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Builders Need to Know the Basics to Obtain Financing

Following are some of the pointers that were offered on how to avoid the pitfalls and establish a good working relationship with a lender:

• When lining up construction financing, Michael Davitt, executive vice president of national construction lending for the Franklin Bank in Houston, recommended the one-time close program, which uses a tri-party contract to turn a construction loan into permanent financing. Among its advantages, the loan can be made in the customer’s name; there is only one origination fee, instead of two; and the builder can get the customer to pay the interest.
• Davitt said that the lender will generally want the builder to have enough liquidity to pay interest on their loan for a year. They are also looking for extensive information on the builder’s background, expertise, company and business plan, including a list of suppliers and their telephone numbers.

• Less experienced builders, Davitt advised, “might want to come in with a more moderate price” if their home prices are as high as those of more experienced builders in the area.
• In choosing a lender, Tom Flowers, senior vice president for the Home Builder Division of the Bank of America in Overland Park, KS, said that builders are likely to find “roughly equivalent” borrowing costs and they should focus their search on finding someone who has established a good working relationship with the housing market and is committed to the industry not just when times are good, but when they are not so good. “Look for a lender with a long-term record of being committed to the home building industry,” he said.
• Look for a bank that can provide the full gamut of financial services that will be needed, Flowers said. “Check that they are large enough to meet your current needs and your needs if you have growth over the next five to 10 years.” Also, if a builder is considering expanding to other regions of the country, they should try to find a lender who will be able to go with them. Another key question is, “can you talk to the decision makers and know what is in their mind and know how the bank approaches the approval process?”
• Flowers also said that good communication is important in maintaining a good relationship with the lender, one that might even extend over the lifetime of a business. “Be up-front and honest with your banker when you’re having bad times” and also keep him posted on the good news. He also advised getting to know the person who administers the loan and the entire lending team, if possible. “The more and better you manage this relationship, the greater the results will be at the end of the day, which can make a difference of millions of dollars,” he said.
• “Tell the lender what you want to build,” said Tom Hallock, vice president of Affinity Bank in Ventura, CA. “You would be amazed how many times you don’t know, or they don’t know.” Plans should be legible and include a site map and aerial shot of the property, a color rendering of the house or property and a title report.
• Hallock said that the lender will also want to know about the builder’s borrowing history and be looking for a current and accurate financial statement that includes income and expenses; and assets, liabilities and net worth. The financial statement needs to be within 90 days of closing on the loan, so two may be needed. Lenders are looking for accuracy, they will require verification and they will want a good explanation if the builder’s FICA score is below 660.
• Also tell the lender how much money you need and how much you are going to make, Hallock advised, keeping in mind that you should be aiming for a 10%-15% profit on a gross basis. “On 40 lots, show me you can build and sell 10 homes,” he said. “then maybe 15; don’t expect financing for all 40 at once.” And have fallback plans if interest rates or absorption rates change or for different scenarios.
• Offer to visit the site with the lender, Hallock said, and provide a market survey and show some comparables. If there are some negatives to the site, such as its adjacency to a homeless shelter, be prepared to show some offsetting positives.
• Ask when the lender will be done with the review, Hallock said, and find out if the lender requires an appraisal, which can be an up-front expense even before there is a commitment.
• “Put together what permits you need, at what time, and build in some cost basis,” he said. “Some lenders require architect/engineer signatures.”
• Once the loan is made, keep the lender up-to-date on what’s taking place on the project through a regular fax or e-mail, Hallock said. Meet the lender at the site and walk the project at least twice during construction. Home building can be “a very messy business, so everybody needs to be moving in the same direction,” he said.

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