All posts by Joe Walsh
Private Construction Financing
The private construction financing market continues to develop due to the benefits provided to both sides of the equation, namely the borrower and lender.
Private construction funding has become the construction mortgage product of choice for many buyers, home owners, and builders in the province of Ontario as well as other parts of Canada.
For private lenders, construction financing is an effective way to get their money placed into the market several times in one year, yielding a very solid level of return.
This is an example of a product that fits certain needs of the market while still charging a premium price.
Private mortgage financing of any type is not cheap compared to institutional lender rates for similar applications. But one of the key differences with construction financing as compared to other forms of private mortgage lending is that the borrower in many cases will choose a private mortgage over an institutional mortgage offering.
Private construction loans on average, can be put into place faster, provide higher capital leverage, and offer more straightforward and predictable draw schedules that their institutional counterparts.
All things being equal, everyone that could qualify for traditional bank money at the lowest possible rates will take it every time… or at least they would in theory.
The challenges of bank based construction financing become the opportunity for the private lender. Borrowers have to understand that the lowest interest rates are provided at the lowest levels of risk. To determine if an application fits into a low risk category of lending, more assessment work is required by the lender which typically takes more time. With most financing applications for just about any purpose, time is a factor in getting funds approved and in place. So when time is a constraint, private money can become the solution.
The second challenge provided by lower cost money is the amount of funds the borrower needs to have invested or have available to invest in the construction project. If a private mortgage solution will provide higher leverage than the next best institutional offer, then private money can again end up being the solution.
The third challenge related to low risk construction lending is the care and conservatism associated with construction draw advances. If you’re a first time applicant, this is likely not a concern to you as you have no historical experience to go by. But for a builder who is continually utilizing construction financing, the predictability of a private lender’s draw administration process may cause you to chose private construction financing, even if it requires you to pay a premium.
If you’re seeking private construction financing in Ontario, I suggest that you give me a call so that I can quickly assess your requirements and provide you with relevant options for your project.
Click Here To Speak With Construction Mortgage Broker Joe Walsh
Private Mortgage Lenders And Rates Are Very Regional
In recent years, private mortgage lenders have grown in numbers as baby boomers seek out different, more secure investing opportunities outside of the stock market roller coaster of the last ten years.
Regardless of where you live in Canada, there are likely private mortgage lenders not too far away that could be interested in your property if private funding is required.
However, unlike institutional lenders that tend to be more consistent in terms of interest rates right across the country, private mortgage funding and rates can vary tremendously from region to region. There can even be different regions within a province where rates and available funds can vary considerably.
Like most free markets, private mortgage funding is based on supply and demand where lenders will charge what the market can bear in relation to the competition.
Private mortgage sources are mostly regional lenders because they understand the real estate market in their own back yard and are more comfortable assessing mortgage opportunities in areas they are most familiar with.
So if any particular area has a limited number of private lenders, it stands to reason that the interest rates quoted are likely going to be more on the high side due to a lack of competition.
On the flip side, in areas where the real estate market is strong and there are a larger number of private lenders present in the market, rates on average are going to be on the lower end of the spectrum.
But there are all sorts of variations around these two extremes and somethings what is available can be very different from what you might expect in any given area.
For instance, in the Ontario’s GTA, private mortgage rates can range from 8% to 12% on residential and commercial first mortgages, depending on the level of confidence the private lender has in the local market where the property is located.
Within the stronger real estate markets in Montreal, private mortgages can start as high as 15% regardless of what may be considered a lower risk scenario.
Loan to value ratios will also vary from region to region, again reflecting the strength of the local real estate market as well as level of competition.
If you’re actively seeking private mortgage financing, you’d do well to contact a mortgage broker that works with private lenders in your area so you can not only develop a better understanding of potential leverage and pricing in your market, but also access their sources as private lenders are not always easy to locate without the assistance of a mortgage broker.
