Financing Pre-Construction

Daniel Patton
 
Sarah: Daniel, welcome. Thank you for sharing what you're going to be sharing with us.

Daniel: Thank you so much. Shawn did a great job. Honestly, I was going to talk a lot about that HST, especially that it's always big on the financing side to prepare for something. Kudos to Shawn. He had a lot of good info. I'll try to fill my time with some other good tips.

Sarah: Let's hear the insights that you can share with us.

Daniel: Lots of different things to cover, obviously. And you want to be working with somebody who's familiar with these types of projects because new cons can range anywhere from single-family, high-rise, commercial, residential. There's many different aspects to this that will be tough to cover, but I'll speak mostly from a residential standpoint, because I think that's where most investors are coming from. Process wise, we know that when we go to the builder, let's say, and we want to buy it.

The property is not built, but we want to put in that initial offer. The builder is going to come back to us and say you need to get a letter from a bank, or they're going to take it from the mortgage broker. They're going to require some sort of verification that you've been pre-approved or you haven't approved.

Most of us get a letter from the bank or from the mortgage broker and we give it to the builder. And the truth of the matter is that the letter doesn't really mean anything. It doesn't mean you're approved. It doesn't mean you've actually qualified. And that process doesn't come until later on. Shawn mentioned the registration and the occupancy date.

Those are key dates for the financing obviously, because the occupancy date is usually the signal that the registration date is coming. And for the sense of the mortgage, the registration is the important part. That's the closing date. Now, the bank won't issue paperwork, really. And for the most part, until they know the closing date.

It's important to always stay in touch, make sure your broker or your bank has a follow up process in place. That you're on top of this because we've seen builders tell clients occupancies happening on this day and registration's happening two weeks later and you need to move very quickly. But the point is in this, in these circumstances where you're just providing the letter as a service to the builder, you need to requalify at the time of closing because you actually haven't done that, which means you have to show income. You have to show down payment, you have to require it.

This can sometimes be an obstacle for investors, because if we're buying a new building construction, that's not closing for a few years and we want to buy properties in between. Then we need to make sure that whatever we're buying in between now and the time that our precon is closing is not going to affect our ability to qualify for the pre-con because we're not doing that till later on.

Make sure you're working with a good partner, a good broker who has that ability to plan it out. Because you're going to need that, especially if your plan is to buy other properties. In the meantime now that being said, there are lenders, believe it or not, that will do full approvals right away. Banks will do a full qualification on the price of the pre-con, whether the property is built or not, they'll do the full income. They'll even do the appraisal on the pile of dirt.

You can get full qualification done upfront. Not every bank offers that RBC has a really good program. They're usually the ones that are in with builders. Things you have to watch with that is the rate Holt especially in COVID as the builds are being pushed out, the rate holds tend to expire. They're not usually as good as today's rates. Today's rates are insanely low. That's a whole other topic, but it's a higher than normal rate just because it's being held for a long period of time. However, if all you're trying to do is requalify for the rate at the time of closing, that's a requalification without having to submit any more paperwork.

You can actually get a better rate at the time of closing just by requesting a rate drop if rates are low for. This process where you're requalifying and or qualifying upfront and giving all your income and all of that, where this can sometimes run into issues is if the builder changes the purchase price, or if there's changes to the purchase price, things like upgrades or builder costs, if that is reflected in amendments to the builder or to the client, then the bank could treat that as a requalification.

It is very important that if you're adding upgrades that you're paying for cash. Sometimes the builder will still adjust the price. If they're adjusting the price, keep in mind, you still may have to requalify because things like down payment, that verification is required. In theory, yes, you can qualify upfront for these properties and never have to requalify again. Never have to worry about it. If you lose employment, buying other properties, you can do that. There are banks that do that, but you have to be a little bit careful of the changes to the price because that may trigger a requalification couple of questions we get on.

Sarah: The other thing too, and I still want to give you a little bit of time, but could we also talk about it from a standpoint of like for example, like when Natasha is doing in terms of buying land and having that finance as well.

Daniel: Buying land and having land finance, it can go from so many different spectrums too. You can go independently through banks, and banks will have construction programs. Again, we talked about RBC. They have a good construction program. What you'll find ranging from lenders to private lenders for the most part. They're going to want anywhere from 35% to 50% down on the raw land. That's just general. They'll advance the construction funds in phases, the banks more often than not, they do actually like RBC has a quota. They want to see investors that are doing this five times a year.

That's the number they actually use. They want to see them turning five, five houses per year. They want to see a resume. They want to see environmental if possible, upfront. They want to see the appraisals. It can be expensive in that sense that you have to fund a lot of costs. But that's the banks. The banks are going to be your cheapest way.

Rates can vary, 4% to 5% through the banks on something like that. And then yeah, private lending, obviously is a little bit easier, a little bit, they're looking for 50%, they still want a lot of the costs up front budget costs, current value of the land value after with the build on the property. But the idea that we would try to stress to most of our investors would be to try to self-finance as much as you can. If you have equity in existing properties or you have home equity lines of credit, it's important, especially if you have rentals with equity, it's important to look at the equity that you currently have to help fund a lot of those projects, because oftentimes that's the cheapest you're going to get the money.

Natalie mentioned it early and it was great. I know it's so hard. And when you're in Southern Ontario to include a condition to financing, but I would 100% echo, something like that. When you're buying raw land, it's very difficult to get an exact quote and know exact numbers that you're dealing with upfront.

If you're the kind of investor that says I'm okay with a little bit of wiggle room rates may go up, might be a little bit more. I just want to know my worst case. That's one thing, but if you want to know your exact costs, get a condition of financing 5 to 10 days, I would say on something like this and an office like Claire, somebody that specializes in these sorts of projects can certainly get some sort of at least a worst case scenario. You know what your numbers are.

Sarah: Amazing. Awesome. Thank you, Dan. Where can people reach out if they want to know more?

Daniel: And email is a great way to reach me daniel@bmselect.ca. That's the best way to reach me. They can check out Instagram as well, Daniel Patton Mortgages, I think it is. I should know what I feel like.

Sarah: Thanks, Dan.

Daniel: No problem.