Why Aren't More Investors Using Construction to Permanent Financing?

[Stuart Udis]

Someone recently reached out asking for advice on how to proceed with the purchase and renovation of a property. This particular investor was interested in using the BRRRR method to build a portfolio of single family homes in a lower price point market (ARV of $100,000). More specifically this investor, who had $120,000 cash on hand wanted my opinion on whether he should fund the acquisition and renovation and complete one home at a time or use financing for the acquisition and renovation and by his estimation complete up to three properties at a time (with reasonable reserves) then refinance the properties upon completion to complete the BRRRR process. It's important to note this particular investor had a construction background and intended to self -perform the construction. I asked why not use a construction to permanent loan and avoid the redundant transactional fees of multiple loan originations, title policies, recording fees, appraisals not to mention investment of time. He seemed stumped despite acknowledging banks often offer construction to permanent financing of 75% LTC up to 75% LTV (In some instances even 80% LTC up to 75% LTV, although many banks adjusted their criteria due to market uncertainty). Given many lenders are willing to fund soft costs such as construction management/development fees and items such as leasing fees, and incorporate contingency line items up to 10% (even if you don't believe that's necessary) if a combination of these were theoretically incorporated into the project pro-forma that's utilized by the bank, the project costs might appear inflated and require slightly more cash up front. However, upon completion, the return of capital can be or nearly be returned upon final bank release and once you factor in the transactional savings of not incurring the redundant transactional costs associated with paying off and originating a new loan, there are even greater savings & can mirror a BRRRR refinance. Given most BRRRR properties contemplated in these forums involve properties with similar pricing attributes, why aren't more investors taking advantage of the 75% LTV component of construction to permanent loans if Lenders are offering it? Especially in this price point where the pro-forma budget can easily be inflated within a lender's guidelines.