In general, will a bank finance construction of a partially completed house, especially if the owner is acting as the general contractor?
If not, what possible options might the owner be able to pursue in order to get the necessary money to complete the house?
Have any of you been in this boat? What about a GC building their own house – how do they finance the construction if they don’t have the ca$h?
Replies
I believe that you can obtain a construction loan if you have a licenced GC that is appoved by the bank. When constuction is finished you can convert it to a mortage.
Our local bank used to be fairly easy on making construction loans to owner/builders, but after getting stuck with partially completed, poorly built, badly designed white elephants, they have tightened up considerably.
one option is using a series of credit cards to play the game, if you have that kind of credit available. Another is to sell you wife and kids.
;)
How'd yopu come to be in this predicament?
I don't need to know, but the answer will tell the banker a lot, such as, "I don't know how to plan ahead" tells him that you may be unable to bring it to completion no matter how much money he helps you throw at it.
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I don't have any problem telling you .
We started the house almost three years ago, bought the land a while before that and had the well and driveway put in immediately. I arranged for a limited budget and we were going to stick to it.
What I didn't allow for is the price of materials skyrocketing during the past three years, and my assumption that I was going to do most of the work on the house. I guess it's a good thing that business has been booming in my line of work, but the downside is that it leaves me one or two nights a week and maybe an occasional Saturday or Sunday to work on the house. Can't get diddly-squat done when you put in four to ten hours a week, solo.
That sounds like a positive change of plans rather than a lack of planning so properly explained to the right banker, it could fly. Try multiple banks for th ebest deal all at once. That presents your self as shopping wisely for the cost of money but if you go from one rejection to another, the facade` is going to make for a dirty presentation.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
"Try multiple banks for the best deal all at once. That presents your self as shopping wisely for the cost of money but if you go from one rejection to another, the facade` is going to make for a dirty presentation"
Not to mention that if you shop multiple banks at once, it shows up as a single inquiry on your credit report. If you spread them over time, it shows up as multiple inquiries & your credit score will begin to drop.
As Piffin describes the partial completed house is a big flag.
Ive heard of banks saying thanks but no thanks.
Heres why;
before the banks usually take the loan they have the original documents. They nomally require tite insurance which says that property is theirs if the loan defaults. You come up asking for money to finish a house you have started and they cant track the history. Pitch it back and wait on the next customer.
I bought one such property from a man that was locked with out help. He had no choice but to sell it to an investor. He was a house mover and bought 2 houses and five lots. He moved both houses and finished one of them. The house he finished was shiddy and it would not sell retail and that went on for a year with a realator. Meanwhile he was dimeless with no paydays . He ended up on my front door step on a Sunday morning . I heard his story and he was in trouble . I showed him the door and tld him I would be in touch. I called my banker and got him up. LOL. He said we will run title insurance and clear him out. We will pay any existing bills he has from his payment from us before he gets a payment. I showed up at his front door and offered half price in cash in 30 days with the contingencies. He took it and we paid him out of trouble. He told me that every banker he knew had turned him down. I dont know why but my banker jumped on it as a good loan. I was kinda partial to it my self .
Tim
In any market there will be private money available. How available will depend on the person offering and his requirements. I've held several small mortgages for folks ranging from atrocious credit to no credit. If the LTV (loan to value) ratio is good, no problem- for me. With proper paper, my risk is minimal. Interest rate is always higher.
When you fall outside conventional guidelines, you get creative by necessity. Sometimes it costs a little more, but your project shouldn't succeed or fail according to the cost of the money.
The client house I built was financed by my land sale (cash from the buyer) and supplemented with his credit card debt. Before the card interest ate him, permanent financing was arranged. Very risky if you aren't sure of your completion schedule, but is an alternative.
A recommendation would be to tap family first. Failing that, start asking about private money. Another choice would be to bring in a GC with a track record. What's cheapest for you? Least attractive will always be selling an uncompleted project. You'd be fortunate in recovering your material cost.
PAHS Designer/Builder- Bury it!
Seems you know quite a bit more than me on this one .
Would you mind telling me what could have happened to the mover in my senario?
Tim
Well, you've got considerably more experience with institutions than I do. I've never taken out a conventional loan. We got seller land financing (97%) and paid cash for our house. What I know is from my Realtor days. One thing I'm very clear about is paper and how Va law works. I won't use conventional mortgage terms. Surprised a few closing attorneys over it.
