Transcription
Construction loans and once again, construction. For not construction, like you, you're going to build an apartment building. Like this is if you buy a plot of land, correct? And you just want to build your house, as opposed to building a house, buying a house that's already built, correct? So, you know, typically, like you said, you buy, you get a piece of land, and now you need funding for it. So there's two ways you can go about it if you're the consumer, if you're the home buyer. You can buy the land on cash, which I would recommend. Um, whether it's cash or you use a credit card, whatever means you find to buy that piece of land, because I feel like this is the easiest way to do a construction loan. Um, and then now you go to the bank to get, um, a construction, a permanent loan, where now that construction permanent loan is basically treated like a refinance. Now, because since you already own the property, and so there's no rush, right, to get your plans and your permits and things of that nature. Because with most construction loans, when you're talking primary residences, which this conversation is about, the bank is only going to give you a construction time of nine to twelve months. So we all know permits can take six months. So if you do a one-time closed construction loan, which is you're buying the land and trying to get the construction loan simultaneously, and you're using the bank for the financing of the land as well, that's when I see problems arise. Because you're not technically the owner of that property, so you can't go out and submit architectural plans to the town that you're buying the property in until after you close, because you technically don't own the property, unless the seller of the property is willing to submit the plans on your behalf, which in most cases, they're not going to do that, right? So it's much easier for you to acquire the land on your own, then use the bank for the construction loan to build your home. And the reason being again is because architectural plans can take, depending on the scope of your work, that can take two to four months, depending on how busy your architect is and how efficient they are. And when you get plans, you're going to go back and forth to adjust things of that nature. So if you're doing a one-time close to construction, that means you're in contract and you have a time clock already to close with the seller, right? They don't want to sit there and wait four or five months for you to get your plans together before you close. So again, that can cause a delay and it can cause some strain between you and the seller. Now, if you got an architect who's on it, they can get you plans in 30 days, cool. You can do the one-time close. But again, another con of that is after closing, now you have to submit those plans to the town to get approval. And depending on the county, which, um, it's hit or miss, right? You just hit a mess for plans. I mean, New York is kind of like, I don't want to say nothing negative because, you know, but it kind of, it kind of gets to the best of interest. Yeah, it gets kind of, it gets kind of crazy and it could be a lengthy process. So now, if you're in a time clock to build and the lender's only giving you nine to twelve months, and some lenders will give you an extension of an extra two to three months on top of that, you've done wasted half of your time just waiting on the plans to get approved by the town. So my recommendation for construction loans and anyone who's looking to build their first home or their dream home, acquire the land first. Acquire the land first. Have a, a dope ass architect who understands the urgency of what you're looking to do. Get your plans and everything drawn up because you already have the home now, or the land. So you don't have to rush. And now, once you have your plan submitted, then apply for your construction loan because now it's more like a refinance. There's no time clock, there's no sellers. You can take four months to close, it doesn't matter. And once your plans get approved, then close on your construction loan, then boom, you can start your, your construction pretty much immediately.
Yeah, so let's talk about the, the other way when you have a lender that will do both, give you construction, the construction loan for building it, and then, uh, actually having the house built itself, right? So there's two pieces. You're paying for both. I think the misconception, this is something we kind of learned through the process, like you get that time frame to build and then, you know, you do that with your building. They'll say it's between six to twelve months, we can get this house built, correct? Right. But yeah, at the mercy of the town, correct? Right. Because, and the builder, and the engineers, correct? And the architects, correct? Um, what's your paying for a house that you may not even live in, right? Because sometimes the building process may take sixteen months. Absolutely. And so, like, for a year, you might be paying interest. But after that twelve months, now you're, you're going to be paying that full loan. So, yeah, talk about that and the importance of having residual income in situations like this.
Yeah, so when you get a construction loan, first, it's an interest, during the construction period, it's interest-only payments. So, like you say, you're going to be paying a mortgage payment, you have to pay your property taxes, you have to pay, um, your homeowners insurance and builder's insurance. You're going to need builder's insurance as well to protect yourself on that end. But yeah, you're going to have a payment. So if it drags out, you know, and the lender says, okay, now it's time to convert from the construction to permanent, now you're going to be paying a mortgage payment that's going to be higher because now it's principal and interest that's going to be included into your mortgage payment. And so your first twelve, sixteen months is all going to be interest-only. And that's why it's very important if you're going to take the leap of faith and build your own home, especially if you're going to act as your project manager, you're hiring your GC, you're hiring your builder, you're hiring all these folks, and you're not buying directly from a builder, right? You're hiring everybody. You have to make sure you know what you're doing and you're hiring the right folks. Because folks will sit here and over-promise and under-deliver you and kill your entire timeline, which ultimately is going to cost you more money as the homeowner. So it's very important that you make sure you vet out your team because your team has to understand the urgency of you getting it done, the timeline, and they have to understand how they get paid as well. Because there's, there's a process of how they get paid. So when you close on a construction loan, the lender is only going to give you ten percent or max fifty thousand dollars within ten, ten days, fourteen days after closing. And typically, that money is used to cover, you know, demolition, permits, plans, you know, things of that nature. You kind of like your soft costs, right? But the lender, I mean, the builder will have to be able to front that job. So let's just say that the build is going to cost a million dollars, fellas, to build, and they only releasing fifty thousand dollars. But the first phase of the project is going to cost you a quarter million dollars. So now, what does that two hundred thousand come from? Right? That two hundred thousand has to come from the builder. They have to be in position to start that job, complete phase one, then the lender will send out an inspector to inspect, you know, phase one to make sure all T's are crossed, eyes are dotted, and then the inspector will go back to the bank and say, okay, you can release the draw of two hundred thousand. And then now the builder gets paid that two hundred thousand and then they move on to phase two. And it goes on like that until the job is complete. So it's very important that you understand your builder understands how they get paid and they are liquid. Because a lot of builders out here are not liquid as well. So you can't pick the builder just because they might have gave you the cheapest price. So how do you know that they're liquid or not? The lenders will vet the builders as well. There's a lot of lenders out there that use third-party, um, companies. I'm not going to mention their name because they don't endorse us, right? And they will have to see the liquidity of the bill, the bank statements, do you have Amex's, whatever it is, to make sure that they are liquid to be able to do this job. Because the lenders, again, they're putting out a million dollars on construction, they want this house built. They don't want to own the property, especially if it's something that's not built right. So it's in their best interest as a lender to make sure that the builder can get this job done and they have the experience to get it done as well. Because a lot of people talk to talk, but they can't walk the walk. So that's why again, like a 203K, I like to call a 203K the training wheels for investors. So a construction loan when you're going through like the conventional way for a homeowner is kind of like training wheels if you want to get into development as well. Because you have the lender by your side and inspectors by your side that work for you and the lender to protect you against the builders. Because you know, we all say contractors are, you know, you know what I'm saying? But you gotta, but the, the bank is always going to make sure that they protect the investment at the same time.
