One builder's way of obtaining spec bank financing

[Rick Hoge]

Interesting strategy.

http://www.residentialdesignandbuild.com/print/Residential-Design-and-Build/Winning-the-Banking-Game-/1$4104

[Ted S.]

I think I would be more concerned about getting sales than financing in this market. I can get financing right now, provided I can show that I can pay the note even if I can't sell the house, I have no problem getting financing.

I cannot find any lot right now that if I buy it and building on it, my hard costs alone won't exceed what the market is willing to pay. I did find some lots that went for $10k at auction. Then you have to get it sold. That can take many months at market value around my area.

[Allan Edwards]

Rick

I really didn't see anything that unusual about the builder's situation, the bank wanted a co-signer which of course secures their position. I know a lot of builders who have investor partners. Asking subs and vendors to defer payment is also a tactic, although less common.

It is really difficult to obtain financing for specs, coincidently I was approved for a loan yesterday, it took forever to get approval. I've never had more conversations with my banker than I had on this loan, and of course they wanted a ton of information. They also asked for a "liquiditiy covenant", which had me scratching my head because I've never heard of this. Of course I complied.

The good part is supply is and has been so limited that I hope in 6-8 months I may be one of the few builders with inventory, specifically new (not stale) inventory.

Another sign of the times is I am building a house for a client and their bank, Wells Fargo, has grilled me about information I have to supply them. Of course I am not on the note, so I was shocked when they asked for references from previous buyers, personal and company income tax returns going back 3 years, past and current personal and company balance sheet and income statement, inventory list, and a 4 page questionaire. It was unbelievable.

[parkwest]

In today's "banking" economy, if I was building multi-million dollar homes over any length of time, I might be thinking of asking the bank for that exact same info they asked you for, Allan... just to find out what's the odds of the bank still being in business by the end of the project.

[Dick Seibert]

Another sign of the times is I am building a house for a client and their bank, Wells Fargo, has grilled me about information I have to supply them. Of course I am not on the note, so I was shocked when they asked for references from previous buyers, personal and company income tax returns going back 3 years, past and current personal and company balance sheet and income statement, inventory list, and a 4 page questionaire. It was unbelievable.

Allan:

That's the way it always was done, plus we had to put up a bond, in 1971 all bonding companies stopped bonding single family homes, so the banks set up their own systems. There is a good side to this, in the mid 70s a doctor went to Sumitomo Bank for his loan and Sumitomo requested my information, after about a week they called me and asked me to stop by, he said that everything was alright with the loan, what did he have to do to get me to move my accounts over to him? He then started referring business to me (that Houston attorney that I've mentioned, who became a good friend, was originally a Sumitomo referral). .

[jstoddard]

Allan
Get used to it. Banks no longer have any place to dump their paper (especially non-conforming loans and Jumbo mortgages like you're dealing with). Since they've got to service the paper, maybe for the life of the loan, they're going to be much pickier than before. I'm surprised Wells-Fargo would even consider a construction-perm at this point but I think they do give some local flexibility to their managers. The reaon they're giving you that kind of scrutiny - they know that if a multi-million dollar house poops the bed halfway through construction.. it's almost impossible to get it finished by someone else. You've done that kind of step-in work, you know what I mean. There aren't 10 builders in Houston who would want to step into the middle of one of your jobs. So even though you're not on the loan - you're still a critical component and the bank is going to look at you very carefully . In some ways it's more important that you perform than that the borrower does. Smart banker.

I'm surprised the bank didn't just give you the option of handing them a performance bond. That's what I used to do for every larger project. No idea what it would cost now but 20 yrs ago I think I paid around a grand per $1M bond.

JLS

[Dick Seibert]

. No idea what it would cost now but 20 yrs ago I think I paid around a grand per $1M bond.

Bonds averaged 1%, higher for smaller jobs, lower for huge multimillion dollar jobs. The bonds are always paid for by the owner, not the contractor, there is no law there, it's just traditionally the way ti was done;

BTW, when Sumitomo asked for my business my request was a large credit line at 1% over prime, they countered with a smaller line, 2% over prime, and a life insurance policy with them as primary beneficiary, my wife secondary, he said he wasn't worried about me performing as long as I was alive to perform, but the bank would be in big trouble if I was killed on the freeway.

[Allan Edwards]

Banks are obviously being more conservative, no matter what type of loan is being made. My bankers tell me bank examiners are breathing down their neck, all aspects of the loan and borrower are being critically scrutinized, this filters down to each deal. These “liquidity covenants”, which require borrowers to keep a certain liquidity level, are being required.

I’m just glad I can even get a spec loan and glad people are still building. Those builders who can be active and have exposure in the market, I believe will be rewarded.