Finding construction financing in the economic desert

One of the biggest challenges facing new homebuilders isn’t finding new homebuyers—it’s pulling the funding together to secure land and build new homes. And even if you have stellar credit and an extensive portfolio of experience, there’s still no guarantee you will be able to find the necessary funding to start new projects.

“What we’re finding isn’t that we have a hard time qualifying for loans, it’s more a matter of whether or not banks have the money. In a lot of cases they don’t. Many banks just aren’t lending right now. And when they do, they’re only betting on the safest deals, so it’s important to have all your ducks in a row,” says Michael Maples, principal with Southern California’s Trumark Homes and a specialist in homebuilder financing.

According to Maples, in the current economic climate, local and regional banks are more likely to work with strong regional builders to keep the economy growing, while large national banks are generally more cautious and less in tune with regional issues.

“We have a longstanding relationship with our local bank, so we get preferential treatment. We also have a good system worked out for land acquisition and material financing that keeps things flowing. But it’s still a very tight time,” says Ashley Wagar, sales and marketing manager with Ochoa & Shehan Builders, the leading homebuilder in Redding, CA.

Timing is everything

The limited availability of funding means that banks, both local and national, cycle through up times and down times. As a result, the full menu of loan products is not always offered, so it’s important to check back regularly, or create proactive relationships with experienced construction loan officers.

“There’s no telling what loan products are being offered on any given day, so it’s important to shop around if you want to get the best options. Check with banks regularly on what products they are offering, and don’t just stop at one. Call your local banks and ask for the construction loan department. Most of the time, if you find a bank that will do a construction loan, it may or may not be competitive in today’s marketplace,” says Maples.

“It’s also important that the bank assigns an appraiser who will work with you. An accurate appraisal is critical to getting a workable loan,” says Wagar.

“We’ve been doing housing land-acquisition since 1993, but we’re brand-new to homebuilding, so we don’t have the legacy and debt issues that other builders have. In that regard, getting funding for projects is a lot about right place, right time, right builder,” Maples explains.

New models and private funding

Outstanding bank loans for new development dropped to $113 billion in the quarter ending September 2009—down 44 percent from a peak of $203 billion in June 2008, according to the FDIC. While large banks are expected to slowly start getting back into the homebuilding marketplace as conditions stabilize, there has been a rush of private equity firms coming in to fill the lending gaps, but offering loans that are considerably more expensive.

Equity firms like Developers Financial Solutions of Rancho Santa Fe, CA, interviewed builders at the recent National Association of Home Builders convention in Las Vegas looking to create new relationships.

“We’re looking for the right opportunities to provide project financing through this stage of the recovery,” says Steve McGee, principal with Developers Financial, which currently has more than $1 billion to invest in residential and commercial real estate.

“After you do the points, most private lenders are charging between 15 and 17 percent right now. Which is, of course, an excellent position for them. Some builders are getting land cheap enough that it’s still possible to use tools like that, but those are exceptional circumstances. Once those loans start to see profitable returns and the market levels off, more private lenders will get involved and that will eventually drive the rates down closer to 10 percent, but that’s probably going to take 10 to 18 months,” says Maples.