There are times within a residential subdivision development process that private mortgage lending can not only be a financing option, but the preferred option.
The strengths of private lending are speed to getting a deal in place, and the ability to leverage property equity on an unfinished piece of work.
So while lower cost forms of conventional mortgage lending may be preferred in most cases, there are times when a bank or institutional lender are just not going to be a good fit in moving your project forward.
For instance, lets start at the very beginning when the land is being acquired. Private mortgages can be ideally suited for bare land financing, especially on property that requires considerable work before a subdivision project can be completed. Many times, conventional lenders will not fund bare land depending on location, zoning, etc.
Private mortgages can also be great forms of bridge financing during the development when the project needs to get more work completed and hit certain milestones before a conventional lender is prepared to provide funds for site development or vertical construction.
Its not uncommon for a subdivision development to run out of money between the time of property purchase and plan approval. At the plan approval stage, the property can typically be re-appraised to reflect the change in value associated with the approvals in place for the subdivision to move forward. But until approvals are in place, appraisers may not be able to increase the value of property beyond the purchase price, especially if the property purchase was recent.
Private lenders who lend on construction and site development for subdivision have the ability to review the work done in the planning process to date, where draft plan approval has not yet been reached, and get a level of comfort to provide additional mortgage financing against the property that can help get it to the plan approval milestone.
This may not result in a private lender assessing a higher appraiser value from the purchase, but it can result in them providing a higher loan to value.
For example, if the land loan for purchase was at 50% loan to value, a 2nd mortgage near the end of the planning process may be able to be done up to a level of 75% loan to value. The additional capital may be crucial to keeping the overall project on track including not only the site planning approvals but the resale marketing as well.
Private money being put into place in a timely fashion not only helps pay the bills as they come due, but also provides the developer with the time necessary to complete the milestones a conventional lender may require be met before a mortgage refinancing of the overall project can take place.
Bridge loans can also be accessed at other stages of the project when cash flow cannot quite get the work completed for the next financing milestone, or to step in and replace a conventional subdivision development financing application that is in excessive delay in processing.
Whether as a primary or secondary option, private construction mortgages can be an excellent source of subdivision development financing.
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