Is your house not made according to your wish or is the space utilization not good? If you need to money to construct your house and change the architecture, you can do so with the help of a construction loan. It has been made very easy for the house owners to take up money for this purpose.

Construction Loan is a help for the house owners if they want to start construction in their house. The reason of construction may be anything like utilizing space, changing the architecture, building a swimming pool, building a garage, constructing spare rooms etc.

Construction loan is basically a temporary loan, secured in nature. It is borrowed for a short term of 6-12 months during which the construction of the house can be completed comfortably. It is an interest only loan, which means that the borrower has to pay only the interest during the time when the construction of the house is on. This lessens the burden of the borrower as well. He is required to pay the principal amount once the construction is over.

Construction loan is available with two options of rate to choose from. They are:

• Variable rate of interest: through the construction loan with variable interest rate, the borrower is liable to pay the interest according to any hike in the market rate. This may help the borrower when the rates fall but may prove to by costly too, once the rates start to rise.

• Locked interest rate: in this type of construction loan, the rate of interest is pre-decided and agreed upon by the lender and the borrower. While taking up this kind of loan, the borrower should look into all the loan costs carefully as there may be expenses hidden in the loan rate.

With help from a construction loan, the house owners can introduce a compete makeover in their house. The burden is also very less and the repayment is comfortable.

We are getting a construction loan through Wells Fargo. We have bought land already and have a loan on it with another bank that we are going to roll over into the construction loan. Our loan officer told us that we have to get insurance on the whole loan amount but that doesn’t make since. Why do we need to have Home Owners Insurance on land?

Owner builder construction gives you the chance to build your own home and earn a lot of instant sweat equity in the process. However, the loan process is more involved and time consuming than a simple purchase or refinance loan. If you are considering being an owner builder, understanding these nine basic steps will make the project financing and planning much smoother.

Step One: Owner Builder Pre-qualification

Before you invest too much time and money in planning your construction project, talk to an owner builder construction loan officer about qualifying for financing. Let’s face it - almost none of us can build a house without borrowing money from the bank. So, take a few moments to speak with a lender who specializes in owner builder financing and learn the details about the program that you would qualify for.

Step Two: The Pre-approval

In the first step, you simply got pre-qualified, meaning nobody pulled your credit or examined any application documentation. At the pre-approval stage, you actually apply for the owner builder construction loan and give the lender the right to pull your credit report and review some income/ asset documentation, as well as review any extra details about the project you are considering building.

Step Three: Compiling and Submitting Your Documentation

The pre-approval mentioned in step two is going to be mainly based on the information that you fill out on the application. Now, you have to provide documentation to prove that you provided accurate information. No owner builder credit file can go through official underwriting until all of the paperwork and documentation has been submitted.

Here’s a brief summary of the typical items required for an owner builder construction loan:

a) Income and asset documentation to prove you earn the income you claimed on the application and prove that you have enough money in the bank/ savings;

b) Blueprints and home plans will be required in order for the appraisal to be completed in step four listed below;

c) Owner builder budget will need to be accurately compiled so the lender knows how much money to lend to get the home constructed;

d) Subject lot purchase agreement (or settlement statement if you already bought it) and clean title insurance for the property to show that there are no hidden liens placed against the land.

Obviously, there are other items that will be needed, but these four items above are the stalwarts of an owner builder credit file. Once these items have been successfully completed, you are almost ready to go to the underwriting phase - as soon as the appraisal is done.

Step Four: The Construction Loan Appraisal

For owner builder construction loans, you will need an appraisal completed based on the land that you want to build on and the home plans that you want to build. The appraiser will examine your future home’s plans and specifications and determine an estimated value based on the recent sale of very similar homes in the immediate area. If you are an owner builder who is attempting to build a home that is out of the ordinary for your local area, you will most surely have problems getting an adequate appraisal completed.

