Monday, April 21, 2014

Key Points About Construction Loans for Commercial and Residential Properties

CONSTRUCTION LOANS ARE AVAILABLE in the United States, Canada, and worldwide for all types of real estate, including:
  • Single-family residential properties
  • Multifamily residential properties
  • Businesses and commercial properties
  • Land, raw and developed
CONSTRUCTION LOANS GENERALLY DON’T COME IN NEAT, standardized packages like conventional mortgage loans which are structured according to strict government regulations.

FOR RESIDENTIAL PROPERTIES IN THE U.S., certain parameters relating to construction or renovation of a property being acquired may be specified in the standard Uniform Residential Loan Application (Form 1003) required for government-backed mortgages.

FINANCING FOR MULTIFAMILY AND COMMERCIAL PROPERTIES is more complex and harder to obtain than residential home loans. Commercial properties include office buildings, shopping centers, retail outlets, healthcare facilities, educational buildings, storage structures, apartment complexes, manufacturing facilities or other properties that will be sold or rented. These properties may cost hundreds of millions of dollars to build, renovate or retrofit. In addition, commercial construction may involve multiple investors, joint ventures, bond financing and complicated tax structures.

Either way, all construction loans have certain basic features in common.
Here’s a brief overview of key points about construction loans.

  • Construction loans obtained by the builder
  • Construction loans obtained by the property owner
  • Construction-only financing
  • Construction-to-permanent financing, where the construction loan is converted to a longer-term traditional mortgage after construction is complete
CONSTRUCTION LOANS TYPICALLY REQUIRE interest-only payments during construction. The principal then becomes due after construction is completed or a certificate of occupancy has been issued. On a construction-to-permanent loan, the lender may schedule mortgage payments to begin when construction is finished and the builders have been paid.

CONSTRUCTION LOANS ARE USUALLY, BUT NOT ALWAYS, set at a variable rate and priced according to a short-term interest rate, such as the prime rate. As a result, interest rates on construction loans can change frequently.

KEY PARAMETERS to consider in any construction loan include:
  • type of loan (construction-only, bridge, construction-to-permanent, permanent, forward commitment; new construction, rehabilitation; debt, equity, convertible, commercial mortgage-backed securities, bond)
  • interest rates and type of interest (fixed, variable, Treasury-based)
  • term (short- or long-term, number of years)
  • loan-to-value ratio
  • availability of tax credits (First-Time Homebuyer Credit, Energy Efficient Tax Credit, Renewable Energy Investment Tax Credit, Low-Income Housing Tax Credit, Rehabilitation Credit, Research and Development Credit and others)
  • additional assistance available from state, federal or local government programs or loan guarantees (Department of Housing and Urban Development, Federal Housing Administration, FannieMae, FreddieMac, Veteran's Administration, Canadian Mortgage Housing Corporation)
DURING CONSTRUCTION, FUNDS ARE TAKEN FROM THE LOAN through a process known as a “draw.” The draw is the method by which money from the construction budget is paid out to material suppliers and contractors.

THE BORROWER, CONTRACTOR AND LENDER establish a draw schedule based on stages of construction, and interest is charged on the amount of money disbursed up to a particular date. Different lenders have different requirements for processing a draw.

MANY BORROWERS USE CONSTRUCTION-TO-PERMANENT FINANCING programs where the construction loan is converted to a mortgage loan after the certificate of occupancy is issued. The main advantage here is that the loan requires one loan application and one closing. These construction loans are sometimes called “all-in-one” or “one-time close” loans.

ANOTHER OPTION IS TO SECURE A SHORT-TERM construction loan, then refinance it into a conventional mortgage when construction is finished. This requires two applications and two closings.

OTHER COMMON CONSTRUCTION LOANS include fixed 15-year, 30-year, interest-only and variable-rate loans.

BEFORE PRESENTING THE LOAN APPLICATION TO THE LENDER, the borrower and the builder must prepare a strict budget which covers two general categories of costs:
  • Soft costs—for expenses like architectural, engineering, legal and administrative fees, blueprints, permits, etc.
  • Hard costs—for the “bricks-and-mortar” items like building materials and payments to contractors to build the structure.
NEARLY ALL BUILDING PROJECTS EXPERIENCE CONSTRUCTION DELAYS, so everyone involved must allow for delays and accommodate the changes in costs they inevitably bring. For this reason, the lender usually sets a schedule of regular inspections. A loan officer may visit the property monthly to monitor progress. If changes are needed, a change order is issued to document them.

ADDITIONAL DOCUMENTS TYPICALLY USED in construction financing include a Construction Loan Summary and Budget, Borrower/Builder Agreement, Construction Cost Breakdown, Draw Instructions, Contractor/Supervisor Information Form, Land Plat of Survey, Floor Plans and Builder Specifications, and Description of Building Materials. Many lenders will furnish a Construction Loan Document Checklist to assist in organizing the necessary documentation.

