|Posted by: hpham Nov 22 2004, 11:36 AM
| I am looking for some advise on how to structure the loan to the home builder. A relative of my close friend who is the home builder over the last 2 years approach me for the loan. His business plan has been to purchase few (usually 4 to 5) lots in a certain sub-division, work with sub-contractors to build the homes, resell and make some monies. Profits for each home (I was told) are between 25K-35K depending on extra options. Lately, he would like to expand his scope by buying more lots - say 20-30 lots. However, his access to commercial credit loan is max-out at apprx 1 million.
My friend told him that I has some cash that is currently invested in low-yield like CD. Therefore, he prposes that he would like to borrow 100K-200K with 13% annual intetest. Principal and interest will be paid at the end of the term.
Since I have never done this before, please give me your advises on the followings:
1. How can I make sure the loan is fully secured? what kind of collateral do I need. I beleive his principal resident was used as collateral with the bank for the commercial loan.
2. should I consider his proposal with the loan or just too risky for me to do it
Thanks for your help
|Posted by: loanuniverse Nov 22 2004, 10:02 PM
Very interesting situation you have here. Here is some feedback off the top of my head.
- The homebuilder is probably thinking of this as an unsecured loan. The problem here is that it takes some expertise to evaluate an operation to determine risk specially for unsecured lending. Even in the best of scenarios with the builder providing you financial information, it would be a tall order for someone not versed in credit analysis.
- I would not lend on an unsecured basis.
- If the builder says something like “I would let you place a lien on the corporate assets of the company through a UCC filing”, that is pretty much “unsecured” the assets that are worth putting a lien on are the properties.
- The assets that you can attach and are worth anything are the lots, the problem is that for him to build on them, the construction lender is going to want a mortgage on them. Therefore, you probably want to finance the lots that are going to be developed at a later time.
- Banks usually finance land at 50%, if you want to consider this at all, I would suggest that you do not finance more than that. Trust me when I say that you need as large a cushion as possible.
- You need to get this land appraised.
- For this to be secured you need to place a first mortgage on the lots that you are going to finance.
- I can not tell you how risky the deal is without knowing more about the collateral, the builder and financial information, but risky it is and mostly because your lack of expertise in assessing credit as well as operational can create a problem for you.
You can not separate risk from return, there is probably a way to do this that will mitigate this risk, but I suspect that would not be the kind of financing the builder is looking for
|Posted by: HUNG PHAM Nov 23 2004, 06:56 AM
| Hi Admin:
Thanks for your advise. I am really enjoy this site. Hung