Board Topic: new homes build 5 townhomes in a very nice area
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Posted by: alpine43 Nov 1 2004, 03:38 PM
I have found land that I want to buy and build 5 townhomes in a very nice area. I am having trouble finding ways to purchase the land (they want $550,000.) I also am not completely sure on how to finance the construction costs. What do you think is the best way to do this? I have little money to put down although my credit is 774.

Posted by: loanuniverse Nov 1 2004, 04:15 PM
Lenders do not like to lend more than 50% on land, and they usually limit the term of those loans to 24 months. In addition, the lender is going to take a look at your ability to develop the land into the townhouses {read your experience, as a developer will be taken into account}. Otherwise, we are talking here about a very speculative loan, which lenders do not like to do.

With a $550,000 purchase price, the lender is going to want to see $225,000 worth of equity on the table. I am not saying that some lenders will not go with a higher loan-to-value, but those are rare and are looking at this more as a collateral loan than one that is going to be repaid. The land loan is what is called an acquisition loan in the industry.

The construction financing is what is called a “development loan”, and the amount that you can borrow is determined by the construction costs as well as the estimate of value “as completed”. If you are thinking of building 5 units, then the land cost alone of each townhouse will be $110,000. We are looking at some pricey townhouses. I looked at a deal for a 12 townhouse unit development where the land cost for each unit was around $210K, but townhouses in that neighborhood are selling for $650K to $800K. You need to know the average selling price in the area before doing anything.

Without substantial equity, this project does not get off the ground.

Posted by: loanuniverse Nov 1 2004, 06:46 PM
I just realized that calling the second loan a “development loan” is not acurate. Development is usually reserved for the additional work that is done to the land to get it ready to build.

The first thing that you do is get a “land acquisition loan”, then that is replaced by a combination “acquisition and development loan” with a construction loan to fund the vertical improvements.

Just a matter of semantics here since most people associate development with construction.

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