Step Five: Owner Builder Underwriting

Just like any other mortgage, your file will have to go through underwriting. However, unlike simpler loans, an owner builder construction loan will require underwriting in two basic stages - underwriting your credit worthiness as a borrower and underwriting the project’s worthiness based on the appraisal and budget. Definitely expect the underwriting phase to last longer for an owner builder construction loan than would be required for a simpler purchase or refinance loan.

Step Six: Clearing Conditions

Once the owner builder loan is officially approved in underwriting, there will almost surely be several minor conditions or issues that need to be cleared up before you can close on the loan. Typically, these are minor issues, such as updating a pay stub from work or providing the latest bank statement. However, sometimes there will be questions and concerns about the appraisal that will need to be addressed. Often, the appraiser will have to make revisions or updates to the appraisal to satisfy any questions that the underwriter has.

Step Seven: Owner Builder Loan Closing

Once your file has cleared all conditions, your closing can be scheduled. You will go sit down with your closing agent or attorney and sign all of the final paperwork. If your owner builder construction loan is good, this will be your only closing required. You will not have to go through another closing once your home is completed and converts to the permanent mortgage. This closing is also the time that the construction loan will fund the money to pay off the land.

Step Eight: Taking Construction Loan Draws to Build Your Own Home

As an owner builder, you will take draws from the lender as you build your home. Hopefully, you will have chosen an owner builder construction loan that allows you to take draws based on individual construction items so you don’t have to finance large chunks of construction at a time. During the construction phase, the lender will also continue to update the title insurance to ensure that nobody has placed any liens on the property while you build your own house. These title work updates are often called endorsements or date downs.

Step Nine: Convert to Your Permanent Mortgage and Move Into Your New Home

Once owner builder construction is complete, you can move into your new home and convert to your permanent mortgage. This should not require a second closing. If you took the time to put together an accurate budget and hire quality sub-contractors, then your owner builder project should end successfully. You should move into your new home with a lot of instant sweat equity that you earned by cutting out the costs of a general contractor and managing the construction process yourself, as the owner builder.

With the ongoing struggles of the housing industry, the government finally decided to step in and rescue the flailing mortgage giants, Fannie Mae and Freddie Mac. So, how will this bailout affect your ability to get an owner builder construction loan?

Good owner builder loans are construction-to-permanent loans that let you wrap your permanent mortgage into the financing with the construction phase. Because Fannie Mae and Freddie Mac have become virtually the only source of funding for banks and other home lenders looking to make home loans, this means that the Fannie and Freddie bailout will create some good and bad changes for you, the owner builder.

The official government move was to create a conservatorship, which means that government assigned personnel are taking the place of Fannie and Freddie management. In other words, the government assigned managers are now in charge of these two mortgage industry titans, including the $5 trillion in home loans that they currently back.

As an owner builder, you may be wondering why all the fuss about Fannie and Freddie. How do they even work? Why do they affect so many home loans in the United States?

Here’s why: banks loan money to homebuyers. Then, these banks sell the mortgages to Fannie Mae or Freddie Mac. Banks then use the money they get from the sale of those mortgages to make new loans. Fannie and Freddie, meanwhile, bundle those loans, attach a payment guarantee to them, and resell them as bonds.

In fact, the government created Fannie and Freddie for the specific purpose of boosting and supporting the mortgage industry. The two mortgage companies are technically privately owned, though they are government sponsored enterprises (GSE) of the United States.

Both Fannie Mae and Freddie Mac have been struggling greatly in the last year due to the falling home prices and rising foreclosure rates. So, with the government conservatorship in place, what does it mean for owner builder construction loans? Let’s start with the good.

The good news for owner builder loans is that qualified borrowers will see better interest rates on their permanent mortgages. As mentioned above, good owner builder loans are designed to be construction-to-permanent loans, meaning the borrower only has one loan closing to cover the construction phase and conversion to the permanent mortgage when the house is done being built.

For owner builder construction financing, a borrower will convert over to the permanent mortgage rate when they are done building the home. With the government bailout of Fannie and Freddie, these highly qualified borrowers could see their 30-year-fixed rates drop substantially. The rate during construction probably won’t be affected as much, but the long term, permanent rate is the more important rate anyway.

