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Private money construction financing:

Eight fundamental steps

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If you have a terrific construction project there is financing available, even when the banks say “no.” Private money financing can be an affordable, highly responsive and refreshing alternative to the protracted money hunt with conventional lenders. Here are a few quick thoughts to consider should you decide to pursue the private money alternative.

Go to the bank and try to get the money, or at very least, determine that conventional financing is not available for your project. Exhaust the conventional avenues before you step into the private money arena. Prepare to pay a little more in financing costs, and know that rates and fees can vary widely between lending firms. While private money can be more expensive than conventional lenders on paper, it can also be more responsive and nimble. That responsiveness can translate into capturing greater opportunities and lower strike prices that may result in increased profits.

Experience, track record and credit count, though not necessarily at today’s banks. While SFG and most other private money construction lenders are credit conscious, we recognize that builders have been through a war. If your project truly meets its market, the numbers work and the track record underscores the builder/developer’s experience, most private money lenders are looking for ways to work with you.

Small, well-conceived projects work best, whether they are an in-fill development or a single-spec house. Design and build to the quantifiable demand and opportunity within the selected submarket.

Construction completion, broken projects and asset repositioning
Most banks aren’t too keen on financing broken projects or construction completion. Private money is a great fit for these project types, as well as for asset repositioning.

Location, location, location -- The old adage applies now more than ever, and lenders that are still ready, willing and able don’t want to play on the fringes. SFG is very active with construction lending in the California’s coastal band and in the greater Seattle area, but there are opportunities in countless other submarkets, as well – find them and focus.

Let the numbers dictate your direction, for they will dictate ours. Make certain your budget and proforma are realistic before the lender goes through them with a fine toothcomb. Make sure you have done your homework, especially on the market’s expectations, product design, construction budget and price points. Margins are compressing as the hottest submarkets are seeing increased competition for lots.

Focus on the LTC, not the LTV -- Most construction lenders are working with loan-to-cost. Loan-to value, while important, is a secondary driver. Prepare for the likely requirement for 25 to 35 percent in cash equity. In many cases, this translates to the lot(s) or land being free and clear.

Think velocity and execution: Get in, get it done, get em sold, get out – Private money comes with a higher interest cost than conventional financing. Be prepared to execute and move quickly through the construction, marketing and sales process. Greg and his partners did this on a five-house detached project in San Marcos in the summer of 2012 -- all five houses contracted above proforma and prior to construction completion; SFG was paid off in less than six months.

-Submitted by by Charles Salas, senior underwriter, SFG of California.

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