Does hardmoney lender ask for building permit for spec home before you own the land?

Question

We are in the process of finding  a HM lender to finance  a lot and spec build.We have a lot that we want to purchase and already have the plans and have built this house numerous times already.One lender is asking to have a permit issued before they move forward. We have always got the permit after we own the land not before we own it.Is thishow it is usually done with HM lenders ? If it is im not even sure a city will allow you to get a building permit on someone elses land.

Jared Rine · Answer

@Marcus Clouse..I'm not an expert in your market but do a good amount of construction lending.  Throwing my 2 cents in here.  I agree with you.  Having permit before owning the land if it's raw dirt is a weird request. Usually in these types of structures from what I've seen there is a draw for the land for say ~50%, and then you get to permit (which sometimes there can be a catch up draw to the LTC for the funds you've put in), and then you can start drawing for vertical.  It's way less cost if you can figure out the land + permit and just go to a lender once you're ready to build.

Marcus Clouse · Answer

I have built around  20 homes in the past 2 years all with the exact home plan and  I been doing spec and custom homes my entire life. I was trying to put the land and construction costs into one loan package.

Caroline Gerardo · Answer

Usually a Land Loan is 50% of what exists- and you need a verbal nod from planning that septic, curbs, gutters, utilities, especially water, and the size of what you plan fits the neighborhood or general plan.

A construction loan on land is a different thing. You want to put the two loans together which is the reason why the permit on land you don't own is a hiccup. Hard money lender is not going to give you one lump sum cash to be free to spend. Any construction lender is going to dole out cash as you progress.

To combine the two into a land purchase and construction loan you need to demonstrate on paper exactly what you plan to build and that the planning desk allows this without a conditional use permit/hearings/delays/neighbor complaints tying you up to wait 24 months to start. Hard money construction loan they do not want to foreclose and finish a project.

So how do you show them?

List of closed deals, time frame to complete, costs of the deals of the past. Skills, tools, subs, muscle you have to complete fast on paper.

Architectural plans with elevations.

Plat map, drawing where house goes, title report, gas lines, cost breakdowns, temporary power...

Reports of existing utilities.

Notes on conversation with planning desk on time frame.

Combining the two loan types can be done, you need to be a great secretarial story teller on paper.

Jacob Sherman · Answer

If purchasing the land will not require the permit to close but will require plans

If refinancing on land that is already owned will require the permit

Marcus Clouse · Answer

Yes I think I can get a permit either way , this is just my first hard money loan so im just trying to make sense of the process. Seems logical to have permit in hand though from a lender perspective .

Stuart Udis · Answer

@Marcus Clouse Most lenders want the building permit issued to fund a loan for vertical improvements. Are you able to secure the building permit while under contract in the current owners name and then have the permit transferred after the settlement takes place? Perhaps this would make the lender more comfortable while giving you the benefit of settling with a shovel ready lot.

Doug Smith · Answer

I do a lot of ground-up spec construction for investors. We usually like to see the land purchased and the permits in hand before we fund the construction phase, but the amount spent on the land and other soft costs go towards the down payment. Here's another key...we usually want to see that someone has done similar projects in the past...or at least projects of progressively increasing complexity.

Marcus Clouse · Answer

I mean its easy to get a building permit in small towns in texas , but never encountered this before owning the land.I own several lots in this particular town but they are not issuing any new water meters until their new water well goes online which wont be until January. But if you find a lot that has an existing meter you can get a permit and build , im not sure they will give a permit to someone who doesnt own the land , just doesnt make ant sense to me.

Erik Estrada · Answer

It depends on the hard money lender. It is still possible to get financing without permits, however the lender will reduce the leverage without it

Dave Kush · Answer

I agree, you can't usually get a permit for anything until you own. Is it a really extensive change that they want to verify is possible?

For example:

to replace a roof you usually need permit. Hml should not require that in advance.

instead, if building new, reconfiguring, etc, something a municipality might not go far, they are perhaps looking for now security before purchasing.

which of these sounds like what you've encountered?

Does hardmoney lender ask for building permit for spec home before you own the land?

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