So, that’s the good news. What about the bad news?

The bad news for owner builder loans is that the guidelines will probably get even stricter as Fannie and Freddie struggle to eliminate any mortgages that they would consider risky. Therefore, an owner builder may see tighter requirements for debt-to-income ratios or slightly larger down payments needed.

However, looking at the big picture, it is important to note that owner builder construction loans will still be available. Things could have been much worse. But, with the government bailout of Fannie and Freddie, the overall good news is that owner builder lending will continue.

Guidelines might be a little stricter, but strong borrowers will see better rates on their permanent mortgages. Weaker borrowers, with credit scores below 700, may find it helpful to spend time during their planning phase working on increasing their credit scores. It will help their chances at approval and definitely help their rates. If you find yourself in this category, speak with your owner builder loan officer about some credit repair options.

Getting a loan pre-approval from a lender is a quick, easy process. Typically, you fill out a few pages about your financial situation, the bank runs the numbers through a computer approval system, and you’re pre-approved the next day.

So, how do so many people mess it up so badly? Simply put, people lie (either to themselves or about themselves) when filling out a loan application.

We’ll look at examples from customers who applied for owner builder construction loans, but the principles of filling out a home loan application will apply equally well to anyone who wants a loan to buy or refinance a home.

Owner builder construction loans are for individuals who wish to build their own house without having to hire a general contractor. Therefore, they manage the sub-contractors themselves and oversee the project.

However, an owner builder loan application is no different from a standard purchase loan or refinance loan application. Almost every bank across the country will use a form known as a Uniform Residential Loan Application, also known as a 1003.

On this 4 or 5 page form, you simply fill in information about your financial situation. On the first page, you’ll cover simple info about the property as well as information about your address, phone, social security number, etc.

The second page will cover your work history and income. The third page will cover your assets and your monthly debts. All in all, the process is not difficult. In fact, anyone, whether you are an owner builder or someone looking to refinance an existing home, can fill it out without too much difficulty.

Therefore, the mistakes that are seen on owner builder loan applications be due to reasons other than misunderstandings. Indeed, almost every mistake occurs when an owner builder decides to embellish his qualifications or thinks it’s unimportant to be as accurate as possible.

You may be asking yourself why it’s such a big deal. Why should you care if you round off your numbers on the application? After all, it’s just a pre-approval. The bank will collect all of the real paperwork later on.

Here’s an example from a recent owner builder loan. A loan applicant decided the pre-approval was not worth his time to provide detailed information about his financial situation. He rounded up his income and failed to mention the child support payments that he is obligated to make each month.

In the case of this owner builder, the application was pre-approved quickly and easily. Why wouldn’t it be? On paper, everything looked great. But, when the bank started collecting the official income documentation and discovered the child support payments being deducted from the pay stubs, the borrower no longer qualified for the loan.

Not a big deal, right? Wrong. This owner builder had already put money down on a piece of land that he wanted to buy as well as purchased blueprints for his new home he wanted to build. Imagine the frustration and anger he caused himself when he found he was no longer qualified for the loan and he lost the money he wasted on blueprints.

Even though this is an example from owner builder construction, it still applies to anyone filling out a Uniform Residential Loan Application. Imagine you are buying a home and make a large earnest money deposit on the house you want based on getting pre-approved from your bank. Now imagine that your pre-approval is based on inaccurate information that you told the bank. In fact, imagine that you also wasted money out of your pocket for the home inspection and the appraisal.

So, what can you do? Whether you are looking for an owner builder construction loan or any other type of mortgage: tell the truth.

Do not think that embellishing your financial picture will help. It will only hurt you in the long run when the lender discovers the errors. You are better off getting an accurate pre-approval based on accurate information.

And, if you are unsure about your exact income numbers or your exact amount of assets, then estimate conservatively. That way, if your income or assets turn out to be higher than you estimated, you will still be approved and qualified for the loan program you are counting on. It works for owner builder construction loans. It works for refinances. It works for home purchases. It works.

