Transcription
They're going to pay me out that $27,500 once I complete that scope of work.
Many people think that it is extremely difficult to get funding for their first new construction home build project. To be honest, I did as well, until I started getting funding for my project. Getting your first ground-up deal funded really only boils down to four things that you must know, understand, and execute on so you can start getting your deals funded.
The fact is, lenders must lend their money so they can make more money, which means that they are consistently and actively looking for good deals. Simply put, if the lender does not find a good deal, they are not lending their money, which ultimately means they are not making any money. However, the key word here is "good." They must find good deals to lend on. Imagine how often lenders are approached by potential investors who, in reality, do not have a good deal, let alone a deal at all.
Here are the four things that you must do to get your first new construction deal funded. You're going to want to write these down.
Number one: Have a deal ready to evaluate with the lender. Again, we want to show lenders that we are 100% serious and we are going to be financially responsible with their money. So, by approaching them with a deal that you've already structured, they will know that you are extremely serious and that you have done your due diligence. So, let's let's take a look at a deal that I recently came across and we can evaluate together whether or not I'm ready to take this deal to a lender.
So, when I'm evaluating a new deal, um, I instantly go to Zillow because it's pretty easy to use and it has the majority of the information that I'm going to need to start with. So, here I have the lot pulled up. It's in Richmond, Virginia. They have a few images of the lot, and I'm pretty familiar with this area because I concentrate in, you know, our Central Richmond Metro Area. They also have the zoning already in here, and they have it zoned as R5. Now, if I didn't know what the zoning actually was, I could pretty easily find it out on the Richmond GIS or through the county records, and I would easily see that it is actually R5.
And looking through here, all I have now is the actual information on the purchase price or the actual listing price, the zoning, the location. And to be honest, this is not enough just to approach a lender and say, "Hey, what can you do for me on this?" I've done some information. And also considering the fact that I know the utilities in this area, there's water and sewer at the street. Electrical is not too far away, it's also at the street. So, while that is good, I'm not 100% ready to approach a lender with this information. We should have already done our research at this point in time. And to make sure we're not wasting our time or the lender's time in approaching them, we want to go ahead and research what that property is, where it's located. Do we already have a property identified? Have we purchased that property with our own cash already before even approaching that lender?
Now, it is not a requirement that we purchase that property already because some lenders, or most lenders, will actually lend you money for the purchase as well as the construction. But having this information is crucial when approaching a lender with a potential deal. Other things we want to consider is what do we intend to do with the property? For example, a deal for a residential complex such as a single-family, duplex, triplex, quadplex, or the sorts, is a significantly different deal than looking at an apartment building where we may have 15, 20, or even more units. So, understanding what you can do with those. Have you done the research to understand what the zone is? What is allowed to be built in that area? What the utilities are? Are the utilities at the street, or do you have to bring them down the road? What type of utilities do you have? Public sewer, or do you have a septic system?
You must also know your timeline for completion. We have all heard the phrase, "Time is money." And of course, when you are dealing with other people's money, specifically lenders, banks, or even other investors, time is money. So, how long will you need to borrow their money for your project? What is your exit strategy? So, are you planning on buying this land, building it, or developing it to then rent it, or do you plan on just selling it and walking away with the cash? This is also important to the lender and how you evaluate this deal and what your strategy is overall.
The best-case scenario for a lender, as well as yourself as the investor, is already being shovel-ready when you approach that lender. What do we mean by shovel-ready? So, shovel-ready means you have already purchased the land with your own capital. You've already gotten your permits, your blueprints, whatever engineering inspections or reports that you need, and now you are just waiting on money from a lender to start breaking ground on your project. Having a shovel-ready lot gives a lender significant confidence in your project and you as well, that you know what you're doing, you're ready to go, you're not going to be wasting their time, and you're going to execute based off the agreed terms that you all have set in place.
So, now that we understand that we need to have a deal ready to evaluate with the lender, the second thing that we need to do is have our numbers and know our numbers. Our focus is making sure that we appear very serious to the lender that we want to work with, and that we have a deal that will be beneficial for them as well as us, of course.
So, here I have the spreadsheet open for a project that I'm currently working on, and this page of the spreadsheet is specifically what I sent to my lender. So, here, as you see, I have all of my costs laid out that my lender is going to want to see. I have my electrical, water, and utility fees, um, all of my site prep work is a separate bucket, um, structural, my different trades, my finishes, and exterior work. And the reason this is important is because the lender, if they approve your loan, this is how they're going to pay you out. So, if we look at our frame cost, once my framing is done, and this includes my roof trusses as well, part of the framing, they're going to pay me out that $27,500 once I complete that scope of work. If we want another example, we can look here at my electrical. So, my electrical cost for this project was $10,000, and that includes my rough-in as well as my trim-out. However, I know that my lender specifically pays 65% on the rough-in after rough-in is completed, and then the final 35% after trim-out is completed. So, to make it easier for my lender when I'm approaching them, I go ahead and separate out these separate out these two costs.