The 5 Types of Real Estate Development Project Financing
For real estate development project financing, there are actually 5 potential applications of funds that can come into play depending on the project.
Here is a brief description of each of the 5 financing applications.
- Land Acquisition. The purchase of the land that will be developed and or built on is typically the first type of financing required. A land purchase tends to be a stand alone transaction that will require financing to close before other aspects of development financing can be considered.
- Land Development Costs. The actual costs for preparing the site, installing services and road ways can be secured by available equity in the project which would be typically be secured by a second mortgage.
- Construction Mortgage Financing. At this stage, the prior costs may have been funded in cash, reside in a first and second mortgage, or have been consolidated into a new first mortgage. In any case, the construction mortgage funding will again be secured by equity in the project for the initial draw and then by the incremental increases to property value that occur at the completion of each draw.
- Condo Inventory Financing. For residential and commercial condo development projects, there can be a need for incremental capital before some or all the condo units are sold. Capital can be required for 1) carrying costs to fund the project until condo registration is in place, 2) additional construction costs or trade payables that remain outstanding at or near the end of the construction phase, 3) refinancing of the construction loan to secure a lower cost of financing during the condo sales period.
- Take out Mortgage. Once a project is completed, the construction financing will need to be paid out by a long term mortgage. This mortgage can be put into place after the construction lien period has expired without any claims being made and an occupancy permit being issued. The take out mortgage can be arranged prior to construction, during the construction process, or after construction is completed in some cases.
Each of these financing applications may require the issuance of a mortgage specific to the use of funds. Each development project financing requirement is going to be somewhat unique based on type of project, capital contribution by the owners, location, regulatory requirements, and so on.
If you are a buyer, builder, or property owner seeking development project financing, please give me a call so that I can quickly assess your situation and review the most relevant financing options with you.
The Challenges With Securing Industrial Mortgage Financing
Industrial mortgage financing is required for a commercially zoned building that has an intensive or heavy manufacturing or processing purpose.
The term heavy would relate to activities like welding or some form of chemical processing where the work being performed has some impact on the building or property. On the flip side, light manufacturing could be performed in a commercially financed building where the nature of the activity does not impact the property and structure in any manner.
With Industrial buildings, many of the challenges related to financing can stem from the heavy usage they are exposed to.
If there are higher levels of wear and tear, staining from air borne materials, or staining from liquid based materials, there can be an impact on the resale value and speed of resale, causing mortgage lenders to be less interested in these properties.
Also, if there is a toxic or corrosive type activity, the building is going to looked at more closely with respect to its containment systems and a higher degree of environmental testing is going to be involved.
Some buildings were also built for rather unique purposes, so if they are ever put up for sale, it may be difficult to find alternative uses for the building or the renovation costs to make it functional for another type of use may be too high to justify acquisition.
For some industrial mortgage applications and locations, institutional lenders will either have no interest at all in the financing opportunity, or will only provide lower levels of leverage and higher interest rates.
As a result, private mortgages can end up being the only option for certain buildings which will result in slightly higher rates than institutional lenders so the underlying business or commercial tenants will need to have sufficient margins to cover off the higher cost of financing.
The key points here are that industrial mortgage financing sources are typically harder to locate and secure than other forms of commercial financing and the time required to complete the financing process tends to run longer than virtually any other type of mortgage financing.
These are situations where a commercial mortgage broker can be invaluable to you both in terms of finding relevant sources of financing, but also helping you meet all the lender conditions and getting the deal closed.
If you required assistance with industrial mortgage financing, please give me a call and we’ll go through your options together to see if we can find a workable solution that meets your needs.
Criteria For Condominium Inventory Mortgage Financing
The main reason for trying to secure a condominium inventory mortgage is to generate additional capital for a condo project that is not completed to the point where condo sales can be closed and the related funds from sale injected into the project’s overall cash flow.
