Can I get funding to construct on a buildable lot with bad credit?

Question

Hello everyone, I love this forum by the way. I like to know if anyone has worked with a lender who will lend on the appraised value of after construction or after repairs value. I'm about to enter into a contract with the owner of a 5000 sqft land in Southern California with full utilities on a promissory note. Total cost of the land is $15K, 4bd/2ba homes are running around 220K and better. I can drop a modular home of the same for 80K. Do I need to pay off the land before I can embark looking for a lender or construct the financing with the original owner to be in a secondary position to a hard money lender?

Any advise is greatly appreciated.

Regards,

Abel

Any advise is greatly appreciated.

Regards,

Abel

Aaron Junck · Answer

I would definitely suggest the PM route. Around here if you got with bank financing they will give you a loan based off of the cost to build or appraised value, whichever is LESS. They will also still require 20% of your own cash in the deal based off of that lower amount.

Example:

Cost to build with land $100k

Apparaised Value $120k

They will give a loan amount of $80k

Abel Gomez · Answer

You're correct, if ever I look for a buildable lot, it must have all services at the site, sewer, electrical and water.  The modular company I've selected can erect a home in a matter of a few weeks if all goes well, not months like a stick home.  May I call you at your number Bill?

Bill Anderson · Answer

Hi Abel,

Does the property have water, gas, sewer, and electricity on the property, if not expect time and money to  complete?

Bill

Menifee, CA

Abel Gomez · Answer

great feed back. Just to be clear, this is a buildable lot, and modular is not the same as a mobile home, ....modular are built as the same standards as stick but the difference is that they are assembled at the site and come in all styles.  The modular company has the experience to erect these. I think its clear, before I enter into a contract with the owner of the land, I have to ask him to take a second position as my goal would be to flip this fast. Now to find a HML or private money.

Brian Mathews · Answer

It sounds like there is already a house of some sort on there.  You said modular, which around here means trailer.  Are you considering building a stick built where that is? Or putting another one of the same on there.  If you have a neighborhood or area of modular and you put a stick built on, you might have a hard time selling it.  If you're never built a home, you might partner with a builder to make sure it gets done and correctly.

Robert Williams · Answer

Hi Abel,

This sounds like a great project if you can get the financing for it.  There are definitely lenders who will do construction loans that will cover the cost of both the land and the proposed build-out.  However, if you have bad credit, financing will become more challenging.  I think your best bet is a local hard-money lender who understands the market and the potential payoff of this deal.  I suspect that they'll want to see a significant down payment on your end to offset their risk.

-Rob

Darrell Shepherd · Answer

Banks are out, but it sounds like you already know that.  None of the HML guys around here would do a second unless they know you well and its a small one like this.  Just roll the $15k into the $80k or get the original guy to take the second.

There aren't any hard and fast rules once you get outside of banks, though.  Just what most guys do.  I like private money better so I can set my own terms, but you've got to A) know people that can stroke $100k checks  and B)  Be the kind of person that people that accumulate that kinda cash will trust with that kinda cash.  They tend to be very conservative.  I do mine at 2 pts, 12%, 100% financing and they get paid back when the house sells.

In your case its going to vary a bit on your experience.  If you've never done this kinda thing before and have lousy credit, and you dont have other assets to collateralize the loan, its going to be real hard to find a lender through normal channels.  The HML guys around here I've never used, they want 20% in, 5 pts, 15% at a 65% LTV, payments along the way AND then they had the balls to ask for a credit app.

The risk of giving you the money to build is you dont build it right.  That money is GONE if you spend $80k and dont have a right angle in the place.  I've seen houses like that.  I looked at one a while back in a high dollar area that the homeowner had basically done himself, it was a teardown with probably $500k in materials wasted.  Big difference here is how many of these you've done like this before- is this an idea or well thought out business plan you've executed before?

If this is the first time doing something like this the road is going to be tough.  If the deal is right, the money is always there, and your numbers are pretty damn good here if they are accurate.  You may be looking more for a partner than a lender if this is your first time doing this, though.