Multiple Home Builders are available each with a wide variety of homes, floor plans, elevations, floor plan modifications, amenities, upgrades, appliances, etc. There are also many limitations on the use of specific properties. For just a sample of some of the issues that are of concern you may find that due to local ordinances the “set-backs” on a particular parcel of land will not allow homes over a certain width or depth to fit on a particular lot. Even though the lot is big enough in size to fit the home, the local governing body has dictated a set of distances that the home must sit within the actual lot lines. Those distances are generally referred to as “Set Backs.” Or, perhaps your parcel is in an area that is subject to “Deed Restrictions.” That means that there is a set of rules that govern things like the color, the elevation, the size, the landscaping, etc. This list is only limited to the terms of the Deed Restrictions and can go on and on. Perhaps the size, shape, color or location of the mailbox is regulated as well. With this in mind the Real Estate Professional can work with both the investor and the Builder to help in the selection process of the home in an effort to meet as many of the various needs and concerns as possible.
Based on the nature of the project this step is no less critical than any of the previous. This is yet another instance where the information on the local market and the evaluation of the supporting data on the part of the investor is critical. Then come questions about the project and the original goals that were set in advance.
- Is this property single or multi family?
- Is it an entry level, mid level, or high end home?
- Is it intended to be rented annually or seasonally?
- Is this to be a short, mid, or long term hold?
- Based on many of the above questions:
- What will be the size of the home?
- What amenities or upgrades will be added?
- What Color selections?
- What landscaping packages?
- Etc…etc…etc…
This list is very extensive and fairly specific to the individual project. Once again, I cannot stress enough the advantages offered by working with a Licensed and qualified Real Estate Professional. The decisions made at this juncture of the deal will have a significant impact on the outcome of the project.
Once this selection is made the investor will order the home from the Builder of choice and will enter into a contract with the builder to build the home.
Once again, the investor is entering into a contractual obligation. This is for a home that does not yet exist but a home nevertheless. The builder is committing to building a specific home at a specific price and the Buyer(s) is committing to the purchase of that home at that price.
Once the contracts for the purchases of the Real Property and the construction of the Home are successfully negotiated, the terms and conditions are agreed to by all parties (Meeting of the Minds), and all the contracts are signed and committed to by all buyers and sellers then this project becomes the responsibility of a Mortgage Professional.
An experienced and knowledgeable Mortgage Professional will have been involved in the genesis of the project and will have worked diligently to ensure, to the best of their ability, the availability of suitable finance products for the investor. When this is done properly and effectively the project will be placed with the appropriate lender immediately utilizing the finance product in that lender’s portfolio that is most beneficial to the investor’s goals.
Generally, these projects will utilize a loan category often referred to as a “CP Loan,” or a “Construction to Permanent Loan.” This is a loan product that is designed for an individual borrower to use for the acquisition of land and the construction of a home on that parcel of land. There are many, many variations of this loan product and many lending institutions that provide this loan catagory. The variations from Bank to Bank and as well the variations within each bank’s CP product line are too numerous to count. This is why it is recommended that an investor utilize a dedicated Mortgage Professional to assist in the selection of this loan product.
Once project is places with the lender the Mortgage Professional will work closely with the investor to ensure that the loan application and loan package is accurate and complete. This is a critical issue as many loans are denied due to inaccuracy or incomplete packages. Even the most savvy and experience Mortgage Professionals will be challenged on a consistent basis by lender guidelines and underwriting processes. This is why working with a Mortgage Professional that is seasoned and knowledgeable is so important.
The CP loan is basically two (2) loans in one.
1. The first loan is the first or “construction” part of Construction to Permanent. This is the loan that will fund the purchase of two contracts:
- The contract for the purchase of the real property (vacant lot) and;
- The contract for the purchase of the construction of the Home with the Builder
This is what is commonly referred to as a “Simultaneous Close” or “One Time Close.” Meaning that the close of escrow on the transaction of the vacant lot and the close of escrow on the purchase of the construction of the home will be funded by one loan and therefore two purchases will close at once or simultaneously.
