Construction Loans? Good?

[Fred Canzano]

Is a construction loan a good way to go for a flip?

I believe it will take approximately 7 months for the work to be completed. Its my first flip and I'm being brought in as a partner to a guy who has everything lined up. Has the property and subcontractors that he uses on other projects ready to go once the property is acquired. My end is the financing and we will split the profits 50/50. Its hands off other than checking in on the project. 

Next- I am getting my LLC going, prior to the start of the project. Its a brand new LLC so there is no credit built up yet. When/If I do a construction loan, is it through the LLC or just me as a borrower?

I know the obvious answers,(go talk to a lawyer or lending company)but, it's 6:30 on Saturday night and none of these people are available. I figured I would get a jump on Monday's work by posting here ahead of time. 

Thank you in advance.

[Dean I.]

Construction loans in my experience is pretty eas6 and have way more favorable terms than hard money. Construction loans typically cover 75% to 90% of cost, meaning they typically cover 75% to 90% of the purchase of the home and the renovations. You'll typically pay through remaining percentage of the home purchase at closing and then you will be able to get draws from the bank for three renovations as work is complate. You may have to send pictures and invoices to get draws, but that's pretty easy. Some will require an inspection. From the hard money lenders I have spoke to, they pretty mucheap have the same process. The main difference is that hard money will generally close in 10 to 14 days, but charge a lot more in points and interest. Construction loans on the other hand close in 21 to 45 days (depending on the lender) but charges less points and interest. Both lending options are interested only payments for 6 to 12 months.

I do all my flips with construction loans and it's pretty easy. I also know of plenty of other flippers who do the same.

As for your credit and length of time in business, that will be the hard part with a construction loan. First, in order to get a construction loan for the purpose of flipping houses, you will more than likely have to go to the small local banks. Theyou have more of an "appetite" for this kind of loan. But even then, it may be hard to find a bank that will fund your first flip. Many of these Banks want you to have some flips under your belt and even be in business flipping houses for a year or two before they will give you a constructionew loan. Keep looking though, if you have good credit and a good income, you can probably find a local bank (even if it is a couple hours from you) that will fund your first flip. After your first 2 successful flips and or after your first year of flipping, it will be easier getting approved. Also, you will need to do this in an LLC, which is easy enough. You will want to elect it to be tax as an S Corp.

Finally, don't just call the banks. I had a few Banks tell me over the phone that they don't fund flips or do construction loans over the phone (because they don't want to advertise it), but when you go in and speak to a banker, they tell you a different story. For some banks, this is only available for existing customers, do it might be worth opening up some checking accounts and credit lines, in order to meet that requirement.

Hope that helps.