I’ve done primarily cash jobs. Do the design, get paid. They use the design and engineering to get financing.
How do design-build companies handle this? Has anyone seen the design fees included in the financing? How is this handled, since the design work has to be done to secure the right financing?
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You're way beyond my design aspirations, but I don't really understand the problem. Have you found a client who wants/needs 100% financing?
My experience is that some cash from the client is expected by everybody. Clearly it wouldn't be difficult to post-finance the design/engineering fees. My last client did, with his long-term mortgage.
My experiences with no-cash-available prospects have been decidedly unfruitful, leading to my avoidance of them.
PAHS Designer/Builder- Bury it!
I think it's just an innocent inquiry from a potential client on what can be rolled in and what cannot. The kind of "you won't learn if you don't ask" thing.
I don't have lots of experience with the financing side, and now I'm curious, too. If the lender wants 10% down (fabricated number), then is there a way to make that 10% of the total project, or just 10% of construction, and all design and planning costs are cash?
Well, my limited experience with lenders has been that they are willing to lend a certain percentage of the completed value of any given project - use 80% as an example, leaving the customer to come up with the remainder of the cost. So I don't see why design fees couldn't be included in the total.
The only reason I'm posting this is because it's important to remember that although lender will lend up to that certain % (80% in our example), the way the borrower qualifies for the loan is based on their ability to pay it back, their credit and income history, more than the total ammount of the project.
Im going to friendly disagree if I may . Heres why .
Its a cost that happens before the proceding . They would need it done already to qualify for the loan .
Contractor bid , plans with design done , and land contract or deed . Now they are ready to see a banker the second time. The first time was to get approved for an amount .
He would be doing the design with out knowing if the banker was going to buy into it also . I dont see it as part of the loan when there isnt one yet .
If they dont have the money for the plans or the design of plans , then I would be "pretty busy ". :)
Tim Mooney
If the lender wants 10% down (fabricated number), then is there a way to make that 10% of the total project, or just 10% of construction, and all design and planning costs are cash?
My limited experience is that design fees are not part of a construction loan but can very easily be part of the mortgage. As these two loans are often packaged, the contractors job would be to ensure that there was sufficient money left over from construction to pay for the design/engineering. Simple enough to be one line on the budget.
When you say 10% down, you are referring to a mortgage? A construction loan has different qualifiers. Most mortgages follow government guidelines. Construction loan details are more at the discretion of the institution.
PAHS Designer/Builder- Bury it!
I think the easiest way to find out is to ask a lender who does construction loans. My experience with real estate loans is that lenders hav widely varying requirements about all sorts of things. Some of them will give you nothing, some will give you anything and charge for it. I'm sure there are lenders who would finance the design fees and they probably charge more interest and fees than the ones who want you to come in with the land and a permit and 20% of the cost too.
I know you are doing the thread just because , but I wouldnt go there in real life. I should have a post before this one if it appears .
Tim Mooney
My experience is that Tom has is mostly correct. And Tim is also correct about avoiding the customer if they really don't have up-front cash.
The take-out loan (permanent financing) will be made on two factors: Appraised value of the property and the borrowers ability to pay.
Our local S & L makes a "wrap" loan that includes one loan closing with one set of closing fees. (That's what I'm building with right now.) We draw construction costs as we go and then get the total loan figure nine months after the construction loan period started. In our case we owned the lot outright and had already done most of the site prep including water & sewer taps fees. We were not asked to put up any $ other than what we'd spent already. As Tom said, there's quite a bit of discretion for the lender.
If the customer simply wants to know if they can "reimburse" themselves for the already paid design fees out of the permanent financing, that will probably simply depend on whether the LTV (loan to value, usually 80% on a "good" loan) has paid all construction costs and still has $ left in the 80% part of the value.
If the customer doesn't have enough $ to pay initial fees up-front, RUN!
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