by Jake Wengroff
All real estate projects are not created equal. Most individuals are familiar with conventional mortgages for the home they live in. But what about money needed to complete construction on an investment property? Or the funds needed to fix and flip a distressed property?
Borrowers should do their homework and rely on a lender with deep expertise not only in various types of loans but also in the local market dynamics.
Conventional mortgages are not the right fit here, as such loans are written for a property that is already built.
To cover the cost of building a new home or multi-unit housing, a construction loan should be considered. The key difference between a conventional mortgage and a construction loan is that rather than providing the entire loan at one time, a construction loan pays a series of advances, more commonly called “draws,” as the home is built.
A construction loan can be used to purchase land and build a home, or construct a home on land the borrower already owns. A borrower can also place a manufactured or “prefab” home on land with construction financing.
Lenders such as Builders Capital offer an bridge-to-build loan, that helps builders and investors from acquisition through financing to go vertical. The loan supports the process of securing plans and permits, for which more traditional lenders do not often provide assistance.
As its name implies, this is for investors seeking to acquire a distressed property, perform the needed repairs and resell it as quickly as possible. Basically, fix-and-flip loans are short-term loans secured by the investment property. Lenders evaluate the potential profitability of the property. Such loans are easier to qualify for and obtain as compared to conventional mortgage loans.
Bridge loans help investors who are in transition from one property to another. Because they are temporary loans secured by the investor’s current property, they “bridge the gap” between the sale of one asset and the acquisition of a new one.
The biggest benefit of bridge loans is the buyer’s ability to immediately use the equity in an existing house to buy a new property and put the existing home on the market without having to wait until the home sells. This can be especially useful in a seller’s market.
Builders, developers, and investors should consult with private lenders with deep expertise in a market. Such private money lenders operate under their own individual loan criteria, which serves to shorten the length of time needed to get a loan funded.
Builders Capital evaluates projects on their potential profitability and borrower experience, assessing the possibility of paying off the loan way before the maturity date. This benefits all parties involved in a transaction, and — again — is helpful in more robust, active real estate markets.
Jake Wengroff writes about enterprise software and financial services. A former technology reporter for CBS Radio, Jake covers such topics as blockchain, security and IoT.