In fact, one great piece of advice is to supply copies of your W2 forms, your pay stubs, and your asset statements when getting your pre-approval. Many customers, not just owner builder customers, don’t want to take the time to do this, because it’s a hassle. But, your loan officer can use these documents to ensure the pre-approval is based on accurate calculations. Besides, you are going to have to submit these documents for underwriting anyway.

For example, a recent owner builder borrower took the time to submit his pay stubs when he applied for his construction loan. A big portion of his income came from bonus pay. It turned out that he could only get credit for the average of his bonus pay over the last two years, in addition to his full base salary. Therefore, his gross income was calculated slightly lower for the loan that he thought it would have been.

In this case, the owner builder fortunately still qualified for the construction loan. However, you can see how miscalculating income can lead your pre-approval to be inaccurate. Therefore, don’t take any chances. Submit your documentation paperwork when you fill out the application.

So, if you are thinking of applying anytime soon for a mortgage for a home purchase or a simple refinance, then take a lesson from the world of owner builder construction loans. Do not discount the importance of providing accurate information about your financial situation on the Uniform Residential Loan Application. The pre-approval is a quick and easy process, but it’s also a very important one. Owner builder construction loans are no different in this respect.

Construction loans, especially owner builder construction loans, are tricky enough when the mortgage industry and housing market is doing well. Things got a lot tougher, though, when lenders tagged certain counties around the nation as being areas of declining values.

These counties are known in the mortgage industry as soft markets, and they are having a big effect on your owner builder loan terms whether you recognize it or not. If an owner builder wants to build his home in a county that is listed as a soft market, then he should expect to have different financing guidelines than someone who is building in a county that isn’t tagged as being an area of declining home values.

It’s a tough pill to swallow for someone who is caught in this situation, but the guideline changes are based on prudent lending principles. The biggest change that an owner builder needs to be aware of is the requirement for a larger down payment than normal.

For instance, if you are building your new home in a soft market, then you can expect to make a down payment of at least 10%. If your normal owner builder construction loan guidelines were for a 10% down payment to begin with, then you may have to put an additional 10% down.

For example, if you are building a home with an appraised value of $250,000, and your loan terms called for a 10% down payment of $25,000, then you may find in a soft market area that you have to actually put 20% down, or $50,000. If you are getting an owner builder construction loan that typically requires no down payment, expect a 10% down payment for any construction in a soft market.

Why is this fair? Look at it from the lender’s point of view. They are putting up a lot of money for you to build a home in an area where loan values are decreasing. Therefore, in order for them to still be able to provide loans, they need borrowers to cover the possible value decrease by bringing some cash to the table.

By requiring owner builders to make an extra 10% down payment, lenders are protecting the loan-to-value ratios in the event that the house value decreases by the time you are done building it.

It helps to look at it this way: the revised guideline for soft markets is actually a good thing. The alternative is that a bank refuses to provide owner builder construction loans in any county that is tagged as a soft market. Then, you would not even get the chance to build your new home.

Therefore, if you are an owner builder who wants to build your new home in an area that is a soft market, at least you still have some options with your construction loans. If bringing an extra 10% down payment is not a possibility for you, do not fret too much. The really good news is that the list of soft market counties around the nation is drastically decreasing in size.

Though there are no guarantees, the mortgage industry is hopeful that the list will be shrunk to a bare minimum size in the next six months or less. Once home values are done dipping, the counties will no longer be considered soft markets. Once this happens, owner builder construction loans can go back to their standard guidelines and down payment requirements.

If you are an owner builder, you are probably wondering if your county is affected by these soft market designations. The only way to find out for sure is to speak directly to the construction lender who provides the owner builder loans. They will be able to tell you for sure if your county is on their soft market list.

In general, owner builder construction loans in Florida, California, and northern Virginia are the ones that are affected the most. However, there are still plenty of other states that have counties with soft markets.

Therefore, do your best to get this information up front from your owner builder loan officer. Don’t wait until it is too late to find out that you have to bring extra cash to the closing table.

