Successfully Financing Your Real Estate Investments: Builder Financed

In most cases, this option in which the builder secures the loan, is the best choice. If you are investing in a large resort development or a condominium tower, it will always be this way. Usually you would provide your own construction financing only when doing a single-family build. But with the negotiating power of our group, we have been able to negotiate for the builder to hold the construction financing—even when building our investors’ homes!

One benefit of having the builder carry the financing during construction is that if there are delays, such as natural disasters or construction problems, it will usually cost the developer more money and not you. No mortgage is required for you during the build cycle.

Typically, you would see the first option, in which the builder secures the financing, in a condiminium project and a planned-unit-development (PUD). A PUD is a planned community with common open space, such as a set of townhomes with amenities such as a swimming pool, fitness center, and so on. The builder must pre-sell a predetermined percentage of the units to obtain financing. As an investor, you help to fulfill the developer’s pre-selling quota, allowing the project to begin. Because the builder is securing the financing on the project, you as the investor are not required to get a loan during construction. This can be a huge advantage. In fact, if you resell the property before construction is complete, you will never have to secure your own mortgage. You, of course, always want to be prepared to close on every single property that you secure. Selling before construction is complete can be one of your intended exit strategies, but it should never be the only one.

As an added advantage for the investor, when the builder secures financing, the investor foes not make any payments or pay any interest during the construction process. This reduces your carrying costs on the project. You are also less likely to be burdened y unexpected additional charges during the construction. These items will vary from builder to builder and contract to contract. Review your contracts carefully to make sure the builder won’t be passing on any additional costs to you.



Key Advantages to Builder Secured Financing

• Not using your own credit during construction

• No interest payments during construction

• Less likely to pay for unexpected charges

• If you sell before construction is complete, you never have to get a loan





Excerpt taken from Making Hard Cash in a Soft Real Estate Market, Chapter 15, Pages 152-153.



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