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ENTERING THE BUILDER MARKET
By Joel S. Pate
In last week's article we covered the originator's need to understand the products that the construction perm lender offers, know them backwards and forwards, and developing the ability to "just say no" when you do not have a loan product for the loan opportunity.
This week's article will take a new direction. Over the next few weeks, we will enter the world of the builder. How you can help him, how to talk to him, what to say, why, and what motivates him.
First, let's qualify the type of builder we are going to target: The best builder to target is one that builds between 10 and 50 homes per year.
In every area of the country, each geographic location has varying price ranges and builders that have a typical clientele. For a minute, let's go back to knowing your programs. If the CP lender you decide to go with prefers Fannie Mae programs, then you only want to approach builders in that price range and clientele type. If your CP lender offers second home loans, and you are near a second home community, study up on the program offerings available from that lender and go see the builders that specialize in the recreation market. If you are in a jumbo market, and your lenders jumbo program is not competitive, do not waste your time in that segment of the market.
Carefully investigate the builders in your area, categorize them into the different types that you identify, determine the builders that would be best for you to approach, based on your personality, your programs, their market, etc.
After you have determined who to approach, then you must prepare for the message, body language, timing, etc. that will give you the best chance of getting the builder's attention.
While you are investigating the market and uncovering the correct builders to approach, begin to prepare your presentation: What are the benefits that one-time close construction perm loans offer builders? These are just a few:
- No personal guaranty.
- Limited use of their capital.
- Reduction in cost.
- No risk!
How's that? Remember from our previous article, a one-time close construction permanent loan is simply a permanent loan that allows a construction element. That means that the borrower must qualify for the permanent loan. You are loaning the buyer of the builders home the money based on their qualification for a specific loan program offered by the lender, for example let's say a Fannie Mae full doc accept eligible. When you originate, the lender underwrites and closes this loan in the buyers name, the builder will begin to receive draws as he progresses through the work on the house: so much for the slab, so much for the framing, so much for the plumbing, etc.
As the home progresses, the lender inspects it and funds the draws directly to the builder, in most cases. At this point, the borrower, not the builder, is indebted on the loan. The borrower owes the interest (interest can be rolled into the transaction or an interest reserve can be established in some cases) and the borrower is responsible for the debt. That means that the builder is not at risk. His customer cannot back out. He will not be concerned about the customer not closing when the home is finished.
While we are on that subject, you have already been paid a portion of your income as well. How many times have you provided a builder or agent a pre-qualification for their customer, worked on the loan while the home was under construction, only to have the customer shop you and end off with another lender? Utilizing the OTC loans, this cannot happen.
The builder sells the home, you originate the loan, the loan closes in three or four weeks, and then, the builder builds the home. You have been paid, the builder has a his customer locked in, he has received appraised value for his lot, improving his cash flow, he has received up to a 10% advance to start the home (builders love that) further improving his cash flow, and even the real estate agent has been paid. Best of all, the builder has no debt, no personal guaranty and is now, probably for the first time, using the lenders money instead of his own.
To conclude this week's article, I want you to do a little home work:
- Determine your lender's owner-occupied, investor and second home loan products
- Determine the type of borrower the lender is targeting with their programs
- Identify the builders that have clientele and build in that price range, market, etc.
- Look for a way to network with the builders that would be the easiest to contact (i.e., the low hanging fruit)
- a. Are you friends with an agent that knows a builder well?
- b. Are you friends with an insurance agent or title agent that the target builder uses?
- c. While you should join the Homebuilders Association, that is not the best place to start.
- d. Look for a person that knows a builder you are targeting and ask them to introduce you.
- Start your research by acting on my Tip of the Day!
Over the next few weeks, we will discuss in greater detail the inherent benefits that will drive the builder crazy, that when presented correctly (and you know that timing is everything), will cause the builder to not only give you a "chance" but will cause the builder to look to you as his chief financial officer. By the time we are finished, the builder will be asking you about truck financing.
Until then, DO YOUR HOME WORK ?
Tip of the Day: Call a real estate agent that you do business with. Ask them this question: Would you be interested in working with me to develop some builder business if I can guaranty that you will receive your commission on the transaction approximately three or four weeks after the contract is written, instead of waiting until the home is completed? The only answer will be: When can we get together. Guaranteed!
If you would like to receive additional information regarding One-Time Close Construction Permanent lending, send me a request by visiting www.vadiumgroup.com/cpexpert.php
Dedicated to coaching YOU to CP Loan Success!
Joel S. Pate
Joel S. Pate, a dedicated entrepreneur, has spent more than two decades in the building, mortgage, and real estate industries and has been involved in over $100 million in construction loans and over $1.3 billion of residential lending.
As the CP LOAN EXPERT columnist, Mr. Pate provides straightforward, unbiased advice about every aspect of Construction Permanent Lending. If you ever wanted to unravel the mystery surrounding new construction lending, then you should tune in.
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