This mortgage is secured by paying out the construction loan and putting in place a new mortgage that will function as a line of credit, leaving it open for repayment at any time.
While the refinancing can also generate a substantial saving in interest costs, the savings created on the interest side will likely be offset by the costs associated with setting up the condominium inventory mortgage.
The true value doing inventory financing is securing additional capital to fund the project through its later days. Additional funds are secured based on the appraised level of completion.
To qualify for condo inventory financing, the property owner must be able to demonstrate that the trades and suppliers to the project have been paid up to date, or mostly up to date. If incremental funds were not capable of at least paying off outstanding suppliers, its unlikely that the commercial mortgage would be approved.
Another major consideration by a lender for this type of bridge mortgage financing is the amount of condo unit pre-sales that have taken place. Because this is effectively a short term bridge loan, the lender will want to see that significant progress has been made on sales which will further verify the market value of the project and strengthen the security position of the lender.
Even if a project is 100% completed with respect to construction, there may still be a need to cover off the financing costs being carried by the project until the condo registration is complete and the development has the right to close sales on pre sold units to generate cash flow.
Basically, the closer the project is to completion and the higher the level of pre-sales, the more likely it will be to secure financing and also to secure maximum levels of leverage.
If you have a development project that requires additional capital, I suggest you give me a call so that we can quickly go over your options together and determine the best course of action for your project.
Mortgage For Rental Property
If you’re seeking a mortgage for rental property in Ontario, there are several financing options to consider.
For the residential market, where investment properties can include a single family unit home, townhouse, duplex, basement apartment, condo and come from a conventional sales process or even power of sale process, the primary mortgage options fall into two groups.
On the institutional side, residential investment properties still fall under the Canada Mortgage and Housing Corporation (CMHC) for insured mortgages. Borrowers and properties that qualify for mortgage insurance can secure leverage of up 90% of the property value.
Mortgage insurance is an additional cost of financing, but it allows for a much higher level of potential leverage which may be required to make the deal work in the first place. Cash conservation tends to be very important in growing an investment portfolio, so as long as the property can cash flow repayment, an insured mortgage will minimize the cash outlay for down payment, potentially freeing up funds for other rental property investments.
The second group of mortgage options falls under the private mortgage category. While a private mortgage for rental property will likely provide lower potential leverage than an institutional mortgage, there are other benefits to consider.
With respect to leverage, private mortgages on rental properties tend to range between 65% and 75%. On average, the leverage will be closer to 65%. To get to the higher end of the range, the property would have to be very strong in terms of its valuation and resale potential.
Private mortgages are effectively bridge loans in that they will either be for a one year to two year period of time. There may be opportunity for renewal, but there will also be renewal fees incurred for term extensions.
Private rental property loans are more about speed to closing and less stringent mortgage qualifying. If you’re on a tight time line to close a deal you can’t afford to lose, then a private mortgage option may be your best approach to getting the deal done. Or, if you’re credit profile is not strong enough to qualify for institutional financing, a private deal may still make sense if the property can generate a positive cash flow after financing costs are factored in.
If you’re looking for a mortgage for rental property, I suggest that you give me a call so I can quickly assessment your situation and provide you with the best available options.
Condo Inventory Financing
For owners and builders that have gotten to the end of a condo development project and require additional funds before the condo registration process is complete, a condo inventory financing solution may fit the bill.
Its not unusual for a condo development project to experience a delay at the end of the construction phase in getting the project approved for condo sales.
Prior to that point, the project takes on more of a townhouse status from a lender’s point of view which can impact the amount of leverage the owner or builder can secure against the project.
And even though the actual construction is now complete, there are still going to be financing cost that need to be paid on a monthly basis to the construction financing lender and perhaps a first property mortgage that would have been used to acquire the property. In addition, there may also be some trade payable to take care of that were planned to be covered by the initial condo sales, but remain outstanding with no new cash inflows in sight.
