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How Do Most Builder/Developers Finance a Production Home Development?
Currently, builder/developers tie up their cash resources and use equity financing or institutional construction loans to develop and build a tract of homes. All of the fees, interest and cost of funds are passed on to the buyer as part of the sales price. Buyers select a lot, floor plan and an external elevation. When the home is complete, if the market is still good, the buyer takes out the project financing with a new conventional mortgage incurring additional closing costs. The builder/developer may send the buyer to one or two selected lenders or leave the buyer to flounder in the open mortgage market.
Why is This Expensive and Risky for the Builder/Developer?
The builder/developer bears the cost of the loan and extended credit lines during the build process. Lenders may limit the number of starts, lengthening the process and reducing the internal rate of return on the project. Adverse market conditions may cause buyers to withdraw from escrow. Homes may remain in inventory for a long period of time, incurring additional marketing costs. In short, the builder/developer is "on the hook".
Why is This Costly for Buyers?
The buyers bear the builder's cost of funds at high commercial interest rates and fees. They pay interest and fees but receive no tax deduction. Then they pay additional closing costs to obtain a permanent loan. Ultimately, the buyers pay for the builder's increased marketing costs and fallout rate.
Stratford Has a Better Way.
At the heart of our program is a buyer obtained, construction and permanent loan in one. The buyers use this loan to close the land at the beginning of the project, cashing out the developer several months early. The buyers carry the construction financing at a consumer rate. The permanent loan is already in place requiring no additional fees, reappraisal or requalification. This saves money and removes risk for both the buyer and the builder.
With plenty of cash and no credit lines drawn, the builder is now free to build as many houses as he can sell and move on to new projects. Because the buyer is responsible for interest and penalties, the builder has more control over pricing, change orders and upgrades. The buyer is motivated to accept a compromise in order to keep the project moving.
Where Has This Worked Before?
One example of Stratford successfully executing this program is at the Moller Ranch development in Pleasanton, California. In 1997 and 1998, 27 buyers purchased production homes ranging in price from $550,000 to $750,000. They all closed on the land 6 - 9 months prior to completion providing more than $7,500,000 in up-front cash to the builder/developer almost two years ahead of pro-forma. All but one buyer used our financing program. The last one paid cash up-front, and paid a $10,000 premium for the privilege. All of Stratford's clients closed with $25,000 - $50,000 less cash than a conventional purchase and received $40,000 - $50,000 in tax deductions. Many of them did not show tax returns. The builder not only closed early on their transactions but out-performed their pro-forma by 15+%.
How Does the Process Work?
Stratford Financial Services, Inc. and the builder/developer work together to establish a pricing structure based upon the current appraised value, that allows the builder to meet his profit goals while at the same time inducing buyers to move forward. Stratford will have its team of experienced loan officers work with each buyer and customize the program to fit the buyer's needs. We establish a phasing structure and line item draw schedule that meets the needs of the builder.
As soon as the buyers have identified their lots, we can move forward on closing their loans. Our funding process takes 30 to 60 days depending upon how quickly we receive all documentation. When we close the loans, title to the land passes to the buyers. The developer is paid the established price of the land and building begins. Draws and inspections can be run simultaneously on all homes being built in the same time frame. Final inspection takes place at the end of the build and the buyer's loan automatically rolls to permanent financing.
Builder/Developer Benefits
- Loan closing pays out land prior to build
- No builder credit is used
- Unlimited number of homes may be built at one time
- Eliminates escrow fall-out
- Eliminates standing inventory
- Allows for marketing at contract price, which is lower than sales price
- Encourages cash transactions
- Removes contingent sales
Buyer Benefits
- Buyer saves on closing costs for permanent loan since one is already included with program
- Buyer enjoys cost reduction because the developer is paid out early
- Buyer receives tax deduction on all interest and points on construction financing
- Once buyer closes there is no need for re-qualification or re-appraisal
- Buyer generally needs less cash to close
- Buyer can build in and finance all upgrades and landscaping
- Buyer does not need to sell current home to qualify
- No income qualifier programs are easy and available
- Potentially cheaper property taxes
The Sooner We Start, the Smoother the Process!
This program works best when Stratford consults in the pro-forma and engineering stage of development. We have also had success with existing projects in mid phase. Either way the process requires planning and preparation. We will utilize our expertise to analyze your project and prescribe an effective marketing and funding program that increases your profits and reduces your risk.
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