Spec home financing is the term used for obtaining a construction loan on a property that does not yet have a buyer. They differ from a conventional loan in a few key metrics.
A spec loan is an industry term used for financing construction of a property, residential or commercial, that the builder has not sold yet. Spec loans are a small percentage of the total construction loans made. To secure an approval for your project you will need to do more leg work compared to a conventional lender. There are, however, lenders out there—as long as your project has good profitability. Due to the fact that Arizona spec home financing is a loan for a construction project that has no committed buyer, this type of loan is much riskier than other construction loans. If you locate land that is completely unimproved, you will improve your chances of qualifying for a loan, so you can build on the lot.
The project you choose should be able to be completed within a solid time frame. You want to look for an acquisition that can be completed quickly since construction loans are short term loans. They last only as long as the project lasts. The loan is paid out in draws with the consideration of the percentage of completion. By starting a project that can be completed quickly, you minimize the lender’s risks. Because the loan draws are based on a percentage of completion, they tend to be small in the beginning and increase as building ensues. You would be well advised to have a cash reserve before beginning your project.
The land is your equity. Using your land as collateral for Arizona spec home financing may increase your chances to secure the construction loan for your project. Some lenders may require you to put the land up for additional collateral for the construction loan. The land could even be used as your whole or partial down payment.
If You Do Not Have Experience, Bring in a Partner
To see yourself succeeding in securing the construction loan, you may want to consider bringing in an experienced partner to demonstrate to the lender your ability to complete the project and show a profit. Bringing in a partner with credit that is better than yours can also improve your chances of securing Arizona spec home financing for the project as well as demonstrating that the project is more creditworthy. If you are short on cash, bringing in a partner can also help with a down payment. They can also assist with improving the asset picture when applying for the loan, particularly if the debt to equity ratio would benefit. Lastly, know when bringing in a partner that you will be reducing your projected profit by giving a share to the partner you bring in.
Develop a business plan that is compelling.
Since you have not secured a buyer yet for your project, you will need to “sell” your lender on your project. You need to tell a story why your project will succeed as well as develop projected financials that are detailed and show how you will produce a profit. You will need to work hard to convince the lender that your project is a risk that he wants to invest in. You will need to develop where your project begins, what your view is as far as how you will develop it, and where the project will be at the end. Every lender will want to know your exit strategy—the “end of the story” that tells him how you will repay the loan. We, at Level 4 Funding, are happy to assist you in developing your strategy for a successful project. Call us for a no-obligation quote.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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