Once this loan closes it does not behave like the average home loan or mortgage note. The initial amount funded will usually (based on various products) fund the entire purchase of the vacant land contract and then go on to fund to the Home Builder a portion of the amount of the cost of the contract to build the home.
The reasoning behind only funding a portion of the cost of the construction to the Home Builder is to allow the Lender/Bank some security that the Builder will perform and build the home. The Lender/Bank will only fund the cost of construction of the home in stages or draws. This is done so that the Home Builder is held to a certain schedule of completion in order to earn the next stage of funding or next draw. Therefore the total amount dispersed to the builder at the “Simultaneous Close,” or the “One Time Close” is as little as 5% or as much as 15% of the total cost of construction contract for the home. After which, the Home Builder must complete a certain portion of the process of building the home in order to get the next disbursement or draw. The following draws or disbursements are percentages of the total and usually related directly to the percentage of completion of the construction of the home. The complete draw schedule usually numbers between 4 and 6 draws.
Note that due to the nature of the loan disbursement, and that the loan amount will increase as the disbursements or draws continue the interest due is dependent on the amount disbursed at the time of the interest calculation. Therefore, the interest due on the loan will increase as the construction of the home progresses and consequently, the loan amount increases.
The second loan is the final or “permanent” part of the Construction to Permanent loan product. This is the loan that will become active when the construction of the home is completed and the loan must now convert to a more traditional form of home mortgage or note. At this time it is necessary to turn over the total amount funded both for the purchase of the parcel of real property and for the total amount funded for the construction of the home to become one lump sum that will be addressed as a traditional mortgage. Generally, the terms (length of term, interest rate, payment amount, etc) of this mortgage are made known in advance of the “Simultaneous Closing” or “One Time Close.”
(Project Analysis and Selection, Contract Offer, Time to Close, Permitting, Construction Period, Completion and Final Punch and Walkthrough)
Overall it is not uncommon to find that the time from inception to completion of most projects ranges between 6 months and 12 months. This can be plus or minus 1-2 months depending on a number of different factors. In general the timing for each stage will be as follows:
This initial step will involve working with your Real Estate Professional and Mortgage Professional to familiarize the team with each other, the Four Keys, and the Goals. Once everyone is on the same page the process of identifying the area and the project begins.
Bear in mind that there will be market data to review and become familiar with. Additionally, the various projects will involve the review of Home Models, Floor Plans, Pricing, etc.
After the orientation and project selection process is complete the next step is to begin the process of Contract Offer(s). As mentioned above this is the point at which the investor begins to interact with the Sellers. This can be as simple as sending the offer and receiving an outright acceptance in a matter of minutes (very, very rare). Or the process can be drawn out for weeks due to possible Counter Offer negotiations or consistent Offer Rejections. It is not uncommon to go through multiple rejections in pursuit of the right deal. Remember, discouragement, frustration and impatience WILL hinder the investor’s ability find the right deal.
Once the investor has a valid contract on the vacant land parcel the next step is to identify and order the suitable Home Model. This is as important as any of the previous steps. There are many factors to consider that must reflect the continuity of the overall project. The goal is staying consistent with the surrounding homes in terms of size, layout or floor plan, amenities (pool vs. no pool) etc. in order to make the project appealing to the intended end user (home buyer, rental candidates, etc.) while simultaneously controlling the pricing as much as possible.
This stage is primarily dependent on the quality of Mortgage Professional that you work with. An excellent Mortgage Professional can asses the project and the various factors involved and move the process along in a manner that is as expeditious as possible. With a True Qualifying process and a thorough Loan Product identification the process can take as little as 30-45 days. When it comes to dealing with Lending institutions and Banks it is always wise to allow an additional 15-30 days for the various miscellaneous issues and tasks.