Not sure I quite understand your question. Ignoring the first crappy house, you had a guy with an unfinished project. This would be major risk to anybody. Therefore, small sale price, as you experienced. The type of loan could easily explain the difference in lending attitude. Wasn't quite clear. You bought the house? If so, your banker was loaning you money, based on your history and the project. Nothing to do with the seller. "We will run title insurance and clear him out" doesn't make any sense to me. A title search to determine clear title is always in order for any sale.
If in fact he had a lot of equity, he should have been able to find some money to finish the project, possibly with quality strings attached, due to his first effort. Private money only requires the lender and borrower agree on terms, assuming no state laws were broken. I can ignore conventional lending practice and take my risks. My returns, including late fees, have run up to 24% over the life of the loan. Usually much smaller.
Sorry if I missed your point.
Only once did I personally deal with a guy bailing on an unfinished project. Tony moved here from Jersey expecting his adult kids to join him. They lasted exactly one summer and took off. Now here's a single guy with 3500' framed, roofed, sheathed, and living in a travel trailer on site. No loan. Didn't take him long to figure that he could never come up with the cash to buy material to finish, even if he spent the rest of his life providing all the labor. Had equity but no stomach to finish the project even if he could have found the money. Our office found a buyer who just about cashed his material and lot money out. Zero for labor. He was pretty lucky to make out that well. Bought another lot in the same subdivision and built a small house for himself. Living there happily. Don't know what he feels when he drives by his old place. Maybe he doesn't. PAHS Designer/Builder- Bury it!
around here, if you are not a license contractor that deal with housebuilding, you cannot fiance. A good friend of mine is a 22 year commerical contractor. the bank would not fiance because he did not build houses.
I'm supposing that the phrase about runing a title search to clear him out meant that the search would turn up any liens filed against the property so they could be sure to have clear title
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Yes as Piff was answering for me . I forgot sorry.
In my deal anything that showed up unclear would have to be paid from his proceeds. If he had a labor or material bill outstanding , a lien , or any jusdgement a check would be cut before he got his own check. Hence clearing the title unless there was too much to balance.
edit; oh yea. The offer and acceptance I had him sign had that listed in an addendom to said offer and was included as a contingency with my offer. That also gave the closing company permission to disperse funds if it happend after his final approval before closing . However it was clear as a bell and it walked through.
Tim
Edited 10/20/2005 4:44 pm by Mooney
Worst case scenario for me is spending a little extra to bring in a good GC.
I spent ten years working in a design capacity for a fairly large GC who did everything from minor residential additions to full custom homes, to commercial and heavy industrial construction. While we parted ways less than amicably, I still kept touch with many of the subs in the trades. What I've been trying to do is throw different subs different bones, so there's been four different excavators, and three different carpentry crews on site so far. They all understand that there may be other guys working on site, that they are responsible for a certain portion of the work and no more, and that they can do the work when their schedule permits and they have to fill in between larger jobs. So far it's worked well.
My electrician is encouraging me to place boxes, pull wires and generally do most of the grunt labor myself. The plumber wants me to run my own staple-up PEX, and is giving me boxes and boxes of pre-formed aluminum plates left over from another job. I am installing my own well tank, water heater, outdoor wood boiler and most of the radiant system.. he gets the DWV and water supply work. These guys have no problem with any of these arrangements, and their labor rate is worked out in advance. I get a contractor discount at my usual suppliers, so I buy my own preferred materials and get expert labor and advice from the subs.
I understand I may be looking at a higher interest rate. The loan being requested is about 25% of the future value of the house. I've had enough of credit cards, trhankyouverymuch. I'd rather stab myself with a fork in the eye than finance a house with a credit card.
Edited 10/20/2005 8:25 am ET by JonE
So far it's worked well.
I don't know if I like your definition of "worked well" Jon!
The big question Jon, is: Is there any equity in this project. If there is some, how much are you going to share with your creditor.
Private Money is the answer. Start with your guardian angles (close family and friends). If you're positive that you can give them a decent payoff, then perhaps they might be able to help using cash or taking an equity loan. But beware, you have to be sure of your exit strategy.
How is the market in your area?
blue
Not sure what you mean by "exit strategy"? This house is long term. My wife and I are both 35, and we would like to retire in it. I'm setting it up once, for life. Even to planning for accessible/adaptible construction (grab bars, wide doorways, lever doorknobs, etc.)
Equity depends on the person doing the appraisal. I'd be willing to share all of the equity in the home if I can get the money.
I think he means in the event that all hell breaks loose & you are unable to finish.
In any event, I'd definitely check out http://www.obls.com. They have no qualms about financing projects that are already underway.
I like credit cards with a zero interrest as long as Im backed with bank money. That makes good sense but only with a construction loan in place.
