Private Lending for Residential Ground-Up Construction
Real estate investors who develop residential investment properties now have a lot of options with private lending, AKA hard money lending. Construction lending used to be limited to the metro area where the lender has a local office, but now you can find lenders that offer ground-up construction loans nationwide.
Private construction financing is only for investment properties.
No private lender will provide a construction loan for someone who is planning to occupy the home as their primary residence or a 2nd home.
Although the pricing is higher than banks and conventional lenders, there are several reasons why a builder or mortgage broker would seek private financing for residential developments:
Dealing with banks can be painful and requires so much documentation. Even for real estate developers with strong financials,
Private lending is typically much faster than dealing with banks. Timing is so crucial in construction, and builders don’t want to risk project delays due to a bank’s processes. This is not only critical for the initial funding, it also applies to the draws for each phase of the project. Most private lenders can fund a draw request in 2 to 5 business days.
Typical Guidelines & Pricing for Residential Construction Loans
Below are some of the general guidelines for most of the lenders listed on our platform.
- Loan Amounts: $200,000 to $50,000,000
- Loan-to-Cost: Up to 85% of construction costs
- Most lenders max out at 75% LTC
- Loan-to-Purchase: Up to 50% for land acquisition
- Must be entitled
- Some lenders go up to 65% LTP if project has building permits
- Lien Position: 1st only
- Loan Term: Up to 24 months
- Payment Structure: Interest Only
- Interest Rate: 8% to 13%
- Most lenders charge around 10%
- Origination Fee: 2 to 5 points
Typical Requirements for Residential Construction Financing
Below are some of the general requirements for most construction lenders on our platform.
- Experience: 1 ground-up project in past 2 years
- Some lenders require more experience
- Must have plans and budget
- Minimum Credit Score: 650
- Sufficient Cash Reserves
- In case project goes over budget or takes long to sell
Videos About Residential Construction Lending
Funded Residential Construction Loans
Private Construction Loan for Super Luxury Townhouse Development in Delray Beach, Florida
i Fund Cities (iFC), a direct lender, funded a private construction loan for a townhouse development in Delray Beach, Palm Beach County, FL. The loan included the purchase of the land, plus the ground-up construction of 6 super-luxury townhomes to be completed in two phases. iFC funded 54% of the $5,800,000 purchase and 100% of the soft costs of $220,000 for a total loan of $3,386,000. The Borrower put down 46% of the land acquisition cost. Once the project has full zoning and building permits, we are going to refinance into a new construction loan for $11,790,000 to build the six townhomes. Construction was scheduled to begin in the Fall of 2021. The completed value was projected to be around $3,700,000 to $4,300,000 per unit. The Borrower, a Philadelphia-based development firm that specializes in residential and multifamily new construction, was primed to get into the highly competitive Delray Beach real estate market. They planned to build six luxury and super-luxury development projects in 2021 and 2022. Although they have major development experience in Philadelphia and had a full network, team, and development plans ready to go in Delray Beach, they were growing frustrated with the lending options available; banks were hesitant to follow them into a new market where they had no track record. iFC funded the land acquisition for this property plus 4 other projects within 30 days of visiting the properties in April 2021.
Lead Funding provided a private money construction loan for a large single family home development project in Eastern Arapahoe County, Colorado. The developer has a very large operation and has completed several large developments in the areas over the past few years. On this particular development, we have provided financing for several phases of the 150-lot project. A number of the homes have already been built and sold. Our most recent loan was a total of $2.3MM for the horizontal and vertical construction for 8 homes. The loan-to-cost was just under 100%. The estimated sale price for each home is $575,000 which will result in a 50% loan-to-value. The builder offers 10 different models to choose from. Ranch and two- story models to choose from. Many features can be upgraded at the buyer’s option. This development loan was funded in April 2019.
SDC Capital provided a $1,000,000 (50% As-Is LTV) loan to complete the construction of a 5,000 square foot single family residence in Malibu. The borrower, a real estate developer, purchased the land in 2018 with cash and was already well into framing when the deal landed on our desk. We were confronted with the usual mid-construction obstacle of obtaining mechanic’s lien coverage. Fortunately, we’ve had more and more success in obtaining this coverage recently, so we were able to put this deal together quickly. Of the $1,000,000 provided, $500,000 was advanced at closing while the remainder was held in fund control. This allowed the borrower to keep moving forward with construction and gave us added protection in case the project stalled out. This loan was funded in November 2018.