The Truth About Construction Loans
Construction loans can get complicated, especially when you are searching for what truly is the lowest cost. There are many factors that go into adjusting the cost of risk a lender perceives on a project, and that insight isn’t always shared with the builder. As a general contractor or developer, it’s difficult to know what you are actually paying for, or what the cost of your construction loan really is.
As the industry continues to grow, many builders are looking to build more and more to keep up with demand. A recent study held in Austin, Texas reiterates this exact sentiment. “Nearly three-fourths of contractors surveyed say they plan to grow their businesses. However, the data also found that 44% believe they'll use cash on hand to finance these goals, but 46% say they struggle with cash flow issues to help with financing.” It’s hard to know how to tackle the lack of transparency experienced when applying for a construction loan.
Here’s an all-too-familiar story: Chris, a general contractor in Utah, and has been building for over 15 years. Chris does a lot of single-family homes and has also built a few townhomes. He builds about 25-30 homes a year, which has been his bread-and-butter for the last 5 years. Historically, Chris would seek financing by sending his project to 3 different lenders to start. He would hope the bank would say yes, but have 2 hard money lenders as a backup. More often than not, he would be stuck using one of the hard money guys because the bank would say no after 3 months of review, and he would need to get moving on the project quickly. As he puts it, “I would shoot for a bank because the rates are so good, but would never hear back quickly, thus delaying my project and revenue stream, so I was stuck using the hard money lender almost every single time.”
Every lending institution will accept different LTVs/LTCs, credit quality indicators, project types, and equity positions. Every project comes with different plans and outcomes, risks and rewards, making it very difficult to find the perfect lender for them to get their dream off the ground. So how does a builder know what they’re getting into before approaching a particular lender with their project? How does someone like Chris find a specific, specialized lender that will take on their specific, specialized project?
Chris, like many other builders, struggled finding lenders that understood his project, or how to best present himself to lenders. He has since sought the help of outside sources, like CoFi, to take a different approach by addressing these potential pitfalls for a builder. Using a consultative approach, CoFi can run any builder or developer through all the pros and cons that can be associated with construction lending. Helping builders understand the effects that equity, build history and the project proforma can have on loan cost is the CoFi way. By aligning each unique project with a lender in the CoFi Loan Marketplace, a builder can find the funding that best suit their specific projects and business goals. With the key players in place for construction loans, builders can experience a sweet taste of easy financing with full transparency throughout the preliminary phases of underwriting, understand all costs associated with each loan, and learn how to best secure funding for their future projects.