Best loan approach in suddenly-expensive Arizona market? Hard $?

Question

Hi everyone. Glad to have found this place and hoping to obtain the correct information for some creative approaches to my project!  The quick-changing Arizona market has thrown a rock in the tracks of my project and I need help

Background: I’ve owned a rental property for 7 years which I sold to pursue this project.  I design custom homes for a living.

About my project: I own the land outright and it’s valued at about $150,000. The blueprints are finished and ready to go. The intention of the home is that half of it is to be used as a live+work environment for myself, and the other half as a vacation rental. I’m going to have the foundation, doors, windows, roofing, exterior sheathing, rough in plumbing and electric, done by a contractor. I am going to complete the interior finish work as owner/builder.

I’m not sure how to obtain funding, or rather, what the best way is.  Construction loan is out of the question as they don’t like owner/builder scenarios.

Originally I was thinking private lender (I’ve spoke to some in the past and they were ok with me doing the work myself) but with construction and home costs skyrocketing in Arizona I’m not sure I can afford to do it this way anymore.

So I wonder if there are better options out there? Like, could I go the hard money route and use my land asset as collateral?

I’m willing to make whatever adjustment(s) necessary to pull this off. Meaning, if I have to turn it into a full rental property, I can do that. I’m willing to also find an investor who can help finance the build and who would then share in rental profits but I’m not even sure if that’s viable or how to go about finding such a person.

I’m opened to anything. Just need some creative input!

Kevin Romines · Answer

Hard money is specifically non-owner occupied only.

That said, you can go that route so long as you agree and most likely will sign a doc saying it will only be Non-Owner Occupied. A private loan can be done to either scenario. I'm not sure why you would consider abandoning a private loan for this scenario unless their terms weren't favorable? Most hard money that I broker will do 80-90% LTC or loan to cost with a max of 75% ARV or After Repair Value. So yes, you have equity in the land and that is perfect, but you need to know what the final value will be to determine what your final ARV will be?

That said, the hard money loan is workable and one of the best ways to do some of the work yourself.

I hope this helps?

Ryan Normand · Answer

Apologies for the confusion.

No, I never got the loan. I had several conversations with a branch manager. Because I'm recently self-employed, I wasn't able to get pre-approved for a loan large enough to do anything useful with. The conversations ended at that point.

Again, if I had gotten further in the process, the owner-builder issue might have come up... or it might not have. The point I was trying to make was that, for anyone else in a similar situation who may be reading this in the future, I wouldn't completely rule out conventional construction loans. I've heard a couple anecdotes about owner-builders getting them, so I don't think it's impossible.

Regarding my original comment - I think it's fine for a GC to manage the whole build. I also think it's fine for an owner-builder to manage the whole build (assuming they have some construction experience). Where I think it starts to get dicey is having a GC manage one phase and then an owner-builder manage the next. The risk comes from transitioning this responsibility half-way through the construction process. It increases the opportunities for things falling through the cracks or finger-pointing if something goes wrong.

You can mitigate some of this risk, but you will need to be very specific about where roles and responsibilities start and end, and get a very clear scope of work in a written contract. This protects both you and the GC.

Hope this provides some clarification.

Ryan Normand · Answer

That's one way to do it. It's not uncommon for customers to ask a GC for ad hoc recommendations on plumbers,  electricians,  etc. Offering to pay them for a list of all their subs is kind of an unusual ask, so you might get some confused looks if you ask for a bunch of subs at once.

A word of caution about this approach: If you already have a strong relationship with a GC who you've used in the past, then use this approach in moderation. If they start to feel like you're just using them for their network,  then they might not want to do work for you in the future.

If this doesn't work for any reason, just remember most subs have their own companies, independent of the GCs they work for, so you can also find them on Google, yelp, Craigslist, Facebook, etc., etc.. You could even go to the pro desk at your local hardware store and ask if they know a guy who does X.

Parker Kenneth · Answer

@Ryan Normandthank you, that clears it up. Would you say a better approach may be to find a GC and pay them to use their sub connections? That way I’m managing it as owner/builder and I hire the subs for just the work I need completed?

Parker Kenneth · Answer

@Ryan Normand

can you clear something up for me. I think I may have misunderstood something earlier.

Are you saying you were literally able to pull a construction loan as owner/builder? I guess my question is why would they allow that? It seems to conflict with your initial comment about needing a gc to do it otherwise it’s too risky for banks.

But yes, I was personally unable to locate a traditional construction loan which allowed someone other than a gc to go through with it

Also, since I think I need a no doc approach now, I guess that’s likely off the table

Wondering if you, or anyone else reading, has any further ideas as far as getting a no doc mortgage which I may need (?). Because of the equity in my land and the fact the final build will be worth $600-$700k the hard money lenders don’t seem to take issue financing it… but what about securing a mortgage in order to pay back the lender after the home is built?

