Construction Loan Financing: 7 Types of Loans and Negotiating Techniques for a Better Deal

Learning how to better manage your construction loan financing can be very complicated for the new construction professional.

Obtaining construction loans are important for Real Estate Developers, Owners, Investors, and even General and Subcontractors.  It can be challenging, but we’re going to show you 7 winning strategies to obtain and negotiate construction loan financing.  

Let’s dive in.

Take Advantage of Real Estate Investment Trusts

Real Estate Investment Trust (REIT) is a company that oversees income-producing real estate properties.  Not only have they historically been a reliable and profitable investment for millions of Americans, but they also present many opportunities for construction companies across the country. 

Many developers and contractors work directly with Commercial and Residential Realtors to put investment deals together.  It often requires putting together the deal that benefits the seller and a group of buyers investing in the deal.  

They typically have a few important members to their team including an Owner’s Representative that can provide construction cost estimating services to produce the budgets for the project, attorneys to write up joint venture agreements and trusts, and marketing manager that can help market the project through various channels including social media and realtor-based sites like the MLS and Loopnet.

Because of their success, they stumble upon big piles of cash sitting in their bank accounts, and since many contractors don’t understand investing or even know-how, it just collects dust.

A golden ticket to financial independence… 

Collecting dust.

Don’t let that be you, invest in a real estate investment trust and start having your money work for you.  

Crowdfunding to Secure More Money

Crowdfunding is essentially a large number of people contributing small amounts of money towards an overarching cause, project, or venture. 

This can be in the form of a GoFundMe page, where people of all ages publish crowdfunding campaigns to pay for their college or buy a car, or nobler causes like helping to pay for someone’s expensive surgery.

This same concept is applied to construction loan financing, many investors provide contributions to the overall project.

They do this through crowdfunding platforms that can be discovered with a quick Google search and then investing their money into quality construction projects that provide profit.

For people newer to the game of investing, or for people who don’t have as much money as others for investing, the discovery of crowdfunding is music in their ears.

Bank Financing (for Beginners)

Most contractors are familiar with all the traditional types of loans that come with running a construction company such as: 

• Interest Only loans 
• Traditional loans

Often when financing a new construction residential project, traditional bank financing is the way to go.  It’s the easiest and quickest way to obtain residential financing. It’s typically much easier than putting together an investment group or crowdfunding for a single-family residential project.  

The banks typically require a few things to get the application process going.  First, they’ll require a schematic set of drawings produced by an architect. Next, they’ll want a budget for the project.  Most Developers and Contractors can benefit from a company that can specialize in residential construction estimating at this early stage to produce the budget for a conceptual project like this.  Most Contractors find it difficult to produce costs before having final (or close to final) drawings.  

Lastly, they’ll perform a credit check and feasibility study on the property to estimate the final appraised value to make sure it’s a good investment on the bank’s part.  If the numbers and risks don’t add up, the bank won’t finance the project for fear of not having collateral.

Let’s go over two different types of traditional bank financing.

Interest-Only Loans

These are adjustable loans that enable the borrower to pay only the interest rate for a set period of time.

This means on a $100,000 loan with a 1% interest rate, you’d pay $1,000 every payment. Then, when the interest-only phase is over, you’d pay the interest AND the original loan bill.

Traditional Loans

Traditional loans are a very familiar sight to most contractors.  According to MoneyCrashers.com, there are usually 4 requirements that come with qualifying for a construction loan:

• A qualified builder must be involved
• The lender needs detailed specifications
• The home value must be estimated by an appraiser 
• You will need to put down a large down payment (around 20-25%)

Satisfying these 4 qualifications and combining it with a great credit score gives you a very good chance of securing the construction loan you need to start building.

There are many different lending companies that offer construction loans, but generally, the rule of thumb is that the better the credit score, the less of a down payment you can expect to submit.

Establish Credibility Early On

Transparency is critical when negotiating successfully.  Whether it’s to negotiate a better deal with a bank lender or to negotiate your kid to go to bed at a reasonable time, it must be win-win in nature.

Establishing genuine confidence and trust with your bank lender can create a positive relationship that leads to healthy business transactions in the future. 

Be sure to always provide your resume, company history, and all your past successes to ensure that the positive relationship stays positive.

Understand Your Banker’s Needs

It is recommended to get to know your banker and to understand their needs. 

This means getting to know what regulations, requirements, or internal management issues affect your banker. You must understand that the banker has a job to do as well, so understanding significant details such as their regulations for their loan officers, or how they manage their loan committees, can benefit anyone who’s trying to negotiate a better deal.

People work with people they know, like, and trust.  Getting to that stage with your lender can definitely help you negotiate more successfully.

Research!

This can be in the form of a simple Google search researching all the different options out there for a better deal.

Instead of trying to change the situation to finesse better deals, how about remove the problem entirely and use a better lender?

There are many companies out there that handle construction loans, do some research and dig deep to find the perfect one for you.  Failure to do so makes every other technique more difficult than they have to be.

Finding Better Investors (with a friend)

Do you have a friend that’s a commercial real estate agent?

If not, connect with one on LinkedIn now.  These are the people that can help put you in better positions among investors and help negotiate better deals for you.

Having a commercial realtor as your sidekick assisting you in negotiating better deals can definitely jumpstart your construction loan process and allow you to accomplish more profitable deals than if you were on your own. 

Conclusion

Negotiating construction loan financing doesn’t have to be difficult, following the 7 strategies in this article can help make your life much easier.

I hope you got some value from this, good luck securing your construction loan!

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