I just started on my second custom home.my first went well consideringthe homeowner’s living beyond his means. I am one of about seven builders or less in the coastal bend area of south Texas who is building ICF homes.I sub out the foundation,plmb,elec,drywall,ect. and I have a small crew that does the ICF, and all carpentry work.
anyways the question I have is about the homeowners bank loans and how others deal with this.
The first HO’s bank had me request draws and they fronted the money for a percentage in order to complete that percentage.
However this new bank that I am working with on the next house, has said they would only fund me after I completed a certian amount. Such as I pay the plumber 5000 and they will reimb. after his work ahs been completed to that effect.
and that would be a small draw.The banker told me that all the builders who have worked with them operated in this manner. Now I am just starting out so I don’t really have 10000 in the bank to play with on someones house
I have told the homeowner that if he wants work done then HE will be paying all the subs
I can give more details if req. but ya’ll get the jist of it. How have construction loans worked for anyone else?
RTC
Replies
Here are some pics of my first house while we wre building.
sorry the pics are so big.
Edited 5/27/2006 12:50 am ET by RTC
nice work...you can probably pick and choose your jobs"I hate quotations. Tell me what you know" Ralph Waldo Emerson
thanks
I've done this. First draw was upon completion of foundation. The owner paid for it out of his pocket. That's the head start.
If you can get the bank to break it up into smaller units, it will work better for you.
NEVER use your own money to finance a contract house.
Eric
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It's Never Too Late To Become What You Might Have Been
I've done it and am doing it right now. The bank I'm working with now works with my style of billing so I don't know if I'll be able to help you or not.
I can request a draw any time I want up 5 draws. It can be problematic because at one point or another the project can owe my pocket several thousand dollars.
Take Erics suggestion and make the homeowner pay for the foundation up front. You should be able to get healthy from there.
Another suggestion is to communicate with the banker and find out more about what he can do for you because you are in a good position to "reccomend" that your customer work with a "better" bank.
I've found that they have plenty of suggeestions on how to handle the billing and get draws.
Edited 5/27/2006 8:17 am ET by TMO
Edited 5/27/2006 8:20 am ET by TMO
Typical construction loan is 3 to 5 draws. Some simply inspect the work as complete and then pay the draw, but many will require a list of payouts you made in getting to each draw and a signed lien waiver from each payee. I would get all the facts on this before agreeing to play ball with a customer's bank. Like TMO says, you are in a power position and could easily interview other bank loan officers, find out their procedure, and ask them how they can help with the bridge funds since you don't feel like having your own money committed for the duration.
Some guys doing these jobs simply have the working capital to run the job, and that's probably the best situation in terms of simply getting the job done without playing money games. You may need to get a line of credit for your business to help keep the cash flowing. Your client may be able to get a second mortgage of some sort, or get a signature loan that's sufficient to cover your costs prior to each draw.
My contract requires the owner to have current funds for the job without selling assets and without borrowing. I suppose I would bend this in certain situations, and I would conceivably even use a business line of credit to capitalize a project for a client with a construction loan, but I would charge A LOT to do so, probably twice the interest that the money cost me, plus fees to cover the admin time. Maybe you should look at this as a profit opportunity.
RTC,
I just went through the same thing on the custom we are working on. I presented a draw schedule for the project, the bank revised it to something where I was carrying $100k for two months, I revised it again, they revised it again, got closer. Final deal was owner paid 10% up front and I went with the revision that most closely followed my expense schedule.
The bank rep acted like I was trying to steal the bank's money and thought it was sacriligious that I dare say no their proposed draw schedule..."Every other contractor just signs the papers-most don't even read the contract".
Stick to your guns. Explain how your expenses will leave you financing his project and that is the job of the bank. If he would like you to do the financing you will be happy to add an additional 10% to the project to cover your financing costs.
Make sure you get a copy of all the contracts up front. Read them closely. The draw schedule we negotiated included a total 10% retainage until receipt of C.0. -no problem. They added an additional sheet into the contract at the closing that had a a sentence that 10% would be retained from each draw of the draw schedule in exhibit C (the negotiated draw schedule). This would have resulted in a 20% retainage-no way!
Once again the banker was appalled that I would not sign the additional sheet, but had no response when I asked why I was not given this form prior to closing so I could review it along with all the other contract documents.
Be careful when you deal with the bank. Some are great, others don't like to let go of their money.
Bruce