Ryan Normand · Answer

@Parker Kenneth

Glad to hear you were able to find a lender and it all worked out in the end.

It's interesting that the lenders were pushing back on you for being owner-builder. Earlier this year, before I had my license, I reached out to a lender about getting a construction loan. They never asked me for an ROC number and never expressed concern about me being the owner-builder. I decided to not to pursue that project for other reasons, so maybe that issue would've come up later in the process, but it didn't seem to be a major concern for that lender as far as I could tell.

Parker Kenneth · Answer

@Ryan Normand

to your question about splitting things between myself and a gc. Because a big part of the pleasure, and reason, of this project for me is doing the interior on my own as I’m amazing at it. And secondly, if people hire me to design their homes and make it pretty - why would I contract this out to someone else to do my job for me? When they’ll likely do worse than what I pump out.

Not even sure I want to work with a gc. I’m leaning towards pulling the permit as owner/builder.

So that’s why a construction loan won’t work. You understand how they function and they’re not applicable to my situation. But as you also mentioned, yes that would otherwise have been the most streamlined and easiest way.  I’ve since found a hard money lender who will lend to an owner/occupied unit under owner/builder permit which is great. I’m thinking this is going to be the route I take. I’ve no problem paying a lender or investor a premium for letting me borrow their money. My main goal is being able to just get the shell built by someone else and finish out the interior on my own

thanks for sharing your insight!

Ryan Normand · Answer

What's the motivation behind splitting up construction responsibilities between you and a GC? It may save you a little money, but it adds a lot of risk for the lender and the contractor, which is why most won't want to get involved in a project like this. I'm a contractor, so I can't speak for the lender, but here are the two biggest risks I would be worried about:

1) Owner/builder doesn't follow through with completing the project, so the loan doesn't close and contractor doesn't get paid for tens of thousands of dollars worth of work.

2) The owner/builder inadvertently messes up the contractors work while finishing the project, potentially creating a safety hazard of causing the house to fail final inspection. The contractor's name is on the permit so they could get sued or lose their license.

Remember... if the project is riskier... the bids will usually be higher. So you may end up cancelling out a lot of your cost savings by introducing more risk and complexity.

I may be biased, but you may want to consider expanding the scope of work for the contractor so it's just enough to get the house past final inspection. This should make getting a construction loan much easier. If you're handy, you can ask the contractor to bid for very basic interior finishes (enough to get your certificate of occupancy) and then you can DIY a lot of cosmetic upgrades later on (things like painting, adding backsplashes, flooring upgrades, putting in nicer fixtures, etc.). A lot of these interior cosmetic upgrades can be DIY'd without a permit (check your local codes), and they shouldn't have an impact on when the construction loan closes.

Bottom line - I recommend doing a basic cost analysis to see how much more you'd have to spend to have the contractor get the project through final inspection. I'm sure there are other creative financing options out there, but a construction loan seems like the most simple and reliable. If you can find a way to modify the scope of work so you can qualify while still staying in your budget, then you'd be good to go.

Parker Kenneth · Answer

@Kevin Romines

It was helpful, thank you!

I wasn’t aware hard money was strictly for investment properties. Maybe I’ll use the equity in my land to invest in a property if this doesn’t work out for me.

The thing is, when Covid hit I went and lived out of country for awhile so my Income trail looks limited. This, coupled with the rising market in Arizona is working against me as far as conventional loans go.

So I thought a loan that didn’t require proof of income would work temporarily. That’s why I was thinking hard money, as they’d use my assets b lender mortgage would be a great option for me as well, but I’m unsure if that’s strictly a type of mortgage in Canada. Is there a USA equivalent? essentially I’m at the point where I feel I need a construction bid for the work I want done, a pre approval from a mortgage company … then a private lender (?) to fund the actual project for a yearjust not sure the exact steps or the best route I need to take

Anyone have any further ideas or know how?

Andrew Postell · Answer

@Parker Kenneth this one is complicated.  I am not sure of any lender that would be ok with what you are describing....you are essentially describing a mixed use property....and you want to be one of the contractors on the site?  I mean, if you are an experienced contractor with your own insurance, references, etc. then that is usually ok by itself.  So if you are willing to make adjustments to make this be a single family home that will be rental and you are an experienced contractor - then you should be able to get a construction loan on that type of a property.

I would encourage you to go attend some of the local real estate investor groups in your area to see who some good lending sources are.  Usually it's the local, small banks that you want to go through this for and local investors usually know who the best ones are.  Good luck!

Best loan approach in suddenly-expensive Arizona market? Hard $?

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