What is better (or does it matter) - a loan based on appraisal (from builder) or a loan based on cost? - I know that part of pre construction is that when its based on appraisal, the builder can do the whole shibang, finance the building, draw on the full loan to build it and get paid, then you close on it, thus taking all the debt but I thought I’d ask this anyway.
What about asking the builder to provide me with a cost analysis of the building? I mean, it would make sense to have this so I know where the money is going exactly! Do builders not like this? [I don’t believe I’d do it unless I have this in writing].
In this circumstance - it’s pre construction in Florida (I know I know - it’s a wacked market - I’m just trying to figure this all out). The broker I’m talking with, who’s marketing the project, informed me that this particular area (Lake Placid) is a “great area…etc.” He gave me the salesman stuff. I’ll do my homework on this, but I was just curious to get my questions answered and gauge some of the reactions on this site.
If your carrying the financing in your name; meaning you get the loan in your name to finance the construction then you should most asuredly ask for a cost breakdown that you should compare to the draws as they are requested by the builder. This allows you to verify that the builder is not going over costs on the project. If the builder is carrying the construction financing and only expects you to find permanent financing then you will most likely not receive a copy of the cost breakdown.
To answer your question though a loan based on the final appraised value would be the best way to go because it would allow you to use the equity in the property towards your LTV requirement.
I work for a company out here in the west that does what your considering and you shouldn’t have any questions to getting a cost breakdown along with your disclosures with financing. Make sure you do your due diligence on any pre-construction deals your looking into.
Keep in mind with traditional lending banks keep thier hands in all the draws and money management also.
Pre-Construction can be very lucrative, however the downfall in this area of investing always comes down to the builder. Be 100% before jumping in.