So, um, what happens if it's not going right? Like, what, as a customer, where, what recourse do you have if the contractor isn't doing what he's supposed to be doing? It's not moving at the timeline that's supposed to be moved there. Like, what, what can you do? You can fire them, but then now you start from square one again, right? Now you have to find a new builder. Now they have to give you their course. Now that's new paperwork that has to be submitted to the bank, right? So it's a whole process that if you're doing this post-closing, right? You're doing it post-closing and you're already in your project, it's like anything. If you do, if you do a bathroom over in your house and you don't like the contract, then you fired them. Now the new contract is going to come in and say, well, their work is not good. So now I've got to tear all that work down and restart it over again. So now the cost will be more than what you anticipated. So you have to weigh out what's the opportunity cost, really, of me firing my contractor right now on my builder at the phase that I'm in right now? Because I'm already started and it can wind up costing you more money. Now, if they're just negligent and they're just disrespectful and they just don't, they're not really there, then obviously you're going to have no choice, but you got to handle your business because you are a CEO. This is real estate, right? So you have to fire them. But understand, there's going to be now a whole new vetting process that the lender is going to have to do. And then ultimately, if they're going to charge more than what the scope of work is already approved, you're not getting no more money. So where's that extra money? If they're going to charge an extra fifty, hundred K, where's that extra money coming from? It's coming from you because you decided to fire them. So it's best why you're in the underwriting process. If you're going to make any changes with your contract or your builder, it's best to do it while you're in the process. Because if they come with a higher scope of work, then you can protect yourself easier and reapply or not reapply, but you can ask for a request to see if you can get more of an approval to compensate for that extra monies. So you just have to make sure again, vetting out your people to make sure that they are who they say they are.
If I'm looking to build a new property and I'm trying to find land, I know you can vet everybody on that side. But is there any way to or is there a database that you can vet the town engineer or the county engineer or the building department? Is there any way to do that? Because a lot of times, and we've seen it personally, like they're the ones that are holding up the whole, the whole things, right? Like, I might not move to that town or I might not try to develop it if I know there's going to be that type of day. If they have a history of that.
So typically, when you're, when you're applying for permits and stuff like that, um, you would want to hire an expediter, right? And an expediter is someone who works within the town or has a relationship with them, and they're able to push the paperwork through in a timely manner. But ultimately, again, it's relationships, right? Like if you hire a great architect and they have good relationships within the town because they're doing a lot of business and they're, they're doing a lot of jobs, then they might not need to hire an expediter because they know Mary Sue over here in this department and their sons go to soccer together, right? So they can have that type of conversation and kind of get things pushed through. But that's hit or miss as well. So no, is there a way to vet really, really not? Um, it's kind of the luck of the draw. And you have to put your plans in as complete as possible because sometimes they'll come back and they want corrections to your plans, and then you got to go back and forth as well. So it's unfortunately, it's one of those situations, you're damned if you do, you're damned if you don't. Um, the town is always going to come back with something. They're always going to want some sort of correction. And there's always going to be some back and forth. And that's why your architect and building is probably one of the most important roles because they have to be quick on a fee. Some architects are just slow as hell to change something so minor. To us, it might take them 30 days. That's setting your timeline back, right? So again, I think not, and that in the building department, you need to vet the architect to make sure that what's their turnaround for changes? What's that? What's their relationships with the town that you're building in? How many jobs have they submitted in the last 60, 90, 12 months? Right? These are questions when you're interviewing an architect. Just don't go off the referral like, oh, he's a great architect in this kind of third. Nah, chill. Ask the questions, right? This is your house, this is your business, you own the property, you're responsible for the mortgage payment, nobody else. So you have to make sure whoever you're hiring, you have to make sure they can get that job done and they have a sense of urgency too, right? And because a lot of these folks, they just don't have it. My graduates from my school being Forbes backdrop backdrop a mic drop backdrop.
[Applause]