AS WITH ALL REAL ESTATE LOANS, the borrower must complete a loan application and document his or her income, bank account details, assets, credit history and other relevant information. For safety, some real estate experts recommend that borrowers go through a pre-qualification process before applying for a construction loan and embarking on any building or rehab project.

IF THE BORROWER ALREADY OWNS THE LAND, the land may be considered as equity on the construction loan. Private lenders and investors sometimes provide hard money loans which are secured by the value of the land and/or building.

LOCATION CAN MAKE A BIG DIFFERENCE IN HOW EASY IT IS to get a construction loan. In areas where the economy is booming, banks are more eager to make new loans because their risk is much less than in areas where the economy is weak and property values are stagnant or falling.

WHEN SEEKING A CONSTRUCTION LOAN, shop around for experienced lenders with a good track record in construction finance. Construction loans can be quite complex, so make sure you understand all the variables and requirements before accepting an offer. Get all quotes in writing. If possible, consider locking in your interest rate upfront.


For a list of more than 800 active lenders providing loans for single-family, multifamily and commercial real estate of all kinds, see Selected Lenders for Commercial and Residential Construction Loans in the U.S. and Canada, published by IWS Inc. Updated annually, this unique directory includes Lender Name, Postal Address, Telephone, Fax, Email Address, Website Address and Loan Program Descriptions. A detailed description is at Product #IWS-91, 160 pages. 8.5" x 11". Price: $29.50. 

Friday, April 18, 2014

How to Get Owner-User Loans For Business And Real Estate

OWNER-USER LOANS ARE AVAILABLE TO all kinds of businesses, including retailers, manufacturers, doctors, restaurants, dealerships, wholesalers, shopping center owners, and service providers.

ALSO CALLED OWNER-OCCUPIED FINANCING, owner-user loans can be used for most business and real estate purposes, such as:

  • Acquiring or expanding a business
  • Buying, building, improving, and refinancing land and structures
  • Purchasing equipment, furniture, inventory and supplies
  • Securing working capital
  • Repaying existing business and real estate loans

AN ADDITIONAL BENEFIT OF THESE LOANS is that they help a business to respond quickly to changing needs and opportunities such as unexpected large orders, marketing expenses, renovations and improvements, working capital requirements, partner buyouts, increasing cash flow, and new product development.

OWNER-USER LOANS MAY COME FROM traditional banks, credit unions, and private lenders, and they can sometimes come with guaranteed loans from the Small Business Administration (SBA) 7(a) (general business loan) program and 504 (real estate and equipment) program.

BANKS AND OTHER LENDERS LIKE OWNER-USER LOANS because they are low-risk and can be repaid from income the business generates. Additionally, they help the lender form a lasting relationship with the business.

BROKERS LIKE OWNER-USER LOANS because they are relatively simple and easy for eligible borrowers to qualify for.

COMPARED TO OTHER TYPES OF LOANS, owner-user loans often have

  • lower interest rates
  • higher loan-to-value (LTV) ratios

OWNER-USER FINANCING SHARES SOME FEATURES with hard money loans, but depends more heavily on the business and its owners.

TO PUT AN OWNER-USER DEAL TOGETHER, you need a business that rents more than half of a building's space. Ideally, the business will own the property where it's located. If the business rents out part of the building to someone else, that's even better.

AS WITH ANY BUSINESS OR REAL ESTATE LOAN, the borrower must furnish the lender with personal and business financials, property details, tax returns, a description of the business's products and services, and other standard loan application information.

HERE'S AN EXAMPLE OF ONE LENDER'S owner-user financing offer:

Property Type: Office, Retail, Warehouse,
Light or Heavy Industrial, Mixed Use
Loan Amounts: $500,000 to $100,000,000
Loan-To-Value: Up to 90%
Lending Area: Worldwide
Credit: Mid-FICO
Documentation: Full or Stated Doc
Target Terms: Several Options available, up to 30 year fixed;
Fixed and Variable Rates
Recourse: Full Recourse
Special Notes: SBA 504 and SBA 7a loan programs and Bank Financing available
Close: Fast Closing

ONE BUSINESS SCENARIO that creates an opportunity for an owner-user loan is where a business acquires property to house the business and buys a building larger than it needs.

THE BUSINESS OWNERS CAN THEN LEASE PART OF THE SPACE to third-party tenants to generate additional income. If the business needs to expand at a later date, it can take over the rental space for its own use, or it can use the building and the rental income to help secure an owner-user loan.