When it comes down to knowing and understanding your numbers, that is solely dependent on what your exit strategy is. So, for example, if your goal is to build to rent using the build-to-rent model, those numbers look slightly different than what a build-to-sell model is. Now, depending on your model, the pathways look different. However, what is always important, no matter which path you decide to choose, is what your ARV is. And that stands for After Repair Value. And in our case, our after-repair value is going to be what the actual value is from an appraiser based off the structure we have built, the finishes we have installed inside of that, as well as the location of that property.
So, for my project specifically, when I approached my lender, I had already purchased the vacant land, and it was already shovel-ready, meaning I had all my permits in place, I had already did my engineer testing, and I was ready to go. The only thing I needed was a loan commitment from the lender, so I knew when I got started with this project, the money would be available for me to build. Since working with that lender on my first new construction build, I work with them multiple times since then. And the reason is because we've developed a great working relationship and understand what each other needs from one another, which leads to my next point.
Point number three: You want to shop around for the lender who will best suit your needs. Different lenders that you reach out to will have different requirements for how you get funded for your loan or if you can get funding. So, for example, these requirements may be the amount of cash that you need to bring to the deal, what your terms look like, do they require you to have your personal credit on there, or do they lend based on the asset? How many years of experience or previous builds do you need to have completed prior to getting funded? And all of these aspects are important when deciding what lenders to work with.
So, let's dive into that a little bit more. So, some lenders that you reach out to are going to require experience. And what I've heard as the standard is, some lenders want at least three builds completed in the past 24 months or two years to know that you have the expertise and the knowledge to actually complete this build. The other thing that I've seen in many lenders is the credit requirement. So, some of them require a 680 or 700 credit score, while others actually will lend on the asset, meaning they use the asset as collateral rather than verifying your own credit or your financial history. This is also important because some of them require that you bring cash to the table. They will not lend 100% on this build because they want you to have some personal equity invested. However, different lenders will have different percentages that they will lend upon, and most of it is either based off the total ARV or the actual build cost for your project.
When I approached lenders for my first new construction home build project, I was actually declined by seven out of the nine lenders that I reached out to. And the primary reason was because I did not have the verifiable experience to give them confidence that I knew what I was doing. Now, granted, I already owned a construction company. I had done countless renovations for other investors. I had done additions and different projects for homeowners as well. However, they did not have the confidence that I could actually do it and I knew what I was doing because of their three-build within two-years timeframe requirement that they had in place. So, out of the nine, the two lenders who actually gave me an approval and a loan commitment, I had to then evaluate which of the two would be the best option for me to go with. And the first one, while their interest rate was a little bit more favorable, I had to consider all of the factors involved. And one of the things that deterred me from working with that lender was the fact that their timeline for approval or final loan commitment was significantly more than the other lender I had reached out to, as well as their timeline to get a draw or a payment or disbursement from the actual money was significantly longer. And the reason this is important is because when you are doing a build, you want to be as efficient and quick as possible. And so, if I complete one stage, I submit a draw request, and it takes three weeks to get that money, that can potentially delay me if I don't have the cash to continue on through the next phases while I'm waiting for that money for the previous phase.
So, now that you've worked to provide the lender with all of the documentation they need, and you have now been approved and received your loan commitment, this leads to step four, and the final and most important step: Be ready and prepared to fully execute on this project. This is your very first new construction home build project. Prior to closing on the loan, you want to make sure that your project timeline is solidified. You've already reached out to your subcontractors and let them know when work can begin. You want to make sure that all of your eyes are dotted, all of your T's are crossed, so that you can execute as efficiently as possible. Remember, time is money when you are working with lenders, and most interest payments start at day zero. Meaning, as soon as you close on that loan, you have your first interest payment, as well as day zero, you start having deferred interest or daily points, especially if you're working with a hard money lender. You do not want to have any delays. And of course, while some of them aren't avoidable, you just want to make sure that you are scheduling and maintaining or managing that project as efficiently as possible.
So, here I have my project schedule actually up for the home that I'm currently working on. And as you see, I have every scope of work or every task item outlined. And while I don't actually have it on here, I'm even factoring in inspections. So, for example, lot clearing and prep work, I have seven days, and I have it highlighted because that is a tentative day, um, or tentative duration, but I'm also factoring in this seven days when I'm going to have my inspections for my silt fence or drain tile or whatever else needs to be installed. Um, my roof trusses, I know I can estimate about 14 days because I worked with this vendor before, and usually they deliver above, um, before then.
Most importantly, you want to focus on delivering a completed project within the timeline that you agreed upon. This very first project will be the start of your new construction build resume, and each project after that makes it easier and easier to get funding because lenders can see that you have that experience, you've done it before, you know what you're doing, and they know what they can expect from you. So, by delivering what you said you would, it just establishes your rapport and gives you a great working relationship with your lender.
So, let's recap the four things that you need to do to get your first new construction home deal funded:
Number one: Have a deal ready to evaluate and let lenders know you are serious.
Number two: Do your research, know your numbers, and have your numbers ready to present in an easy way for a lender to understand.
Number three: Shop around to find a lender who best suits your needs based off of all the factors involved in this project.
And number four, and the most important: Deliver what you said you're going to deliver and be fully prepared to execute.
I hope you guys enjoyed this video. Don't forget to subscribe and hit that notification bell so you can see my upcoming video about how I make all of my budgets for my projects and get actual numbers for my subcontractors. See you guys soon.