Owner builders who fully understand the effects of building in a soft market can plan around the guideline revisions and still build their dream homes, saving tens of thousands of dollars in construction costs. But, an owner builder who does not pay attention to the realities of the new market conditions will be the one to suffer the consequences.

A good owner builder construction loan will have only one closing to cover the land purchase, construction phase, and conversion to your permanent financing. Therefore, the owner builder loan will have two sets of interest rates: one while you build, and one rate for when you move into your new home. Every owner builder should understand the inner workings of these rates when planning to build.

The interest rate while you build your home is called the construction rate or the interim rate. For an owner builder construction loan, this rate should be locked in when your file is in underwriting. This means it should not change during construction.

The construction rate on owner builder loans is typically an interest only rate that should accrue only on the funds that you borrow as you build your home. There are some owner builder programs out there that will set the interest to accrue on the overall construction line of credit. However, you should try to avoid this if you can. It is better for you as an owner builder if the interest simply accrues only on the funds that you actually draw during construction.

But, what dictates the actual interest rate during construction on owner builder loans? Typically, this rate is tied to the Prime Rate, which is manipulated by the Federal Reserve. This does not mean that an owner builder should expect his construction rate to be set to the exact prime rate or even set to a simple calculation from the prime rate. However, it does mean that you should expect the construction rate to go up or down relative to the prime rate.

Many owner builders think this is the case for all types of mortgage rates, but they don’t fully understand the difference. For example, a 30 year fixed mortgage rate will not adjust in motion with the Prime Rate the same way that a short term construction rate typically will. So, for an owner builder who wants a construction-to-permanent loan to build his house, it is important to realize the difference.

Now that you understand that the construction rate is fixed during the construction period and tied relatively closely to the Prime Rate, you should also understand that it’s one of the least important features of an owner builder construction loan. Why would someone say such a thing? Aren’t interest rates the most important part of a loan? Not if it is an interest only rate that only lasts for the short period that you’re building your home.

In other words, if you only spend nine to twelve months building your house as an owner builder, and you are building a home that falls within the conforming loan limits, then differences in your construction rate are only going to have very minor effects on your overall project costs. This is especially true if the owner builder loan is set up so that the construction rate only accrues on the funds as you actually draw them during construction!

Now that we understand construction rates, what about the interest rate for when you’re done building your home. When an owner builder finishes construction, he is ready to move into his new home, hopefully without having to go through another round of closing costs and fees.

At this time, the owner builder can lock in his permanent mortgage rate. A good owner builder construction loan will allow you to choose which type of loan program you want for your permanent financing. In other words, you can choose a 30 year fixed mortgage or some type of adjustable rate mortgage, etc. Of course, nowadays, almost every owner builder is smartly picking a 30 year fixed mortgage. But, it’s nice to have the options available to you.

When you are finishing up construction, you will be able to lock in your 30 year fixed rate at that time. So, your permanent rate will float until you are done building. A good owner builder construction loan, though, will not mark up your permanent rate in any way. Therefore, when an owner builder should move into his new home at the lowest market rates available based on his credit qualifications.

A nice thing about owner builder construction is that you are building your home for much less than the actual market value of the finished home. Therefore, a good owner builder program will give you credit for the instant equity you have built into your property and will accordingly be able to finance your permanent loan at lower interest rates. For example, if an owner builder spends $240,000 to build a home that has an appraised value of $300,000, then the permanent loan should give him credit for $60,000 down payment.

In the example above, this permanent rate will be a nice, low interest rate, because the overall loan-to-value ratio is below 80%. And, as a bonus, you won’t have any mortgage insurance to worry about paying either, which will save you even more money each month.

Overall, if you want to be an owner builder to build your own home, make sure you understand how the interest rates are structured for your loan. And, understand which features of the loan are truly important and worth worrying about. An owner builder who can do this will save himself a lot of trouble and money.

Owner builder construction loans are more complicated than simple purchase or refinance loans. Whereas these simple loans are typically involve one easy step, owner builder construction loans on the other hand involve the payoff of the land, the construction loan holdback amount, and the conversion to the permanent financing. In other words, that’s three loans wrapped into one.

