Starting a new building project is a lot like launching a new business. First comes brainstorming creative ideas – imagining a new property or development. Then, there’s planning…lots and lots of planning – from location scouting to sourcing the right contractors to complete the job. Finally, it’s time to get funding that will let you make those plans a reality. It’s an exciting time, but often a daunting one as well. Once the team is ready to go they expect you to put the deal together to get everybody working.
Financing new construction isn’t like any other type of funding in the business world. Construction loans have many moving parts, fund in stages, and have to be closely managed. As opposed to buying a property with a known value, the final value of the building under construction isn’t guaranteed. Other developments might not come through, another area could become hot, despite the efforts of developers, or you might land on a gold mine – a sought-after nexus where everyone wants to be and that can claim top-dollar for rental space or property acquisition.
For construction loans, the lender takes a much more active role in the loan process. That makes it all the more important for you to choose the right lender to participate in your plan. In this article, we’ll take a look at two common types of lenders and how they work differently when it comes to funding your construction project.
Traditional lenders, such as banks, often shy away from approving construction loans for small businesses. That’s because the work on the part of the lender is higher than with other types of loans, and there’s more risk involved. What if the project doesn’t get finished? What if the borrower runs out of funds before the build can be completed? Will the finished project end up being worth the initial assessment?
These lenders do a lot of work to mitigate these risks. You’ll need proper insurance to cover accidents and damage. Regular inspections need to be performed to ensure the lender that your project is meeting appraisals. You’ll need to have a contingency fund in place in case your plans need to change. Dealing with multiple funding stages also complicates the loan process.
Yes, you can find construction loans through traditional lenders, but they often charge more to compensate for their overhead. In some cases, a large national lender won’t have the local knowledge that could help when you decide to build. Having a lender that deals specifically in construction loans is an advantage in more ways than one.
Many business owners look to private lenders for construction loans. There are several advantages to choosing a private lender, including an easier application process. Private lenders, in general, don’t have to operate within the same regulatory framework as banks do. This freedom allows them to be more flexible when it comes to approving your loan.
If you decide to go with a private lender, choosing one with expertise in construction is a good idea. First off, the lender will know their construction loans inside and out, especially in your local area. They will have worked with the same contractors, developers, and engineers on multiple projects. This knowledge will help you avoid a contractor with poor performance or follow through. If you haven’t sourced a contractor, speaking with a qualified lender may help you with referrals to top construction crews in your market.
A construction loan through a private lender will have most of the same components. You’ll still receive funds in stages that correspond to your building progress. The same costs, such as legal expenses and permit fees, will be included in the loan. But, because private lenders specialize, you’ll work with a team experienced in this sector of the market, meaning they can help pre-assess risks and tailor the loan to take into account variables necessary to get the job done right.
Matching Developers with Lenders
Choosing a lender is a commitment you won’t want to take lightly. There are many moving parts to a construction loan. Hard costs are the most obvious expenses, things like equipment, materials, and labor. There are also soft costs such as permits, inspections, insurance, and interest charges that need to be considered. Add to that land costs and your contingency fund, and there’s a lot to consider.
How do you know which is the right lender for you? Ask yourself these critical questions:
- Size. Can the lender handle the size of the loan you’re looking for?
- Trust. Does the lender have a reputation for reliability? Have they funded many successful projects in the past?
- Contact. Is it easy to get in touch with your lender? With construction loans, you’ll be working closely with your lender. So, it’s important to be able to contact them when you need to.
- Clarity. Are the terms and conditions easy to understand, and does the lender welcome any questions you might have?
With everything on your plate, choosing the right lender can seem almost as daunting as the project itself. Fortunately, there are professionals that can take some of the load off your hands.
Using A Loan Broker
Because you and your lender will have a relationship that lasts throughout the construction project, you’ll need to effectively match to the right one. It’s a loan broker’s job to facilitate the process and set you up for success. Think of them as personal shoppers for your construction loan.
Loan brokers don’t usually have a horse in the game when comparing loans. They want to match you with the loan that suits your needs best. If you were to go directly to a lender, they would show you their own products, but not the competition’s. With a broker, you can see products across multiple lenders and shop offers to choose the best one to suit your construction plan. Brokers also know who specializes in construction loans versus who’s less experienced with them. A lender may advertise that they offer construction loans when, in reality, they’ve just begun to dip their toes into the industry.
If you’re looking to add new real estate to your company portfolio or develop a property to sell, a loan broker takes the headache out of finding the right financing. Before meeting with a broker, you should have a good idea of how much you’ll need to borrow, a set of detailed plans, and a value estimate of the completed project. Being prepared will help you both start in the right direction. If you’re not sure what you’ll need to apply for a construction loan, your broker can give you a complete list of documents and materials to get ready. It’s time to get building!