interest" loan options.  We require monthly payments for our capital.  The way around this is to raise private money (notice it is different than private lending) and structure it in such as a way that your private money investors opt to receive repayment of principal as well as earned interest when the project sells.

Con - Using Bank Financing:#1: They are going to check credit, Personal DTI, 2 yrs Taxes and Business income/ performance over a period of time, license standing, background check, and Liability/ Workmans Comp Ins. The only thing I will check is background, license, insurance, along with proof of previous builds.  This cuts down on time and hassle for the builder#2: Banks may take 30+ days to close.  I can close within 2 weeks as long as everything is in place and the builder is organized and thorough.My suggestion find a local Private Lender, local to where you are at and choose to work with them.  You could also look for Private Money (meaning unsophisticated investors) who you educate and "sell" them on your concept build, or idea.  This will most likely need a SEC filing to offer non-registered securities commonly referred to as a REG D 506(c) or (b) to be legally able to raise private capital.  Best wishes to you, and much success

Jay Hinrichs · Answer

I have construction loans from 4 banks in 3 states NONE of them will give draw money up front they only allow for draw for work in place just like HML do.. at least in my experience with  over 200 bank construction loans i have gotten in the last 10 years.  my current pricing is 1 point and 5 to 5.5% and of course interest is only paid on drawn funds not the commitment.  need full financials 2 years of FULL tax returns track record.. what helps me is I always pay cash for the dirt and never ask for a dirt advance.. Makes it easier for my Banker to approve my loans.  need third party apprasial but no JUNK fee's like HML like to hit you with..

Rick Pozos · Answer

20 years in the business?? I would think that a bank would lend to you with super duper great rates. I have a couple of friends who are homebuilders in the San Antonio area and they get construction loans or lines of credit against other properties that they own.

Most lenders are going to put the property that is completely paid off, as collateral. Then YOU start the build. They will pay you back the amount of construction that has been done.  When you do some more work, they give you more money. BUT you are still going to have to pay interest on the money that you have out. Every month your payment is going to get bigger and bigger.

I dont believe anyone is going to lend you money to build the house AND no payments until the end?? Not likely. Again, if you have that much experience, you should be able to put a property up as collateral or the land that you are building that is lien free.

Ryan Deasy · Answer

@Michael Voltner

have you considered hard money? i know the company i have used does ground up construction. may be easier than finding a true private lender. happy to help.

Edwin Epperson · Answer

@Michael Voltner yes as is the case with most builders, even high volume builders.  It's always a matter of cash flow restrictions.  That is why going with a lender that will offer a draw process would be beneficial.  Let's assume vertical construction cost will be $280,000.  Let's then assume you have $100K liquid.  Now obviously you could not finance the entire build with your capital, you don't have enough.  Even if a lender were to offer you the $280,000 assuming the ARV is enough, and pay that to you in full immediately after construction that still doesn't help right?  So finding a lender who would do a draw process would work.  In this case, let's say you break that $280K project down into 6 draws of $46,667.  This means you start the project and put $46,667 of your own capital, which leaves you $53,333 of your own capital.  The lender would send out an inspector to make sure the project actually has $46,667 worth of construction completed (all based on a line item breakdown, which I'm sure you're familiar with) and then they wire you back your $46,667.  Now you have your original $100K back in your account and you continue to "recycle" that same $46K into your draw 2, then draw 3, and so on.   In this way you're able to build a $280,000 with effectively, only $46,667.  It's a great solution for a cash-strapped builder.  Of course, this does not help matters if you have no capital at all.  But there are ways around that; equity structures, subordinate debt, LOC's ect.

Michael Voltner · Answer

Thank you for the response. Being that this would be the first time, I wasn't sure exactly how the process worked. I have talked to a few banks on construction loans, but wasn't sure if works any different than a hard money lender. (They maybe kind of the same thing?)

First Time Private Lending....Good Idea??

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