Planning Tip #1
If your property has a habitable structure, or can be readily made habitable, it may be worthwhile to rent it out while you take the project through the permitting process. This helps with your cashflow and with housing shortage in your community. And it may change the tax nature of your project (e.g., Rental for potential 1031 exchange tax deferral? Or long-term capital gains if you choose to sell). Talk with your CPA or tax advisor.
Planning Tip #2
Talk with licensed general contractors (GCs) and talk with us Abundance to set a realistic budget before you buy the property or start on the permitting process. Construction lenders are thorough with their underwriting (see below). You don’t want to be stuck with a piece of non-income producing property, or spend valuable time and money ($30,000 to $50,000 on soft cost) if you cannot qualify for a construction loan.
Planning Tip #3
Don’t rely on your architect’s estimates for budgeting. Talk with licensed GCs in your local area, whose quality and workmanship meet your expectation. They will have the latest scoop on construction cost trends and labor costs.
Planning Tip #4
For realistic holding cost, pad your schedule by 2 to 3 months for permitting, and 4 to 6 months for construction. This will give you greater holding power to make good decisions. You don’t want to be running short on funds, and sacrificing quality.
Planning Tip #5
Do not break ground or have any material delivered on site until after your construction funds are all settled – closed escrow. Some lenders and title insurers will do a job site inspection the morning before they fund the loan and close escrow. If they find any signs of work, they will consider that a “broken priority” to their lien protection. They will deny the loan, or require you to post “Stop Work” notices for 90+ days.
Planning Tip #6
Don’t use your 401K or IRA as construction reserves. While some lenders allow this, this is a really bad idea. Your 401K and IRA are for your retirement, and protected in bankruptcy court. Don’t risk it.
Planning Tip #7
Construction lenders require “As Completed” appraisal based on your proposed building plans, finishing material, etc. There is a shortage of qualified “As Completed” appraisals. Budget 4 to 6 weeks for this.
Planning Tip #8
Give yourself 3 to 5 months to secure a bank construction loan. If bank construction loan is not viable for your project, then you’d still have time to evaluate private money construction loans.
Planning Tip #9
Shop early for your Course of Construction insurance policy. Yes, you’ll need it in addition to your GC’s builder’s risk policy. Make sure you ask for a “policy specimen” and review it carefully before you pay. There are a lot of exclusions in these policies, and often a long “minimum earned premium” period. If it’s the wrong policy, and you cancel the policy after you receive the policy binder 20 or 30 days later, you’ve wasted that minimum earned premium. It took us 6 months to get one for our recent project. Contact us Abundance for our insurance agent referrals
Planning Tip #10
Get organized. For each construction draw, your construction lender will want to see “Paid in Full” invoices and lien releases from your GC and possibly your sub-contractors. Your upcoming permanent financing lender will also engage title officer to verify that all GCs and subs have been paid, with unconditional lien releases. You can save yourself a lot of time by maintaining good records of these payments and releases.
Planning Tip #11
Start working with utility companies early, especially PG&E. Even if you had both gas & electric on site before you started construction, the City / County will likely allow only one utility service before you receive your certificate of occupancy; and the other once you pass all inspections. Utility companies are back-logged, especially during wild fire season. Plan ahead and follow up diligently.
Planning Tip #12
Remember to get yourself pre-qualified for the permanent financing before you start your construction loan, and continue to improve your monthly income and expenses. You don’t want to quit your day job during your construction process, and risk not getting a good, low interest-rate permanent financing at the end of the construction. Remember, construction loans have balloon payments, and can be expensive to extend beyond the maturity date.