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ELIMINATING THE BUILDER'S NEED FOR ADDITIONAL CAPITAL
By Joel S. Pate
Well, are you ready? For my weekly readers, last week, we discussed in great detail the components of a builder's need for capital and why it is so hard for a builder to successfully grow their business.
This week, let's jump right into the details of the substantive difference in commercial financing and OTC-CP loans.
The No. 1 thing I want you to know can be best described by the following story I heard at a broker's convention. A broker was asked by a customer, "Mr. Broker, what loan program is best for me." The broker thought for a moment and thoughtfully answered: "One that I have."
You see, as far as I can tell, the average broker and originator will never directly benefit from a builder utilizing commercial financing to capitalize his business. But, you can directly benefit from the OTC-CP market if you do what it takes to become an expert at this loan and then convince a builder to give you a shot.
The No. 1 reason a builder will consider OTC-CP loans is for the reduction in capital needed to grow his business. Last week, we covered the details of how much money a builder must have in the bank to successfully fund the construction of 20 to 30 homes per year.
If you missed that discussion, I suggest you immediately go to the archives and read it first before moving forward.
Commercial banks require, are mandated to require, that a builder have in capital enough money on hand to maintain an appropriate current assets to current liability ratio.
In comparison, an OTC-CP lender does not have a lower credit requirement, they just simply structure the transactions/loans completely different and this allows for the builder to maintain an appropriate current assets to current liability ratio while growing their business with less capital.
In order to have a clue of what I am talking about, you really need to review the archives from the last several weeks.
The bottom line is if you can learn this information and convey it appropriately to a builder, the builder will understand it. Once you get started, your builders will start telling other builders about you and they will call you. Of this, I am certain.
You see, builders utilizing OTC-CP loans do not borrow the money to build the home or purchase the lot. Who does? The builder's customer is the borrower. Since their typical customer only has one or two loans at a time, it is much easier for the builder to have many more homes going up at one time since they are not using their own balance sheet, the one that limits the banks ability to let them grow, they are instead using their customers balance sheet, really their FICO score, to finance their business.
In last week's article, we discussed the capital a builder is required to have to maintain a proper current assets to current liability ratio, and how much money they would need to grow their business.
Let's spend a few minutes comparing the average builder's cash requirements for building homes utilizing OTC-CP loans. How much money will a builder need in capital to build five homes at one time utilizing OTC-CP Loans?
The quick answer is less. The long answer is the builder will be paid 100% of the appraised value of the lot when they start the house. The loan taken out by the customer, who is the actual borrower, will be 100% of the builder's cost and profit. The builder will receive this money as they progress through the construction and then have to wait for the final 10% when they complete the home until the borrower modifies the loan (usually less than one week).
If you read last week's article, you already know that the builder, utilizing commercial financing, needed $200,000 in capital to successfully build five houses at a time. Using OTC-CP loans, the average builder can reduce that number by approximately $100,000 or better yet, use the $100,000 to purchase more lots or build more houses.
Do you think you can sell that to a builder? I bet you can.
I presumptively estimate that 90% of all builders utilize commercial banks to finance their business. One thing you want to do when considering a new business approach is understand the size of the market that is available to you and understand the percentage of the share of the market you will have to capture to be successful.
So, I ask you this question: How many builders are in your area? How many homes do they build? With the knowledge you are gaining from these articles, do you think you could secure just 10 loans per month from that market? What percentage of the market would you have to capture to only gain 10 loans per month?
I bet the answer is a very, very, very small, even minuscule number.
If it is, and you will dedicate yourself to working hard and learning the information that I am sharing in a little more detail, you will be able to originate and close in excess of 10 more loans per month within six months.
If you would like to receive additional information regarding One-time close construction permanent lending or join one of my conference calls on this topic, 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, 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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