The solution in these types of cases is what we refer to as inventory financing whereby the inventory of units where sales cannot be completed at the present time can be used to secure additional capital.
If the project qualifies for institutional financing, the construction mortgage will be paid out and incremental funds provided to a level of 65% of the completed project value.
If the construction loan was from a private source, at an interest rate likely between 10% and 14%, the refinancing will also drop the mortgage rate to 6.5% to 7.5%, creating a significant saving in financing costs.
Any commercial mortgage refinancing is going to cost money to accomplish, so the interest savings can potentially offset the costs of getting a new mortgage into place.
A mortgage for inventory financing is set up as a line of credit with interest only payments required and an open mortgage term so that the outstanding balance can be paid off at any time, making this a very effective form of bridge financing.
If you are working on a townhouse development project that is in the process of receiving condo registration and needs additional capital to keep the lights on and pay the bills, then condo inventory financing may be a good fit. For these types of scenarios, I recommend that you give me a call so I can quickly review your requirements and provide available options for your consideration.
Gas Station Financing
“Gas Station Financing Tends To Be A Very Specialized Form Of Commercial Lending”
Due to the increased focus on environmental issues and the related environmental laws focused around environmental liability issues, there are less commercial lenders interested in financing gas stations now than there were several years ago.
Any financing request, regardless of the lending source, will require recently completed Phase I and Phase II environmental audit reports from a recognized auditing group. If there is a material amount of contamination detected, further levels of testing may also be required as well as the completion of remediation work identified.
Interested lenders are also going to require a commercial appraisal of the gas station which is also a fairly specialized activity that will need to be completed by an accredited commercial appraiser that is acceptable to the lender.
For the most part, gas stations are financed by private sources that have a strong focus in this market in order to properly understand the market risks as well as all the operational issues that need to be taken into consideration when reviewing a request for commercial financing.
Because most of the funds available come from private sources, the mortgage rates of interest are going to be higher as well as the lender fees on closing. So in order for a business to cash flow a higher rate mortgage, it may require a higher owner invest than what you’d typically find in other commercial properties where the mortgage loan to value averages out at 65%.
At the same time, a borrower may still be able to acquire institutional financing if there are loan guarantees or lease guarantees provided by one of the major gas and fuel companies that meet the requirements of a traditional bank’s commercial financing program.
Private mortgages can also be interest only or amortized payments, depending on what the lender is prepared to offer and what the borrower is prepared to accept. For interest only scenarios, a long term financing strategy will need to be developed to refinance the mortgage at some point or pay it out from other sources in order to pay off the principal.
If you’re seeking gas station financing in Ontario, please give me a call and I will quickly review your situation and provide any options that would be available to you.
Click Here To Speak With Commercial Mortgage Broker Joe Walsh
Land Acquisition Financing
For those of you seeking land acquisition financing where money is required for the purchase of developed or undeveloped lots of land, here are a few basic parameters to keep in mind.
First, there do tend to be several sources for property financing in most areas. The more developed the property and the property location in general, the more land mortgage options will be available.
Land can be purchased for a planned construction project by a home builder or home owner, or for speculative reasons for individuals focused on buying and flipping real estate properties for a profit.
In either case, for residential serviced lots within well developed areas, the loan to value from an institutional lender will likely range from 65% to 75%. If the property has a planned construction project where the construction financing is already arranged, the related financing cost for a bare land purchase can be as low as prime plus one or two from an institutional lender.
If you take the same type of scenario mentioned above, and moved it into a rural area where only well and septic is available, the financing percentage will drop to 50% in most cases.
The private mortgage market also provides funding for bare land purchases with similar leverage requirements. For well developed sites and locations, private mortgage lending rates will start at 10% and go up to around 14% for unserviced land.
Some private lending sources for bare land will require that you have a plan to build in the near term and won’t finance purely speculative purchases while others will if they like the long term potential of the property.
