December 20, 2007

Does Your Subdivision Builder Have Enough Equity?

Residential Subdivision Construction Lenders Now Require 25% of Equity

A subdivision developer is usually required by his construction lender to contribute a certain percentage of the total cost to build the subdivision. For example, if the total cost of the project is $10 million, historically his construction lender will require that the developer contribute 20% of the total cost of the project, which in our example would be $2 million.

Homes were selling like hotcakes three years ago. Aggressive banks, in order to attract more subdivision construction loans, were making loans as high as 90% of cost. In the above $10 million example, this meant that builder only had to contribute $1 million in equity versus the traditional $2 million in equity.

With the housing bust, however, residential subdivision construction lenders have become far more conservative. In today's market, a builder may even be required to contribute 25% of the total cost of the project.

If you are a mortgage broker, and you're working on a residential subdivision construction loan, the very first thing you need to feret out is how much bona fide equity your developer has in the project. If he hasn't contributed at least 20% of the total cost of the residential project, the deal is probably not going to get funded for a few years.

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