Therefore, if you need a construction loan, especially if you are going to be an owner builder, you should take the time to choose the right closing agent. It is important to understand the role of the closing agent and the things to look for when hiring one.

So, what exactly does a closing agent do in relation to your loan? For owner builder construction loans, the closing agent will assist you with the signing of all the final loan documents. This is typically an attorney or a title company. Generally, you can freely choose between either of these to do the closing for you. A few states, however, require you to use an attorney for the closing.

The owner builder lender will provide instructions to the closing agent just prior to the scheduled closing date, and the closing agent will prepare a long list of paperwork for you to sign. One of the most important documents is the settlement statement, often in the form of a document called a HUD-1. It is this document that itemizes the owner builder loan transaction, including all of your closing costs.

However, the closing agent will also handle the payoff to the seller for the land if the purchase of the land is wrapped into the construction loan. If the owner builder already owns the land, then the closing agent will oversee the payoff of the balance of the loan on the land. Likewise, for owner builder construction loans, the closing agent will ensure the appropriate distribution of closing cost fees to the appropriate parties.

This fee distribution and paperwork preparation is done for you at closing. However, prior to closing, the closing agent will be the main point of contact for your owner builder loan’s title work. Title work is simply insurance against other, unknown liens on your property. The closing agent will coordinate the delivery of this title insurance to the lender for review in the loan’s underwriting stage. For owner builder construction loans, though, the closing agent might also oversee title insurance updates while you your own home. (Often, the lender will have its own title company to handle these updates during the construction phase.)

So, now that you understand the closing agent’s role for your owner builder loan, you ought to know what to look for when choosing the right company. Most people immediately look for the cheapest closing agent, but this is often a waste of time and effort. The bulk of the closing fees are going to be set by someone other than the closing agent. The fees specific to the closing agent typically vary within a local area by no more than a couple hundred dollars. Therefore, hiring one closing agent versus another agent in a town will typically have very little cost variation.

Therefore, it’s more important for an owner builder to hire a closing agent who is familiar with construction loans. If the closing agent has never done a construction loan before, the paperwork and lender’s instructions will be foreign to them. This can easily cause delays and headaches for you, the borrower.

Also, you will want to find a closing agent that can handle closings in the county where the subject lot is located. Because the closing agent is the one who will record your deed of public record at the local courthouse or county office, the closing agent has to be able familiar with the county where the land is located. And, speaking of location, it also helps if the closing agent’s office has a convenient location for you to drive to for the final closing.

Finally, when an owner builder chooses his closing agent, he may want to decide between hiring an attorney or hiring a title company. Often, title companies that perform the title searches on the subject property will also provide services as the closing agent. There are two advantages to this: the fees are often slightly lower, and you have direct contact to the company that is providing the title insurance.

However, you may wish to hire an attorney as your closing agent instead of going straight to a title company. The advantage to using a closing attorney is that they can provide you with legal guidance that a title company may not be willing or able to do. In some states, you won’t have a choice. You may have to hire a closing attorney due to state laws.

Therefore, if you need an owner builder construction loan to build your own home, then don’t choose your closing agent based solely on price. Instead, an owner builder should look for a title company or a closing attorney that has a background with construction loans and that is familiar with the local area.

People building a custom home, whether acting as an owner builder or hiring a licensed general contractor, often have to be reminded of one simple, vital point: look at the big picture.

Owner builders, especially, have a chance to save tens of thousands of dollars being their own general contractor and managing the construction project themselves. In fact, avoiding the builder’s markup is the true secret to saving. Owner builders who try to do everything by themselves or save a few pennies on every aspect of the project will end up losing more time and money overall. And, there will be a greater potential for a failed project.

Instead, everyone building a home should step back and focus on the big picture.

Focusing on the big picture means an owner builder should not try to nickel and dime every aspect of the project. You should definitely not skimp on the quality of the project, and you should not sacrifice the quality of the professionals you hire in an effort to save a few bucks.

