Commercial Lending- Residential Construction

Welcome back to AES. This is our continuing series on the construction financing arena, specifically residential construction financing. I want to talk directly to my lenders. When I say lender, there are two aspects to this. There's the commercial lender, the lender that I do a tremendous amount of business with, and that I've cultivated relationships with and the mortgage lender. We've seen a tremendous uptick recently in the one time closed construction loan, but my commercial lenders, I want to talk directly to you because your bread and butter are small business owners, especially in the arena of community banking, which I am incredibly passionate about.

So our company started in a community bank. I was actively borrowing money from a very professional lender who took the time to cultivate the relationship that he developed with me. He educated me on the process by which I could borrow money, develop real estate, and then liquidate those assets on the open market and then come right back to him and do it all over again. I'm hoping this information will make the process a little more palatable for you and maybe cultivate some more business and some longer-standing relationships. That will take a guy like me who bought his first house for $5,000 and tried desperately to make it as unsuccessful as possible and turn me into a guy who's going to run $750,000.00 to 1.5 million through your portfolio annually at very low maintenance to you. So that's kind of the plan.

The first thing that I'd like to address is, do you have the stomach for development lending? When I say development lending, I'm talking about at the community bank level, commercial lender out there grinding. I get it. Do you have that desire to engage in that type of lending? It's an excellent question to ask yourself as you're looking at your career. Maybe you did it years ago, perhaps you've been in the business 25 years, and you looked at it years ago, back in 2007 and 2008. You said I'm never doing this again. So maybe it's time to take another look at it or perhaps you've just washed your hands with it. Perhaps you're new to the space. You are a fired-up commercial lender you're going to take on the world. I think that's fantastic. But if you're going to get in this space of commercial, residential, 1-4 family development, you're going to lend money to people like myself and my wife. We are going to do four or five speculative new construction, single-family homes a year. Do you have the stomach for it?

I think it's overly complicated in some areas. I'm going to speak directly to you, the commercial lender who's looking to develop standing and lasting relationships with developers or people moving into the space of a real estate development. Residential, 1-4 family renovation or new construction. This type of lending can be a great asset to add to your portfolio. This all depends on your institution's tolerance for this type of lending. It is considered in the industry to be a higher risk. With higher risk comes a greater reward.

Let's look at if you're interested in doing this type of lending. I have a few insights over my years of sitting in the middle of these transactions that I'd like to bring to your attention and hopefully they will assist you in your career. Do you want to lend money to people to build houses or renovate houses? I know it may sound like a silly question, but it's an important question. If you don't understand this space. If it's not your cup of tea, then let someone else do it. Use it as a referral source. Let another commercial lender, even in your institution who may have more experience do it. He may enjoy it more. Let him do it. Probably not what you were looking for, but it's essential because a commercial construction deal in the residential space, properly structured, can be very low maintenance and pain-free process.

If you're not paying attention to it or you haven't developed a system, or you haven't studied your institution's internal processes-underwriting guidelines- funding practices. If you don't know this stuff. Odds are you're going to have hiccups in your commercial construction lending process. If you're going to do it, do it right. Know your process. Now, we haven't even talked to anyone about building anything. Study your institution's process, study it. Ask them, what are my underwriting requirements? What information do you require? What's the process by which I get this deal through to closing? Have them educate you. Then you can lay that out on the desk and say, okay, how difficult is this going to be to sell to the open market?

Now you're a commercial lender. You know how to get things through committee and underwriting. You're going to want to know this. Whatever you have to go through is going to be transferred to your client. The more efficiently you can explain the process. The requirements to renovate a two-unit multifamily residential structure, or to build a new speculative project is going to solidify your relationship with your client. It's also going to make your life easier. Understand the process of your particular institution. They will tell you, ask them.

So after you have the process, you have a good idea of how it's going to role out. There are some things you're going to want to add to that process. It may be the most magnificent process on the face of the planet.I'm going to give you some insight into things that you're going to want to make sure you've got locked down. This is going to be an education process for the majority of builders and developers. I've been in this space 30 years borrowing money, and I've been monitoring construction financing, the deployment of capital to residential construction projects for 15 years.

In some areas, it's still the wild wild west. The last thing I want for you is to get caught in a 2007 2008 scenario. There's no reason for that to happen if you approach development lending in the way I'm trying to describe.

So after you know the process, the internal operation of your institution. You're going to want to develop your method that lends itself to reducing risk and increasing your efficiency. Put together a package that you can hand to your prospective client. They're going to walk in and say, Hey, I'd like to build this, and you're going to say, fantastic. Then you're going to hand them something that engages them. It gives them something that's going to allow you to collect the construction project efficiently.

What are they building now?

I understand how it's currently done today in the commercial space. Hey Frank, give me your budget. Give me your plans if you have them. I'm going to slap all this together with your credit. Then I'm going to go try to get it to closing. That's all well and good the way it's been done forever. But when Frank can direct his client to a mortgage lender who's got this slick one-time construction product and more of these operations are starting to fund these with investor capital.

There's gotta be a reason I'm going to borrow money from you. That reason is the model of community banking. It's just easier. It's more efficient, and it's more personal. Have something to give to this individual that's going to guide them through this process. The pre-closing process, because up to this point, this has been a post-closing sort of scenario. You collect whatever your bank tells you to collect, you do your magic to it, you get it through underwriting, you get it to closing, bam. What happens next? So you're going to want to put together a package that covers these things.

License Insurance Detailed Plan Detailed Budget

You want them to collect these things.

I get it; it's a very competitive market out there. Someone walks into your bank and says they want to renovate a two-unit multifamily residential structure, and they can't deliver this necessary information. What's the point?

So I get it. The space is incredibly competitive. Someone will lend money on a project drawn on the back of a cocktail napkin, but that's not you. You're looking to build and cultivate a stable of successful, efficient developers.

You can take a guy like me who borrowed $5,000 to renovate his first house. You can be that lender that helped me and my wife go from that project to running a million dollars through your portfolio every year at very low maintenance. We know what you need. We show up with it. Here's our next project. We do our thing, we know your funding process, we knock it out, we liquidate the asset, and then we come back, and we do it again. So you take 10 of us, $10 million added to your portfolio annually. Your institution's happy because we know closing these construction loans is high fees, reasonable interest rate, good turn. This doesn't add to your portfolio long term. But you know, if it shows up three years in a row and adds $10 million to your face at the bank. Word starts to spread. Hey, if you're going to borrow money to renovate or build something, you have to see this guy or this gal. That's how it's done.

If you were in this space and you got out of it. We've been studying now for about 15 years. We have some new ideas and concepts that I think can hold back the tide of what's going on in the industry. It can also give you a competitive advantage in this highly competitive space. I'll see you next time.

Paul R. Pablovich


( AES) Asset Evaluation Services, LLC

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