The new construction space presents a great opportunity to real estate investors as they can bring highly desirable homes to underserved markets and make a great profit while doing so. Financing new construction can be a challenge however, especially since traditional lenders have very strict lending criteria on their construction programs. To better serve the investors in the space, private lenders offer their own new construction program tailored to those borrowers. They offer more flexibility and speed than traditional programs and are often easier to qualify for as well.
For brokers, offering new construction financing lets you reach a new segment of investors and grow your loan pipeline. Want to learn how? Here’s everything you need to know.
As more and more investors feel the effects of the nationwide housing shortage they’re turning to new construction to create opportunities in markets where inventory is scarce and there’s less competition. This doesn’t mean they have to sacrifice on returns, though. Investors can benefit greatly from conducting due diligence to find high-demand areas, and since they have greater control over the final product, they can tailor the home’s design and layout to each specific market and maximize property value. New construction can also support both rental and resale exit strategies, making it suitable for any investor’s portfolio.
Let’s quickly go over the different types of construction loans so you can understand the basics when speaking with loan providers. First, there are two loans a borrower will need for a new construction project, a lot loan (unless they are planning to purchase the lot outright) and a ground-up loan. The former covers only the purchase of a parcel of land, while the latter provides funds for the materials and labor used to build a property i.e. everything from the ground-up. Not every lender offers lot loans, and ground-up loans are much more common in private lending since they involve financing real property.
Another important distinction is that there are two types of ground-up loans: construction-to-permanent and construction-only. The first allows borrowers to easily transition to a long-term financing structure after construction is completed and is perfect for investors who prefer a rental strategy. Construction-only programs are more suited to investors who plan to immediately sell the property.
Brokers who offer new construction financing often find that it’s a great addition to their loan offerings and can help them close more deals. Expanding the types of programs you provide ensures that you can meet the unique needs of any borrowers, and it helps retain previous clients who might otherwise seek a specialized lender. It also allows you to reach a new segment of borrowers ranging from experienced builders to fix and flip investors who are looking to shift gears. Perhaps most importantly, it allows brokers to differentiate themselves in the lending space and establish a reputation as a seasoned pro with varied expertise in real estate financing.
For clients who aren’t familiar with the advantages of new construction investments, you can offer your expertise to help get them get up to speed. Explain how, when it comes to financing construction projects, borrowers can often obtain more favorable terms since leverage is based on the final value of the property. Also show them how private lenders can help investors save money by only charging interest on drawn funds rather than the full loan amount. This also helps free up funds so the borrower can focus on getting the project completed or dealing with any last-minute unexpected costs.
How do you get the conversation started with investors though? Especially those who are new to space? First, lead with solutions, not products. You may already have investors who are struggling to meet their growth or acquisition goals. New construction can give these clients another avenue to real estate returns. These projects are not limited to buy-and-sell investors either, with many build-and-hold properties achieving strong ROIs. However, it’s important you take time to educate borrowers on the process. Set expectations early regarding financing timelines, permitting, draw schedules, and exit strategy. Also help them understand how these loans are different from conventional loans.
Your goal is to provide value well beyond just the financing programs you connect borrowers with. By offering educational opportunities as well as your expertise in the space, you become a valuable part of the investor’s team and a trusted resource they’ll know they can return to with future deals.
The other way you can provide value to clients is by helping them navigate the common challenges that come with securing a new construction loan. This can start with documentation requirements but also extends into finding a program that supports the client’s exit strategy. Helping investors understand project timelines is also key. Even minor delays can pile up and each month means additional holding costs that eat into returns. Encourage your clients to make draw requests on time and stay in regular communication with their contractors to avoid delays & keep the project on track.
Finally, it helps to partner with experienced lenders in complex deal scenarios like these. The importance of a responsive loan partner can’t be understated. Being able to navigate problems and receive funding in a timely manner doesn’t just mean the project goes smoother, it also helps you deliver a better experience that often leads to more business.
If you want to provide your clients with a stellar lending experience, partner with a lender that has a proven track record in the real estate investing space. RCN Capital lends to real estate professionals, commercial contractors, developers, and small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors and lending partners. If you are looking to offer construction financing to your clients, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.