If you’re thinking about investing in bare land for building or speculative reason and will require a land acquisition financing facility, then I suggest that you give me a call so that I can quickly determine your available options and work with you to find a mortgage that meets your needs.
Inspection Reports for Construction Loans
If you’re looking into construction loan financing and wondering how a lender determines how much of the project is completed at any point in time, here is an example of an inspection assessment that would be similar for many construction lenders.
By applying the example that follows, a lender or third party appraiser will inspect the project at certain points in time and utilize the inspection report to determine how much has been completed and how much of the project remains outstanding.
This is important when a construction mortgage lender is reviewing a draw request in that the lender will always make sure there are sufficient funds retained to complete the job and if the draw requested has not completed enough specific stages of the project, then its likely the construction draw will be reduced.
Here is an example of a lender inspection report.
Inspection Report Example Stages Assessed % Applied % Complete Excavation 2 Foundation 12 Sub-Floor 1 Framing – Begin 10 Framing – End 10 Roof 3 Doors / Windows 8 Soffits / Facia / Eaves 1 RI Electrical 2 RI Plumbing 2 RI Heating 1 Basement Floor 2 Insulation / Vapour Barrier 1 Heating Equipment 2 Drywall / Primer 7 Interior Doors / Casing 3 Cabinetry / Counters 6 Paint / Stain 7 Flooring 6 Finish Electrical 1 Finish Plumbing 2 Exterior Finishing 8 Concrete Work 2 Grading / Decks / Landscaping 1 TOTAL 100 100
From a borrower and/or builder point of view, the inspection report allows you to make sure the expected work for any particular draw is going to be completed on time.
Its also important to make sure that stages are completed prior to an inspection if possible to avoid an arbitrary assessment of how much is left to be done at a particular stage which could also lead to a draw reduction.
To be clear, if a draw does get reduced for whatever reason, that means there are now less funds available from the construction loan to pay the bills incurred to date. The short fall will have to be made up with another source of funds which hopefully can be done in a timely manner so the overall project does not get delayed in any way.
While the description of the stages and percentages applied may vary among lenders, the example provided is pretty representative of what you will expect with a home construction project.
If you’re trying to locate and secure construction financing, I recommend that you give me a call so that I can quickly assess your situation and outline relevant options that can work for your project.
Click Here To Speak With Construction Mortgage Broker Joe Walsh
Commercial Property Mortgage Strategies
“When Looking To Secure A Commercial Mortgage, The All Important First Consideration Is The Amount Of Time You Have”
Unlike most residential mortgages that can be closed in 10 business days, a commercial mortgage tends to take longer due to many of the different lender requirements that can come into play. More specifically, commercial property loans can require updated appraisals, environmental assessments, title surveys, building inspections, business financial statement reviews, to name the most common areas of assessment.
While these areas may also be covered off for residential home purchases, the equivalent processes with commercial properties tend to be more involved and take longer to complete.
When the buying opportunity is for a property that isn’t long for the market, the time lines for closing will be shorter, making optimal or ideal financing difficult and perhaps impossible to locate and secure before time runs out on the offer to purchase.
If the property is a great buy or is an ideal fit for your business and too good to pass up for whatever reason, you may want to reconsider your property financing strategy.
Remember that the goal is to complete the purchase and if financing is going to be required, then you have to focus on sources of commercial mortgage financing that will work with your time requirements.
And even though it may cost a bit more in fees and rate in the short term, a private mortgage may be the best approach to make sure time doesn’t run out on the deal.
While private mortgage lenders may require many of the same third party reports, they may also consider reports that are already available even though they may be several years old if the lender is comfortable they still represent the subject property. And because you will be dealing with typically one person versus an entire organization, the speed to assess and generate a financing commitment will be much faster.
This is not to say that you should abandon seeking a long term low cost commercial property loan. The economics related to the property may require the ability to eventually secure more optimal financing over time. But once again, the key is to get the deal closed, so after that’s out of the way, there will be plenty of time to search for the best possible solution.
