Owner/Builder Construction Loans

TREE's DIARY:

Wow! A whole new world has opened up for me in Real Estate! Just when you think you know everything, you discover that you barely know anything!

As you all know, I’ve been talking to lenders and brokers the past couple of weeks in search of a good loan for our new construction. I thought I had it all figured out in terms of the lending industry, but this owner/builder lending business is a whole other ballgame.

We’ve narrowed it down to two different lenders. Actually, one is a lender, the other is a broker. (If you don’t know the difference, see my Basic Real Estate Terms. If you want to learn more about mortgage lending, see A Word About Lenders and Brokers).

An owner/builder construction loan is a loan that is granted to an owner of a property who wants to build the house themselves, or at least act as their own general contractor. It is not necessary to be a licensed contractor, but most lenders require you to hire a licensed contractor or a site supervisor to oversee the project.

Since Mike & I are neither licensed nor have any experience as a site supervisor, we’re going to need to hire one. The good thing is the lender does not care if we hire a friend who qualifies nor whether we pay them, as long as we enter into a contract with them that they will oversee our entire project from start to finish.

In addition, many new construction loans allow you to withhold all payments during the term of the construction! The interest is still accrued; however, no payments on principal or interest are required until the house is finished. They set up a reserve interest account by calculating a percentage of the amount borrowed at the stated interest rate by the term of the loan and add it onto the amount of the loan. While this technically means we will be paying interest on the interest, it also means we have no payments while we build. We calculated the total interest we’d be paying by the end of our construction term and it works in our favor in the long run based on our needs at this time.

While we are getting a construction to permanent loan, which means once we finish construction, the loan rolls into a conventional mortgage loan and we don’t have to refinance or pay a second set of closing costs, we are planning on refinancing to ING Direct anyway, unless they can offer us a better rate. The current rate for our construction loan is between 6 and 6.75%, once it rolls over, it should be more conforming.

Another great thing is that since we already put money down when we bought the property, we can use that existing equity as well as the money we pay the Architect to cover the down payment. The closing costs will be rolled into the loan and we will not have any out-of-pocket costs up front.

Construction loans are basically reimbursement loans. You are approved for a certain amount of money, then as you buy materials and build, you draw upon that approved amount bit by bit as you go along and are reimbursed that draw amount back into your pocket. You only accrue interest on the amount that you have drawn at any given time, not the amount that you were approved for.

I really love learning about this industry and the more I learn, the more I find that I really love the industry itself. I love Real Estate investing. It’s frustrating at times, but it’s so fascinating to me. Everything from the financial lending institutions to the buying and selling to the building and remodeling. It’s all so much fun! Maybe that’s why Monopoly was always my favorite game growing up. That, and Twister!

So far, Mike has been pretty removed from this process; he doesn’t enjoy it as much as I do. I think it’s important in any partnership to know what each person’s qualities are and maximize them.

Mike is really good at design. It’s hard for me to envision something unless I’ve seen it somewhere else. He’s the one who basically designed our initial plans. He was so into it and spent hours in Excel creating and tweaking. I was a little bored to be honest. He has wonderful grand ideas but hates sorting out the details to make them happen. I love the little details. I love research and discovery. He’d rather say, “Here’s a good idea, go make it happen.” I’d rather say, “Now there’s a good idea, I’m going to make it happen.” Maybe that’s why we work so well together in this business venture.

So far.


MIKE's DIARY:

Yes, that is true. So when my entries mysteriously stop, don’t believe her when she says I disappeared while hiking in the mountains, you can bet we finally stopped “working well” and I’m probably buried somewhere up in them thar hills.

But hats off to Tree. Seriously, she’s put so much damn work into all the excruciating details of this project it just boggles my mind. I’d like to say it’s because I work so many hours and am just too tired at the end of the day to focus but honestly I don’t think I could keep myself interested in this stuff even if I didn’t have a job.

I feel bad sometimes because I really do want to help and be a part of this, and I know I am (I’m not a total slug) but compared to the amount of research this woman has done my efforts pale in comparison. Thank God she likes me.

So far.