Why dont you go see a banker and see what he says? Id like to know if he will or not and if he wont what his specific reasons are. Ive only heard and never been there done that becuse Ive been advised differently. Could be a good learning experience.
Tim
I just got off the phone with the pres of my bank that I use for my commercial accounts.
He said basically the same thing but was more imformative of course<G>
Depends on the customer .
They would need a higher rate becuse its more work.
You produce every bill for every stick of materials from every vendor.
You also produce a bill from every labor item.
You must proove through an appraisor that its solid worth to the loan and they order their own man to report to them.
They work closely with the title insurance company and must "clear" any out standing debt.
If any thing comes up out of kelter they will decline .
They would need signed clearances from every one they had been paid .
So in other words they would rebuild the job completley tracking it . They would only do this for an established account that has track record but would still charge accordingly.
Tim
I understand I may be looking at a higher interest rate. The loan being requested is about 25% of the future value of the house. I've had enough of credit cards, trhankyouverymuch. I'd rather stab myself with a fork in the eye than finance a house with a credit card.
Stabbing yourself will make you even more short-sighted. There is no evil here, only a tool. You need that tool. Now, where's the cheapest place to buy that tool?
It really is that simple. Don't try to complicate it. Lose the excess baggage and it'll be clearer.PAHS Designer/Builder- Bury it!
You could say that stabbing yourself in the eye with a fork would make you short-sighted, eh?
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Haven't tried it, but it seems likely.
I peeked at Jon's profile and saw Vermont. You'd know better about the state stereotype, but I made a stab at it. <G>
As you undoubtedly know, I was only trying to say that credit is a tool. Like many, it'll cut both ways. Because you can get hurt is no good reason to avoid it, any more than your circular saw. Credit cards can be like 30 day vendor accounts, but they also have available some interesting goodies, like free or minimal interest for a time. Also can be the most expensive credit you could find. Depends on use.
I actually once knew somebody who bought a house with cards. Didn't last long before collapse like a.......... house of cards.
I better quit...PAHS Designer/Builder- Bury it!
Depends on your relationship with your banker and the bank's internal rules.
Real Estate agents talk about "location, location, location."
Bankers talk about the 3 Cs: eiether:
"Character, Character, Character"
Or
"Character, credit [history]," and, er, something else I forget
Oh, yeah, "collateral."
http://www.obls.com/
They will finance projects that are already underway.
We were in a similar situation once. We were able to get an FHA 203k rehab loan from a bank that offered those types of loans. Not all banks deal in FHA type loans.
Jon,
I was entirely and firmly ensconced in boat you described. Unless things have changed dramatically in the lending industry in the last 15 years (unlikely) , I think you will need to find financing from friends or family to finish the home with a homeowner acting as the GC. Banks are very squeamish about lending money to non-professional GC's
Good Luck
I've been building my house using cash to this point. At some point, we will likely borrow to finish up, but it's not the end of the world.
Yes, the vast majority of banks are leary about lending to owner builders, but it's all about looking. Start in the phone book & start placing phone calls from the top of the list down. First question should be: Will you finance a house being built by an owner acting as his own GC. You don't have to file an application with each one, but you can will at least have a list of banks that will do it.
Hit Google, there are several places across the nation that will finance owner builders. It's a little trickier if you have already started your project, but if your title is clear, then it's just a minor hitch for most of these lenders.
Another option that I've been exploring in the event that the DW's patience with our temp trailor runs out before completion is a land loan. If you only need a small amount to finish this could be a viable option. One loan officer at a local bank told me that their land loans are 3 year loans w/ payments amortized over 15 years & a lump sum at the end of 3. The only issue is that the will only finance up to 50% of the appraised value of the land & that the land will likely appraise for less with a partially finished house on it. However, if you don't need much to finish up, something like that would work.
Definitely look into Owner Builder Loan Service (the site I posted earlier in this thread). I've had many conversations with them (even talked to the president of the company) and they have no problem with financing owner builders who have already begun construction. Also let your fingers do the walking - go from A-Z in the yellow pages & ask every institution in your area.
I haven't seen credit unions mentioned yet. Although I haven't approached them with an owner/builder construction loan they do have a reputation for being willing to undertake financing for their members that commercial banks will not approve. It seems that membership restrictions have been relaxed lately and one may be able to join a C.U. now even though they couldn't in the past. As an aside I haven't had my credit union ever hold a check. Anything I deposit, even in an ATM, is available immediately.
Edited 10/21/2005 12:36 pm by Renoun