The Home Builder will have some internal processing that is required to properly assemble an application for the Building Permit. Certain drawings will need to be done, Engineering and Surveying may be required. Often times a Lot or Site evaluation may be required in order for the Home Builder to confirm the compatibility of the site and the Home Model. Then, depending on the where the project is being done, the local city or county offices can process permitting for residential work from as little as 2 weeks to as much as 12 weeks.
This will vary somewhat dramatically depending on the Home Builder, the Project, and the Local Conditions (market, labor pool, climate, etc.). The Home Builders are selected based on their reputations, quality of construction, ability to perform, and pricing.
A quality Home Builder can complete a small home, under ideal conditions, within 4 months. That same size and style home in another part of the country can take 9 months. There are too many variable to address in the process of building a home that can affect the timing. However, it should be known that it is usually in the Home Builder’s best interest to complete a home as quickly as possible. Most Home Builders must utilize a fair amount of cost “projecting” in order to price the construction of a home. This is intended to take into account the cost increases of various products and resources over the coming months during the construction. Therefore the faster the home is completed the better. If the home takes much longer than expected the cost projections will likely be insufficient and the Home Builder runs the risk of losing money on the project. This risk is minimal if the Home Builder is experienced, and knowledgeable.
If we take the outside timeframe for each of the above stages we come to an average of 12 months.
| Project Analysis and Selection (1 week avg.) |
1 wk |
| Offer-Acceptance-Communication (2 weeks avg.) |
2 wks |
| Home Order (1-2 days) |
2 days |
| Simultaneous Closing or One Time Close (1-2 months avg.) |
2 months |
| Permitting (1-3 months avg.) |
3 months |
| Construction (4-6 months) |
6 months |
| Total Time on average |
12 months |
Based on what the nature of the project and the goals identified the process of either marketing for sale, annual rental, vacation rental, or lease options (to point out a few) may be started well prior to the completion of the subject property. Based on the market conditions and availability of end user buyers, annual tenants, vacationers, or lease to own buyers the investor will work with the Real Estate Professional to optimize the potential for securing a contract or lease.
The strategy for identifying the end user is formulated well in advance of the commencing the project. Based on the original market analysis provided by the Real
Estate Professional the plan or the “exit strategy” will be outlined with as much room for flexibility as the project allows. This Flexibility is vital due to the ultimate unpredictability of the Market. Any Real Estate Investor that plans to rely solely on a single exit strategy with a project that is not pre-sold or without a secure contract from the beginning is planning to fail.
Marketing a speculative project for sale upon completion
Selling a spec home for a profit, immediately upon completion, is every investors dream. Imagine utilizing a program that requires very little capital down, little to no debt service during the construction period, pricing that is below market, and in an appreciating market that allows for substantial equity to grow during the construction of the project.
“NO MONEY DOWN, NO MONTHLY PAYMENTS, BELOW MARKET PRICING, AND HIGH APPRECIATION”
The above scenario really does exist. It happens somewhere in America on a daily basis. It requires that all of the characteristics mentioned above have to be present. Even in the ideal market environment it is rare that such circumstances sustain. Therefore, it is irresponsible of an investor, a Real Estate Professional, and a Mortgage Professional to assume that all of the ideal conditions required for the “quick sale” or “flip” will exist 9-12 months after a project is started. If there are enough positive characteristics to support the “quick sale” or “flip” plan the investor can be sure that there are also enough unpredictable variables to support the need and development of alternate exits strategies in order to prepare for the market changes and shifts that are inevitable.
The marketing of each project is unique to the project
Some basics
- Larger dollar projects usually need more planning and additional time on market
- Rental projects will require qualified and experienced Property Management
- Affordable homes generally will be more appealing if in good proximity to major ingress and egress routes (i.e. Highways, Expressways, major state routes, etc.).
- Multifamily projects rely on rental analysis and as well unique to the preferred outcome.
- Marketing a quick sale or “flip”.
- Generally, the process of marketing an affordable home in Cape Coral will.
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