Since we just closed on the land and the construction loan, why not get into a bit of the details of the loan from Independent Mortgage Company. This may be dull for most of you, but I know some of our readers are very interested in the financing aspects of a new development project and just how construction loans differ from typical mortgages.
First the basics of the loan terms:
- Rate = Prime + 2%
- 2 Points in loan fees
- 1 point on the gross sale of the corner (120K) house.
These terms are a bit higher than normal due to the fact that this is our first project as a development company. These rates should go down on subsequent projects, assuming the first project is not a massive failure for some reason.
Next comes the dispursement of the actual money for the construction of the house. At settlement on the land last week, the bank paid for about 75% of the land. We had to foot the rest of the bill in cash and also pay for 100% of our soft costs on the project to date which is around $25K.
The construction loan is then given to the general contractor in a series of seven draws throughout the project. The bank will come out to inspect the homes and make sure everything is completed before cutting the check for that phase. The GC handles disbursing payments to all of the subcontractors as well as material vendors. The GC’s fee also comes from these draws, so it is in both of our interests to stay on budget to make sure our profit margins are in tact at the end.
We had to negotiate a bit with the bank on the draw schedule due to the up front cost of the SIPs. Below is what the final draw schedule turned out to be. The terminology for each phase is from the bank so not everything applies to our project (ie. we have no garages):
Draw Schedule for 100K House Project
Draw #1: 10% at closing.
Draw #2: 15%
- Building permits
- Excavation
- Rough Grading
- Footings and Foundations
Draw #3: 20%
- Exterior Walls Sheathed
- Rough Framing
- Inside Partitions
- Roof Sheathing
- Window/Door Frames
- Insulation
Draw #4: 22%
- Rough HVAC
- Rough Electrical Wiring
- Rough Plumbing, Tubs & Shower Set
- Exterior Siding
- Basement & Garage Floor
- Roof Completed
Draw #5: 20%
- Drywall
- Cabinets & Countertops
- Interior Painted
- Finish Floor
- Exterior Completed
- Garage Doors
- Interior Trim
- Ceramic & Sheet Tile
Draw #6: 10%
- Water & Sewer Connect
- Final HVAC
- Walks & Entries Complete
- Carpeting
- Finish Plumbing
- Finish Electric
- Appliances Installed
- Driveway, Apron, Sidewalk
- Final Grade
- Landscaping
Draw #7: 3%
- Certificate of occupancy
Since we closed last week the first draw on the construction loan has been dispersed. Most of it went towards our 50% downpayment required on the SIPs and the remainder went to our GC to begin work. We will be meeting tomorrow afternoon to discuss the schedule for the project in more detail.
{ 6 comments… read them below or add one }
Hey Chad,
I ran into similarly unfavorable terms with my project, and ultimately decided to wait a while…there were other circumstances I won’t bore you with as well..
But to my question: Did the bank fund 100% of the hard cost of construction? Did they appraise the property as it will be built, then loan based on the future value?
Shawn
hi.
i recently discovered your page and just wanted to say awesome – awesome to the max! i’m completely engrossed in what your doing and can’t thank you enough for writting about it (the whole development process is such a mystery to me)
i’ve got a lot of back posts to catch up on, but i did have a question on the financing:
how exactly does the interest accrue? i’m assuming its only against drawn capital – and only against principle – but at what interval does the interest build (monthly?). and the rate is an annual rate, correct?
this is useful to put together projections to determine “true cost” of the project – and identify opportunities to save by accelerating work/inspections/etc.
this is the side of development that i’ve never had explained.
thanks again ~ you’ve got yourself a fan & maybe a future buyer, or at the very least – a copy cat
Shawn,
Yes, the bank financed 100% of the hard costs of construction. They were originally supposed to finance 100% of the soft costs as well but did not cover any of it in the end which has left us cash poor for the second project. We will most likely need to seek investors…
The loan was based on the appraised future value of both homes as they will be built which was $255K each.
grey ghost,
Welcome to the project and thanks for your comments. All of your assumptions about the financing are correct. The interest reserves are built into the financing which is nice, so we don’t have to make any monthly payments out of our own pocket to cover them during construction. We will make one payment to the bank when the houses are sold and that is it.
I noticed your web site and I am representing a manufacture of enery efficient houses (R rating of 91%) moving from eurpoe to the US looking for financing have all information for a presentation on construction of homes looking for $2,000,000.00 to start project with three model homes large institutions are not interested. Have any ideas
Jim – My only idea is to start small with your own money and work your way up.