4 Key Considerations for Funding New Construction Projects

New construction projects can be highly profitable for real estate professionals, contractors, and developers alike. These ventures often offer significant returns compared to existing property investments, making them an attractive option for financing. However, new construction projects come with their own unique set of challenges. As a broker, private lender, or referral partner, understanding the key factors involved in these investments can help you offer better financing options and set realistic expectations for your clients.

Whether you’re assisting developers with securing the right loans or guiding contractors through the financing process, here are four critical considerations that can influence the success of new construction projects.

1.    Having a Solid Construction Plan is Critical for Loan Approval

A well-defined construction plan is one of the most important factors when financing new construction projects. As a lender or broker, ensuring your client has a thorough, realistic, and well-detailed plan can be the key to securing a loan.

A construction plan should include the following elements:

• Clear Project Goals: A well-structured blueprint that outlines the expected outcome.
• Timeline with Milestones: Specific dates for key phases of the construction, such as ground-breaking, framing, plumbing, and final inspection.
• Budget Estimates: Detailed financial projections, including materials, labor costs, and potential contingency funds for unforeseen expenses.

For lenders, the presence of a comprehensive construction plan makes the loan application much stronger. Many lenders, particularly those specializing in new construction financing, may require such plans before proceeding with a loan approval. Furthermore, having a solid plan in place demonstrates to potential investors or contractors that your client is organized and serious about the project, increasing their chances of receiving favorable financing terms.

Even if lenders don’t outright require a detailed plan, it is likely to result in better loan terms. As a broker or referral partner, you can advise your clients to work with real estate agents or financial consultants to develop a plan that aligns with their financing goals.

2.    Expect Timeline Complications, and Be Ready to Adapt

Real estate professionals know that delays are almost inevitable during any construction project. Even with a meticulously planned schedule, issues such as shipping delays, material shortages, and unexpected weather conditions can cause significant setbacks. As a broker or lender, it’s crucial to understand that these complications can have a direct impact on the loan’s structure and repayment timeline.

To help your clients prepare, it's important to set realistic expectations from the outset. Make sure they understand the potential risks associated with delays and build contingency time into their project timelines. Additionally, builders should be encouraged to include buffer periods for common issues that arise during the construction phase.

For private lenders, this means understanding that delays might lead to extended loan repayment periods. It's advisable to discuss these risks upfront with borrowers and adjust loan terms accordingly. As a broker, you should also keep your clients informed about the impact of delays on financing, such as additional interest accrual or the need for renegotiation of payment schedules.

3.    Negotiating with Builders: A Crucial Step in Cost Management

As a broker or private lender, one of the most powerful ways to improve the profitability of a new construction project is to assist your clients in negotiating terms with their builders. While contractors may seem firm on pricing, there is often room for negotiation, especially when it comes to the overall cost of the project and additional upgrades.

Encourage your clients to:

• Negotiate Construction Pricing: Builders often have flexibility in their pricing structure, especially when dealing with bulk material purchases or subcontractors. Even a slight reduction in cost per unit can add up over the course of a large-scale construction project.
• Request Upgrades in Lieu of Price Reductions: If the builder is unwilling to lower the overall price, ask for upgrades or additional features at no extra cost. These can include higher-end materials, additional square footage, or premium finishes that will increase the property’s value upon completion.

These negotiations are important because any cost savings in the construction phase directly benefit your clients’ bottom line. For brokers, offering your clients advice on how to manage their budget efficiently can help build long-term relationships and position you as a valuable partner in their business.

4.    Lender Selection: You Don’t Have to Go with the Builder’s Preferred Lender

A common misconception in new construction financing is that the builder’s preferred lender is always the best option. While builders often recommend certain lenders due to existing relationships or incentives, it’s important to do your due diligence to ensure your client is getting the best financing deal possible.

As a broker or lender, helping your clients explore multiple financing options can result in a more competitive loan offer. Ensure they shop around for the best interest rates, loan terms, and repayment schedules. Sometimes, a less-publicized lender may offer better terms, or a specialized lender in new construction may be able to offer more tailored financing solutions.

Encourage your clients to work with a lender who has experience in new construction and understands the nuances of funding these types of projects. A lender with a strong track record in this area will likely be more flexible and better equipped to handle any unexpected complications that arise during the construction process. Whether you’re a private lender or broker, offering your clients a diverse range of lenders can help them secure financing that aligns with their project’s unique needs.

Financing new construction projects is a multi-faceted process that requires careful planning, a solid understanding of timelines, and effective negotiation. As a broker, lender, or referral partner, guiding your clients through these critical considerations can lead to smoother projects and more successful investments. By helping your clients navigate construction plans, delays, cost negotiations, and lender selection, you can provide valuable insights that position you as a trusted advisor in the new construction space.

How RCN Capital Can Support Your New Construction Financing Needs

At RCN Capital, we understand that new construction projects require special financing solutions that cater to the unique demands of contractors, developers, and investors. As a nationwide lender with experience in new construction, we provide competitive loan options for real estate professionals who fund these projects. If you're looking to finance a new construction investment, connect with us today to discover our competitive financing solutions and how they can help you grow your business.