This means both sub-contractors and loan professionals - these are the two sets of people who will help insure your success.

For owner builder construction, the big picture does not involve trying to find the cheapest sub-contractor, just for the sake of price - it means finding the best value, which is the right combination of price and quality labor. You will pay dearly for the mistakes made by lower quality sub-contractors. Owner builders, especially, need to locate and hire the right sub-contractors for the job. You will be glad you did when your home is built with quality material and quality labor.

The same principle is true for who you choose to work with for financing, whether you need an owner builder construction loan or just a standard construction loan for a custom home. For example, if you are an owner builder, do not try to save a few pennies by working with someone who does not have expertise specifically in owner builder loan financing.

If your brother in law, the mortgage broker, does not close dozens of these exact kinds of loans each year, go elsewhere. You will spend more in the long run - in both time and in real dollars lost to ineptness and incompetence.

Not all loan programs are created equal, and not all loan officers are either. Remember the big picture and be sure to work only with people who understand your unique construction program needs, especially if you are going to be an owner builder to manage your own construction process.

In fact, in this case, you may want to ask your loan officer if he or she has built his or her own home before. This will be a sure sign of someone who understands your needs throughout the project.

Owner builders who lose sight of the big picture, because they get caught up in the small details of trying to pinch pennies, are the ones who end up using cheap materials, low quality labor, and low quality financing. Unfortunately, when this happens, it is the owner builder who suffers and loses both time and money.

A SECRET STRATEGY TO TURN LOSERS INTO WINNERS

I received a question from a Realtor last week that will give you insight into a purchase strategy that you can use with a commercial property whose current cash flow can’t support a loan large enough to complete its purchase. In other words, loan to value is restricted to 50% or less because values have shot up and cap rates have declined. We see this a lot on the coasts, in large cities, and on high quality properties.

In this particular situation, we were dealing with an apartment building in a beach community that was selling for 22 times the current gross rent! (I kid you, not!) And believe it or not, that is a fairly standard Gross Rent Multiplier in higher end beach communities in California.

The property could only support a loan of about $1.5 Million and the asking price was over $3.5 Million. To purchase that property “as is” would require a $2 Million down payment and would only offer the investor a 3.7% cash on cash cap rate with its current income (less with the loan). You’d be better off finding a good money market account!

However, there were two options we could take that involve looking at what the property could be, not what it is. And herein lay one of the most powerful financing/acquisition strategies involving construction loans you could ever learn as a real estate investor.

Option 1 was to look at the building as apartments, but with upgraded rooms, exterior, and hallways. Adding some granite counter tops, wood floors, better appliances, and the like would allow the new owner to raise rents approximately 33% to 40%. This would raise the maximum loan to almost $2.2 Million on a permanent basis. We could potentially get a construction loan to acquire and renovate the property in that amount, preserving the Buyer’s capital and increasing return.

Option 2 involved looking at the building as a potential condo conversion. Condos located that close to the beach and the local towns were selling from $800,000 to $1.2 Million. There were 9 units in the building. Taking the low end of the range would give us a final sales value of $7.2 Million!!! That’s a potential profit of over $3 Million on what might amount to a $300,000 renovation and conversion. In this case, a lot of investigation remains to be done to see if this is a viable alternative. On top of that, the overall market for condominiums has become rather soft and it might be a hard project to sell to a financial institution at this time.

So what’s the lesson? In older investment properties, commercial properties that have been neglected by the current owner, or properties whose owners’ have fallen on hard times, there exists an opportunity for an educated investor to purchase real estate at a significant discount with high leverage! Construction loans on commercial property usually allow the investor to come in with 15% to 20% of the total costs of the project, provided the construction loan doesn’t exceed 75% to 80% of the final, stabilized value. On multifamily and tract homes, the loan to costs can be as high as 90%.

So the next time a lender tells you “no” because a project doesn’t cash flow, is in need of repair, or has had an ownership problem, turn the tables and consider using a construction loan to acquire and add value in one step.