From the desk of Colm Dillon ...
Looking at the heading 'real estate development loan,' please notice that it's the word 'development' that makes all the difference from your past real estate loan application.
A development loan is not just a matter of filling out a few forms at the lenders office and attaching a set of plans. It is an entirely different process.
The quality of all the development work you do reflects on you and the impression you leave in the business community. This is always 'true' but it is especially true when you are starting out on your real estate development career.
The 'work' you put into your Real Estate Development Loan Application tells the lender your standards. If your application is well presented, precise, detailed, neat, and correct ... you will create a favorable professional impression.
The opposite of that style of application for a real estate development loan makes the assessor 'dig deep' to find what he/she needs to know and may result in questions being asked of you, causing you lost time which may ultimately mean you are rejected.
So just like everything I teach you ... in your development work, do it well the first time... and do it professionally.
In my e-bookResidential Development Made Easy I include a Real Estate Development Loan Application for you, with all the words included that you can tailor to your precise development.
That’s why I include the "Made Easy" phrase in my e-book title.
Not All Lenders Do Real Estate Development Loan
In another article I wrote more on information on a real estate development loan, and explain the development financing process, whereby my students determine their proposed development's financial viability, before actually buying the land, as well as getting development approval.
So I won't go thought all that again here.
Suffice to say that you should not assume that the lender for the land purchase, will also be the lender of your real estate development loan.
OK, Having Got That Out Of The Way
Development of land is all about the site's capacity. A developer want to know how many units/apartments/condos/flats s/he can put on their land and there is a process we go through toestablish these figures.
From there it flows through to a feasibility study, development approval and finally the lodgment for a real estate development loan.
At this stage of my explanation I want to save you some money .... quite a bit of money actually.
I want to talk about a Land Appraisal or Land Valuation as it is called in other countries, so bear with me for the next few lines ... it will be worth your while.
Land Appraisal or Land Valuation
There are several traps for the unwary. Like everything in life, it's easy when you "know" and can be expensive when you "don't."
Here's The Tip
Don't instruct an Appraiser or Valuer to carry out an appraisal or valuation of the land for you, before you submit a real estate development loan application.
The lender has a special board of approved appraisers or valuers they use and will only accept their nominated firm or company to do it.
So you will have spent and wasted your money if you get one done, as the lender won't rely on your document's figure.
Lenders Are All About The SECURITY OF THEIR LOAN FUNDS.
You see the lender may assume that you were able to influence the appraiser or valuer, to make the value of the property to be the same as the price you are actually going to pay ... let's say $1,000,000.
Now if you were able to influence the appraiser or valuer, do you think it is reasonable for you to assume that a powerful lender, to whom you are making a real estate development loan application, will also be able to influence an appraiser or valuer to reach a more conservative figure ... say 10% off ... say $900,000.
Well, if you were an appraiser or valuer and wanted to stay on the lenders' approved board, to get regular work dished out to you every week, do you think you would agree to the more conservative view the lender required? I'll leave that up to you to decide.
So on the face of it, if you were to get 100% on your real estate development loan valuation to buy the land, you'd get $900,000 and have to find $100,000 out of your own pocket ... ouch!!
Let me give you an example:
Valuation & Percentage of Borrowing
If the real estate contract price of the residential property you want to buy is higher than the valuation you receive, you have to make up the difference. Sometimes called the deposit GAP. For example:
If Contract price = $1,000,000 and you borrow 100% = $1,000,000 – The Deposit from your pocket is $zero.
If the Valuation = $900,000 and you borrow 100% = $900,000 – The Deposit from your pocket is $100,000; So you have to find the extra $100,000.
Most banks will lend up to 95% of valuation, however, if you select the 95% borrowing route in Australia, you will have to pay an insurance premium of $'000's.
This insurance on your loan, is wholly for the benefit of the lender, – not you. You just pay the Premium ... Up Front!
OK, So What's This All About, Colm?
It's about reducing the lender's risk by reducing their cash exposure to you the customer. Which just makes it all harder for you.
So don't bother instructing and paying for an appraisal or valuation yourself ... save your money.
What Can I do?
Let me give you an argument, that you may like to use with the lender.
If you follow the market research work I set out in my e-book, you will never overpay for land in your area of development interest. So that means that the $1,000,000 mentioned is the real market value.
You see, with my development system, you will have proved that the proposed development you can do on the land substantiates the $1,000,000 you have on contract and has proven that the development is Financially Viable. OK?
An appraiser or valuer in establishing the value of the land used one or two systems or both:
1. Comparable sales of property in the vicinity of the land you intend buying calculated on the basis of dollars per square foot.
2. Establishes the development capacity of the land, (just like you) typical construction costs, (just like you) a reasonable market profit margin, (just like you) and sales prices for the units/condos etc (just like you)
So one can legitimately ask the lender how come s/he has come out 10% less in value than your own detailed development assessment. Your assessment will be far more detailed than an appraiser/valuer, because you actually intend to construct it ... not just value it!
See the difference?
So that is a long way of explaining how to save you several thousand dollars, but I think it is worth it, if you now know how the system works.
Back To The Real Estate Development Loan Application
Following the exact format I set out in my e-book, only changing the words and figures to reflect your personal development, you will be giving the lender "all the information" s/he needs to make an assessment of your property development loans and grant you approval.
It will only contain information that is relevant to the lender and nothing more.
Author of "Residential Development Made Easy"
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