ANOTHER ADVANTAGE of owner-user property is that, if problems occur and the business needs to raise money quickly, it can sell all or a portion of the space and, if desired, lease back what it needs for its own use.

EITHER WAY, THE OWNER-USER SETUP makes lenders feel more secure, so they're more likely to make the loan the business seeks.

OBTAINING AN OWNER-USER LOAN usually involves a hybrid approach. It uses the value of the real estate, the rental income, and the finances of the business and its owners.

EACH CASE IS DIFFERENT and presents its own opportunities. Often, the borrower and broker can persuade a lender to make the loan by highlighting the right mix of strengths—whether these strengths reside in the building, the rent, the business or the personal qualities of the business owner. A down payment may be required, particularly if the business is new.

IF THE LENDER LIKES THE PROPERTY WHERE THE BUSINESS is located and the business has money coming in, an owner-user loan can often be arranged.

This article was originally published in the May 2014 issue of Money Watch Bulletin. Subscriptions to Money Watch Bulletin are available in print or downloadable PDF for $95/year (12 issues).

Tuesday, March 25, 2014

How To Find Or Buy Low-Priced Preforeclosure Real Estate

YOU CAN FIND OR BUY real estate at bargain prices by looking for preforeclosure properties. Preforeclosure is the period of time between when a homeowner has stopped making payments on a property and when the property is sold at auction.
YOU CAN FIND A PREFORECLOSURE HOME at a cheap price for yourself or a client. Then, you can pocket your commission or rent or flip the property for a profit.
  1. Preforeclosures are cheaper that regular foreclosure properties.
  2. During the preforeclosure period, you can visit and examine the property. At a foreclosure auction, this isn't possible.
  3. With a preforeclosure, you deal directly with the owner/seller, soon after they've received a foreclosure notice from the lender, city or state.
  4. Negotiating with a seller is easier and less competitive than bidding against professionals at a foreclosure auction, and it's simpler than dealing with a lender.
  5. Owners wanting to sell a home during preforeclosure are motivated to sell.
  6. You or your client can rent the home to the owner after taking it over and sell the house back to the owner or to another buyer for a profit at a later date.
  7. You don't need to pay huge amounts of cash upfront like at an auction.
YOU FIND PREFORECLOSURE LISTINGS by taking these easy steps:
  1. Call your city recorder’s or clerk’s office to learn which agency handles foreclosures. Foreclosure data from lenders is freely available public data.
  2. Contact the agency and ask to be put on their free information list.
  3. Read the information on foreclosure procedures for your area. Public records may include a Notice of Default (NOD) from a lender, telling the owner the house will go to auction if payments aren't made. This is when the preforeclosure period begins.
  4. Get to know the preforeclosure period and how long the owner has before he or she must sell. Owners are more motivated to sell cheaply during preforeclosure.
  5. Get to know the "redemption period"--the time the home owner has to buy back the home after it goes to a foreclosure sale. Look for the shortest redemption time possible. Some areas have zero redemption time; others as long as a year.
  6. Before you or your client makes an offer on a preforeclosure property, be sure to inspect it and have a competent real estate attorney review the offer.
  7. Consider using a sale-leaseback deal to allow the seller to remain in the house. An attorney can write it for you. With a sale-leaseback, you or your client owns the property and receive regular rent payments from the seller.
IN ADDITION TO THE PUBLIC RECORDS OF FORECLOSURE LISTINGS mentioned above, you can find NODs and preforeclosure notices in local newspapers, where lenders are required to publish this information. 

Check out HUD Homes at Other sources include the real estate listing services and websites like,,,, and Also be sure to check your area's business and real estate journals and magazines.


Real Estate Books and Self-Study Courses from International Wealth Success, Inc.

Thursday, March 06, 2014

Download More Than 850 Community Banks and Lenders

RECENTLY WE BROUGHT YOU A FREE LIST OF 600 MORTGAGE LENDERS. TODAY we're sharing a list of more than 850 community banks, credit unions and private lenders with you. You can download the 45-page PDF to get phone numbers, email addresses, websites and mailing addresses.

THESE LENDERS MAKE PERSONAL, BUSINESS AND REAL ESTATE LOANS and are called Community Development Financial Institutions (CDFIs). 

CDFIs FOCUS ON HELPING LOWER- AND MIDDLE-INCOME PEOPLE in areas where they've been underserved by banks and other lenders. CDFIs are designed to help people and communities become financially healthy. 

CDFIs ARE CERTIFIED BY THE UNITED STATES TREASURY and the Community Development Financial Institutions Fund, which you can find at For more details, you can contact the Fund at (202) 653-0421 or

For more real estate tips and methods, visit the International Wealth Success Website.

(PDF, 45 pages, file size: 300 kb)

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