On the one hand, this private bridge loan strategy is going to cost you more money in the short run, but this may actually be offset over time if a less rushed approach to looking for best fit mortgage financing results in options that would not have likely been discovered in the rush to close the deal.
If you’re in the process of purchasing a commercial property, I suggest you give me a call so that we can identify the options you need to be focusing on to get any potential deal closed on time.
Click Here To Speak To Commercial Mortgage Broker Joe Walsh.
Private Second Mortgage: The Four Most Common Uses
There are basically four scenarios that would best suit the use of a private second mortgage on a residential or commercial property.
The first and perhaps the most common scenario is when the borrower’s credit and/or repayment ability does not allow him or her to qualify for additional financing via an institutional mortgage. Private mortgage lenders do not have the same credit requirements as traditional lenders, allowing them to consider a broader range of credit profiles.
The second scenario is when a borrower with good credit is seeking higher leverage than what an institutional lender is prepared to provide. For second mortgage financing from a traditional bank, the loan to value requirements, depending on the property, application, and lender policies, can range from 60% to 75%.
Again, depending on the property, some private lenders may go as high as 85% of the value of the property for a private second mortgage, providing greater leverage in the process.
The third scenario is where a borrower requires a bridge loan to take advantage of some opportunity or complete an existing transaction where there isn’t much time to work with. In these cases, the additional cost of private mortgage financing is likely far less than the opportunity cost related to not being able to close a transaction on time or at all.
The fourth most common scenario is for construction financing where the primary motivation for using a private second lies in higher leverage and more predictable draw advances. The private mortgage is typically registered behind the first mortgage that was utilized to acquire the property where construction is taking place.
One of the features of a private second mortgage is the speed in which it can typically be put into place. If the property value can be quickly established and the credit profile of the individual is solid, financing can be put in place in a matter of days versus weeks for an institutional second mortgage.
While private second mortgages will come with higher rates than institutional mortgages, they also can be put in place a lot faster, have much simpler credit requirements, and less conditions written into the mortgage commitment.
If you are trying to locate and secure a private second mortgage, I suggest you give me a call and I will quickly outline what options may be available to you.
Reverse Mortages Provide More Options For Canadian Seniors
Unlike the U.S. market, Canada does not have as many mortgage options for seniors looking to tap into their equity during retirement.
One solution that is gaining more interest for those over 60 years of age are reverse mortgage programs.
Reverse mortgages have actually been around for quite awhile, but have only become marketed on a regular basis in Canada over the last few years.
The reason for their growing popularity again comes back to choice and options related to retirement financing of home equity. According to Statistic Canada, 77% of a senior’s net worth is tied up in their home equity and over 1.5 million seniors own their homes mortgage free.
So with the bulk of retirement assets tied up in real estate, it only makes sense that owners may want to draw against their investment during their senior years.
The alternative to mortgage would be to sell the property and downsize into a lower cost property in order to free up cash. But some consumer based research reports also indicate that over 80% of seniors do not want to move, so selling the home to extract value is not an option for them.
In the 1990’s retirement and pension funds benefited significantly from the stock market and as a result, seniors tended to use their home equity for estate planning purposes. However, in the last 10 years, stock market returns have been down, leaving many with inadequate sources of capital to finance retirement, especially with the average life expectancy continually going up.
Add to all of this the fact that the overall population is aging as baby boomers reach retirement age and you can see that there will continue to be a growing demand for financial vehicles like reverse mortgages that allow retirees to more easily tap into their retirement resources without having to up root their lives at the same time.
While reverse mortgage programs do have certain restrictions, they are much easier to qualify than a traditional mortgage and no payments are ever required on an approved loan for as long as the borrower lives in the home being mortgaged.
And the funds being generated can be used for any purpose from supplementing existing cash flow, to starting a hobby, home improvement, in home medical care, travel, helping family members, and so on.
