Help! Can you explain construction loans? (square foot, foreclose, clause, investment)

[kitty3]

Hi! I may be making an offer on a home that sits on an acre of land. The price is cheap--love the location, hate the house (too small, crappy walls, ceilings, floor, etc). The house was built in 1987. I had a contractor look at it, he said we can basically tear down to the outside walls and foundation, and remodel--essentially getting a new house.
So I would buy it as is right now, put down a down-payment and I guess then get a conventional loan. Then would I have to take out another loan (construction loan) for the remodel part? And this may sound stupid, but would I need to get home-owners insurance (at first) when it is essentially going to be torn down to the bone anyway?
Also, how do you really know if the estimate the contractor and architect give you for the project will be accurate?

[oldmanbob]

Sounds great, and be sure the land comes free and clear, and get a g ood title company to help. Yes you need insurance, and a few lenders out there, have a program, that will allow you to get estimates, for all you expect to do, and it is treated the same as a construction loan, and you draw out, as you spend and the building progresses. No real guarantee, that most contractors will stay in line, and some will promise to stay within a certain per centage, so get good estimates. Interest rates are great, so a sweet time to lock in, as last post were down to almost 5.75 and could even go lower. Depending on how bad the current house is, be sure and get a couple of builders to take a good look, as you would be supprised, what you might can save, and just do some major remodeling. Good luck, and hope this helps.

[darstar]

Most loans these days are based on equity . What little available money is out there , is going to what the lenders see as a " good investment ". That does not include properties that are less desirable . Look for 20 to 30 per cent down on these types of properties. It is not a good time to build , unless you have cash. Even then , there so many deals out there that are undervalued , that do not require a total remodel.........have a good plan , all your estimates in line , a time frame , and look professional . The banks are loaded with failed projects , which , may look like a smart buy , but , to a reseller , are almost worthless. Many of these projects will need a co-signer , 50 % down , and , a clear path , that the lender can understand , as to outstanding leans , construction debt , etc. Working with a well known general Contractor helps. most banks will not loan on new build , or extensive remodels , without one. The problem is , the contractor will charge more for his work , than the property is worth , as a lot of his costs are fixed. You may need to look for venture capital , depending on the values and debt load when finished. So many unknowns , maybe the Government will ease the problem , but , for now , its a tough sell....I know.

[bigtrees]

Originally Posted by kitty3

So I would buy it as is right now, put down a down-payment and I guess then get a conventional loan. Then would I have to take out another loan (construction loan) for the remodel part?

A couple way you can do this. If you can get a large enough home equity line of credit, you can use a HELOC to do the remodel.

If you go for a construction loan, then get the construction loan right away and forgo the home loan. The construction loan will need to include the land so the bank can foreclose on the property in case you don't make payments.

The HELOC will be a cheaper and simplier solution if you can get one for enough money.

Originally Posted by kitty3

And this may sound stupid, but would I need to get home-owners insurance (at first) when it is essentially going to be torn down to the bone anyway?

Yes, the lender requires home owners insurance to insure their value. The problem with tearing down a house that you have a conventional loan on is technically you are destroying the collertal and the lenders don't like that. (The deed of trust includes a clause that says you won't do that.) But regardless if you follow the deed or not, the lender will require homeowners insurance.

Originally Posted by kitty3

Also, how do you really know if the estimate the contractor and architect give you for the project will be accurate?

Get several bids and compare. Talk with them to find out their knowledge and whether they come up with estimates. Get your own estimates in certain areas. I had a really good builder give me an estimate, and I checked into his prices and found he underestimated by $100,000. I elected not to do the project rather than get half way done and not finish.

[chet everett]

bigtrees abd darstar more realistic about this.

I would have serious reservations about telling anybody that they could accomplish what you want to do in this lending environment. Basically you want to take a 21 year old house (which is NOT old, or falling apart) and do a 90% tear down. If you got the place for JUST land value you would still need to have a ton of CASH to build essentially a whole new house.

DANGER DANGER DANGER


The prices of construction goods is off only a little bit from their retail peaks.

Labor is more available, but not much, rates are still expensive and the skilled sub-trades may be up a bit in some areas, as the hordes of quasi-legals that depressed labor rates are gone...

Even an honest GC will tell you what you wanna hear, it is possible to build something for a low low price of $70 or less a square foot, but to do that you are going to have to forego ANYTHING luxurious and/or do all the work (including sourcing stuff) yourself.

Lenders KNOW this and have no desire to put themselves in the situation of having to foreclose on a partially finished place. If you have experience you would not be asking here. If your GC has financing sources (and some actually do) he would have turned them to you.

SO -- where are these GCs getting financing? Some are "deep pocket" family businesses, they "invest" in keeping their crews busy. Others have webs of business -- one guy who operates locally in the Chicago suburbs usings money from his massive used car business to support his cousins' remodeling business. The rates they can get in the "consumer lending" business are a lot better than any bank would give him, and he gets to keep it all in the family...

Still, I just have real profound doubts that this is a smart thing to do right now.

Find another house that does not have crappy walls, ceilings, floor, etc. There are plenty out there! I really doubt you will be successful in sinking a ton of money into any project in the current financial situation.

[Austin-Willy]

You need to talk to an honest mortgage broker about your options. I agree with bigtrees that you don't want to close with a permanent loan and then go get a construction loan. That will only lead to unnecessary closing costs. Good luck.