OT - Construction Loans

[onsight512]

My wife and I are looking at a house that'd need some major work prior to us moving in. I spoke to a lender about a rehab loan, but it seems that those types of loans wouldn't cover enough of the 'rehab' costs on this particular house.

Among other things, the place we're looking at will need some work on the foundation and we'd like to add some square footage while we're at it.

Does anyone here have any experience &/or advice with home construction loans?

[onsight512]

Bumping this up.

[vqdriver]

Do you have a loan broker?

[wallymann]

if the loans are relatively short-term consider taking a loan against your 401k. the fees are essentially nil and the interest paid goes toward your 401k balance.

[onsight512]

Originally Posted by vqdriver

Do you have a loan broker?

Not yet. I'd originally spoken to Quicken, to get a pre-approval, but after I discovered what this house is going to need, I called them back and they don't do rehab, or construction, loans. I got a recommendation for a broker that is familiar with rehab loans, but he told me that one of those wouldn't cover the dollar amount that this place'd require.
I'm now going to begin exploring a construction loan, but wanted to see what I could glean from the hivemind that is the Paceline.

[Ralph]

For similar situation, my Well Fargo loan officer has referred me to the bank mortgage specialist before....when I inquired about borrowing a couple hundred for a few months while building a new home. When I mentioned to the mortgage specialist I didn't plan to have the loan very long, (would have no mortgage after new house built and current house sold) and didn't want to pay a bunch of upfront mortgage fees, she said she could charge me a little higher rate on the loan for the short term and avoid most of the upfront fees....I thought that was a good idea. I didn't do the loan or build the new house, but learned from the experience. Would shop that idea around if doing again....now that I know how to do it. Bank rates sometimes are higher than others. So if you are considering a bridge or construction loan, try to avoid all the upfront fees by paying a tad higher rate on the loan for the short term. Might be a few thousand dollars ahead that way.

[Tandem Rider]

I'm sure every state is different, but the most important thing is you need a Banker who understands your situation, you can work with. Interest rates were higher than a conventional loan, meaning there is some incentive to finish up and roll the loan over. You need to have several conversations with your banker.

In our case, all payouts to suppliers were in the form of a request from us (a copy of the bill actually), this went to the bank, a lien waiver went to the supplier/contractor from the Bank. After the signed lien waiver was returned to the Bank, a check was sent to the supplier/contractor. This is how we paid the lumberyard, foundation guy, bricklayer, etc. Any small expenses like diesel for the skidloader, when Mrs TR found lights she absolutely had to have, a few loads of rock, etc we just paid out of pocket.

[sokyroadie]

Are you acting as the General Contractor or paying someone to do it. It you are doing it, a bank that knows you may be more likely to do the funding.

#1 - make sure you have firm estimates and a grasp on what can and will go wrong when you find hidden issues. It is hard to run out of money when you are 80% done and have to beg the bank for more.

#2 - make sure the house will appraise for what you need after all the renovations and inevitable overruns.

Jeff

[rnhood]

Old homes are all to often a money pit. Raze it down and build new.

[Tandem Rider]

Originally Posted by rnhood

Old homes are all to often a money pit. Raze it down and build new.

Gotta disagree here, we doubled our money doing this, twice. The important thing is to know what you can and can't do yourself, and don't step outside those limits.

[paredown]

I think you are on the right track--we did it the other way, and you end up with effectively with two "closings"--once to buy, and once to refinance when you are done (assuming the renos are significant).

What you are looking for is a "bridge" loan for construction that will give you a set number of days from the time of purchase until the roll-over into the new full-fledged loan. That way you pay closing costs once only. Wells used to offer these--period is typically 6 months to 1 year.

A couple of caveats:
--you need full plans, so that the appraisal for the final loan can be based on the expected value of the renovations

--You will then have a hard date for the work to be finished since the period of the bridge loan will be set--they will want to do a walk through and the work will have to be substantially finished for them to appraise to the new value--so if you are acting as GC you need to have your ducks (mainly good tradespeople) lined up ahead of time.

--make sure the value proposition is there. In a market with rising prices and scarcity, (and if you don't pay retail for everything you do and/or you do significant work yourself) it may make sense. If your house is in Seattle, San Francisco or even the area around us where there is now price pressure--you could be like Tandem and make money. In other markets, tread warily--renovation work almost always involves surprises and hidden expenses. You could end up like us--selling the house for less than the cost of the renovations because of bad timing (Great Recession) and bad cost estimates from the builders. What you do get though is a house that is to your taste, and that is no small thing.

Adding on is an area that can throw the build calendar out the window--I would make a stop to your local planning and zoning board to ask about the process--here it can be as much as two months (because the meetings are irregular) if what you are planning to do requires a variance (eg setback requirements) and therefore public hearings. It is always easier to work with the existing footprint--you may or may not require permits (around here the rule is 60% change> permits required).

I would not be afraid of foundation work, but again, good concrete guys are busy and hard to schedule. You will probably need an engineers stamp on any plans that involve major structure, like foundations. Often though, specialists who do this work all the time may do this in-house as part of the price.