The real estate market is ever evolving. Many of us witnessed the fix and flip market boom with 50%+ profit peaks. While fix and flips still return a decent profit, many investors are finding it difficult to pencil out a deal that makes sense. As inventory remains competitive and acquisition prices continue to rise, investors are shifting into Ground Up Construction—but that doesn’t come without it’s own set of complexities... For builders, a successful project is one completed on time and within budget, but that is no easy feat these days. There is a magnitude of overruns with large projects often surpassing their budgets and experiencing schedule delays – pushing budgets up and timelines back. So, what do you do when your construction project doesn’t go according to plan? Let’s dive into your financing options that can help get you back on track and over that finish line. GETTING YOUR CONSTRUCTION PROJECT ACROSS THE FINISH LINE
While that used to be a more common option, the construction lending landscape has shifted significantly. Those that do still operate in this space have tightened their rules. Most of them no longer offer construction loan extensions and those that do charge hefty fees. For a builder or developer operating within already tight margins, these fees can throw the entire project into jeopardy. For example, a mere 1% extension fee on a $3 million construction loan would cost you $30,000 out of pocket. A CONSTRUCTION COMPLETION LOAN: THE SUPERIOR SOLUTION A construction completion loan is, in essence, a rate-and-term refinance based on the higher appraised value and can include a construction credit line for builders who need more funds. In addition to that, any loan costs associated with the refinance can be rolled into your new loan, so you’re not paying any costs out of pocket, helping your overall liquidity. This provides developers/builders with three valuable outcomes: 1. The ability to pay off a maturing construction loan. 2. More time to complete construction and sell the property without sacrificing quality. 3. The ability to use the funds from a construction credit line to see the remainder of the project through.
THE BASICS: WHAT ARE CONSTRUCTION LOANS?
Construction loans are short-term, interest- only loans that fund the building of a home. Whether it’s a tear-down or ground-up project, many lenders offer short-term construction loans, often at a high rate due to the increased risk. Since these loans tend to have shorter terms, typically for a period of 12 to 18 months, developers have very little wiggle room for unexpected issues or delays during the building process. Time and costs are the two essential components of every ground-up construction project that are always interrelated. The right financing solution can make all the difference in getting your construction over the finish line without sacrificing quality and/or profits. If your loan is reaching maturity and/or you’re going over budget, here are a couple of different routes developers take: 1. Rush to complete the project on time and compromise on quality. 2. Request an extension (for a fee), but not all lenders allow it. 3. Refinance to pay off the loan, extend loan terms, and get more funds to complete the project. THE LENDER EXTENSION TRAP You may be thinking: “Can’t I just extend the loan if it runs over the timeline?”
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