If you’re considering a reverse mortgage or would like to know more about how they work and if they may be a fit for your situation, I suggest that you give me a call and I’ll make sure you get all your questions answered.
A Debt Consolidation Loan Can Boost Your Credit Score
The debt consolidation process with respect to your credit score is a bit of the chicken and the egg.
When you have a high utilization of credit cards and lines of credit, the credit scoring system utilized by Equifax and Trans Union will reduce your credit score to reflect what they believe to a higher level of credit risk.
If you go through a debt consolidation process whereby your credit card and lines of credit balances are paid down or paid off completely, you will likely see a significant jump up in your credit score over the next 30 to 60 days after consolidation is complete.
The challenge here is that the impact of your unsecured debt on your credit score may impact the types of mortgage refinancing programs you can entertain, ergo the chicken and the egg…. if I refinance, my score will go up, but because my score is too low right now, its going to cost me more to refinance.
But a higher credit score may have other significant benefits to you as well that need to be factored in.
As an example, say you’re a small business owner that utilizes personal credit cards to fund your business. This can be a pretty common occurrence, and in many cases, the only way the business could have started up in the first place.
But over time, as the business grows, the ability to seek business credit will indirectly be impacted by personal credit.
Put another way, almost any type of small business financing takes into consideration both the business credit profile and the personal credit profile. If the personal credit card debt is pulling down the personal credit score, a business owner could be declined for a business loan that has minimum personal credit score requirements.
A personal debt consolidation that removes the balances owing on the short term unsecured debt will allow the credit score to jump up and now potentially allow the business owner to get the additional financing the business is seeking.
The point here is that a good credit score can benefit you in many ways, most of which will result in greater access to capital and lower cost of borrowing. So even if you’ve never missed a payment on anything and have excellent cash management skills for juggling a number of unsecured debt balances, make sure that the overall impact on your credit score will not hamper your ability to secure capital in the future or even to make debt consolidation less beneficial over time.
If you are considering debt consolidation, I would recommend you give me a call so I can quickly assess your options and answer any questions you may have.
Here’s a Proper Budgeting Approach For Construction Financing
One of the keys to not only securing construction financing in the first place, but getting your project completed on time without incurring additional financing costs and delay related costs, is developing a proper construction budget.
A construction budget plan should contain the following four parts.
First, you need to complete a detailed list of all the costs for the entire project. These costs should be backed up by written estimates from vendors and reviewed for completeness by someone other than the person putting everything together.
Its easy to get too close to the numbers and miss something or double count something else in the process. Having someone else review the costing details will give you more confidence in your estimates.
Second, develop a construction time line and assign the project costs to each construction element listed. The time line should indicate at what stage draws will be required and what amounts the draws will need to be for.
Third, maintain a construction financing variance report of the actual costs versus budget for each stage of the project. In this way, you’re going to be able to spot overruns or cost savings and factor them into the remaining costs that are still outstanding.
If you are running over budget at some point, you’re going to need to adjust your cash flow projections and draw requirements accordingly or cut back on the project in any discretionary areas to reduce costs. When more cash is required, you want as much lead time as possible to effectively deal with it so draws can be made on time and the construction project can stay on track.
Fourth, make sure you have a contingency allowance built into your overall project costs. Contingencies can vary significantly by project in terms of what’s reasonable, but in most cases an allowance of 10% will protect most projects from becoming underfunded.
The contingency allowance by itself doesn’t mean much if there is no source of capital to fund it if required. This should be established before the start of the project to avoid any disruptions in the event that overruns do occur.
A detailed budget will also give construction mortgage lenders greater confidence in your project and may even help you get higher leverage or better rates if a lender believes your project management plan of attack is sound.
If you’re seeking construction financing in Ontario, I recommend that you give me a call and I will provide a free assessment of your construction mortgage options.
Click Here To Speak Directly With Construction Mortgage Specialist Joe Walsh