Is what this bank told me true?

Question

Hello,

In a few years I want to build a triplex and live in one of the units for a few years. It would be my very first home. In my town there's no triplex units for sale and the people who own them won't be selling them in a few years. There's no reason too. What I'd like to do is build new. I emailed a bank just asking some information about the process because what I'm working on now is a business plan. I'm trying to read and learn as much as I can over the next few years as well as save up a lot of money. This is what the bank replied with when I asked about a first time home buyer wanting to build a triplex.

I also asked if it would be possible I do 80% of the work since I worked for a big construction company for 5 years and my dad has built a few houses in his day. Between the both of us we could it taken care of.

I know this is just one bank. But what I'm trying to find out is this the type of response I'll get from all banks? Does anyone have any advice? Suggestions?

Here is the banks reply,

"Hello there, I do have new construction programs rolling out at the end of this month, however, these are only for single family dwellings so they wouldn’t allow you to build the type of triplex or fourplex that you are looking for, I think you would have this problem with any bank.  All of the programs that allow you to build those type of properties are commercial and require a big down payment along with a lot of money in reserves.  The other problem is that it is going to be hard to find anyone that will loan you the money to do the work yourself.  As I said, I can do a single family dwelling new construction loan, but all of the work has to be contracted out, and they do not let you complete any of the major work yourself.  Sorry for the bad news and please let me know if you have any questions, thank you

Mortgage Loan Originator"

Mike Wood · Answer

@John Burtle While I think you can easily find smaller local banks that will do construction loans on new construction 2-4 unit houses, some of the items that you want are likely impossible.

I build duplex houses for long term rentals. I use a local bank for the construction loans.  Most of the banks that I spoke with only did construction loans on SFH.  Of the ones that did construction loans on 2-4 unit houses, every one requires a general contractor.  They want to general contractor to protect their interest. That is not to say you can not do some of the work, but the majority of the work must be with a GC.

Now for the part that will likely be your biggest problem, based on what I understand you said, every bank will required at least 20% of the costs as a down payment.  If you owned the land, you could use that, otherwise its cash.  Some of the banks I have spoke with wanted 25% of the costs.  This is based on the cost of the project, not the value (when you are finished and convert the loan to permanent finance, it will be based on appraised value).

For me, I buy the land with cash.  Develop the building plans and get my GC onboard with costs.  I then take that package to the bank, and they do their work (appraisals, credit checks, etc) and I go to loan closing with any required cash in addition to the land cost.

As I said, you can work out something with your GC so that you do some of the work.  This will reduce your downpayment amount, as it will reduce your costs.  But I doubt that any bank will be OK with you stating that the construction is going to cost $25/ft2 (due to all of your work being free) when typically costs are in the $100/ft2.  They will see thru that.  I personally do AV wiring, interior painting, tiling and flooring.  This reduces my cost and allows me to build more instant equity.

One last thing.  Make sure that the area you want to build can support the costs of new construction.  Around me, I have to be picky about where I build, as lots of areas can not support the cost of new construction (i.e. the appraised value would be less than the total costs).

Jacob Sampson · Answer

You may need to find a money partner.  People like to talk about this business like it doesn't require money and there are people that get wealthy that way but there are also people that win the lottery.  It doesn't mean it's the best plan to build wealth.  Look at your bankroll as a gauge of your preparedness to get into this game.  Then have fun getting more prepared!

Jeremy Pace · Answer

@John Burtle

is this a giant national bank, or a community bank, or a credit union?

Everything that bank is telling you is true about their bank.  There's no universal lending rules, so it's unlikely that every single bank would treat you the same way.

Some of the things to consider ... you will likely require considerable cash reserves to get any bank, of any scale, excited about loaning you the money.  New construction can present a real risk for a bank, because if you don't complete, they don't even have an asset to take from you.

Gene Hacker · Answer

I suggest that you approach a few small local banks.  They can have a bit more flexibility compared to the large nation wide banks/lenders.

John Burtle · Answer

Thanks again for all of the replies. I am going to continue to do research and spend a lot of time on here reading posts.

Does anyone have any book suggestions in regards to real estate?

I downloaded the free book from biggerpockets and I'll begin reading it tonight.

Franklin Romine · Answer

Talk to one bank you get 1 answer, talk to 10 banks and you get 100 answers.  Keep pealing the onion with lenders and you will get your capital.

Joe Splitrock · Answer

@John Burtleyou will find different banks have different rules and different things they specialize in. You can check around, but finding a bank that will finance your first building project on a triplex with you doing the contracting and most of the work, will probably be difficult to find. You have no track record. It would be less risky for the bank if an established construction company was doing the project. They are going to want at least 20% down and your sweat equity isn't a down payment. Your income will be a factor too. To lessen their risk, they will want to see income and cash reserves to show you can make the payment until you get it rented. For more conventional financing, my lender wants to see me have 6 months of payments in the bank for a ready-to-rent property.

Your best bet is to have cash saved up and find a small bank that is willing to take a chance on you starting out. Local banks may take into account the shortage of multi-family and may see less risk in you getting it rented. They are taking a chance because you have no track record, so they will want skin in the game (cash down). Talk to a bunch of banks and you will start to get a feel for what they will require. One bank is not enough to know for sure.

John Burtle · Answer

thanks for all of the replies.

Diamond residential mortgage is who I had contacted.

For new constriction most banks require 20% cash down, correct?

John Burtle · Answer

Construction***

Thanks for the reply. It's starting to sound like what I want to do won't be possible then.

Jacob Sampson · Answer

They will likely want more than 20%.  Banks want 20% when there is an actual asset backing the loan.

Is what this bank told me true?

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