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Improve Your Builder Financing in Four Steps

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Improve Your Builder Financing in Four Steps

Are you considering talking to a lender about financing? Learn four must-have tips for improving your odds and learn about 10 items you’ll need to obtain a line of credit.

By Sheree R. Curry, Contributing Editor March 31, 2007
This article first appeared in the PB April 2007 issue of Pro Builder.

Interest Rates on the Rise
5 Tips to Improve Cash Flow
10 Items You'll Need to Do to Obtain a Line of Credit

Sure the housing economy has slowed, but you're still trying to run a business. You have to make payroll; architects need to be commissioned; there are processing fees to pay, utilities to cover and marketing campaigns to back to pique buyer-interest. You need cash. A loan would help, but good luck with that.

A few years ago when the housing boom was in full blast, it wasn't as difficult to get approved for a commercial loan. How quickly things can change with the roll of dice.

Competition for those loan dollars is fiercer. Commercial loan applications are up. Lenders are lowering the loan-to-value ratio; they are increasing interest rates and reducing the amounts they are willing to lend. The days of requesting a loan on the back of a paper napkin are over.

"A higher percentage of builders are saying credit conditions are worse," says Dave Ledford, staff vice president for finance and housing policy at the NAHB. As an example, he cites a section of a February-released NAHB survey of builders that says, in the fourth quarter of 2006, 25 percent of those seeking land acquisition loans said it was harder to get approved than the previous quarter, whereas in the third-quarter survey, only 8 percent said that conditions were worse.

"Now is not the time to go to a new lender," he says. If you want to have a fighting chance in this game, "rely on existing relationships."

When the economy is booming, you have market conditions riding in your favor. Today, the rules of the game focus more on how many I's you dot and T's you cross. Fail to include a financial statement, your paperwork might move back two spaces in this lending game; but if you make all the right moves with a lender, you have a better chance of leaping ahead of the competition and making it to that finish line where the loan awaits you.

To win this game, "you must have a strategy," says Chuck Breidenstein, who teaches finance banking; zoning and financing; and diversification courses for the Home Builders Institute's master builders program. Each move must be strategic, and each interaction [with the lender] should involve an intended and predictable consequence."

On the following pages, you'll find information that will help you develop and refine your strategy. We've broken the process into four steps and have added sidebars that speak to how you can improve your luck the next time you are at the lending table.

Step 1: Treat Your Lender as a Business Partner

When you choose to borrow money from a bank, you must begin looking at the lender as your business partner, says Chip Lundy Jr., chairman of Williamsburg Builders in Columbia, Md. "You need to disclose everything to them about your company. Full disclosure about your financial position is essential to build a reputation and quality with the lender. If you don't do that, you are dead in the water."

This is especially true if things are going south. When that happens, the first thing you need to do is make a call to the lender, he says.

In the mid-1990s, three business entities operating under Williamsburg Group, parent to Williamsburg Builders, fell onto hard times when several homes were each being built under different price points.

"The market was really soft, and we had to merge two of the three companies," says Lundy. "We hired Arthur Andersen out of Pittsburgh because they were experts at putting together a business plan on a huge scale. We brought them in August 1995, and we asked them to work closely with us on how to reorganize these companies. As soon as we had a plan put together around September, we individually met with the lenders — four or five local banks in Baltimore we were dealing with. We explained what we were going to do, when we were going to do it and what was going to happen into the fall. We then told our employees.

"In November 1995, we gave the lenders a progress report and we said to them, here is what we said we were going to do, here is what we've done. If you are not going to renew our loans, I'd like to know in the next 30 days, because we have to submit our [loan renewal] applications in February and get approved in March.

"One bank we had a loan with for maybe $6 million said, 'We'll give you whatever you want.' I said, 'What about $14 million,' and they said, 'Yes.' They were all so delighted that we had disclosed fully to them what our plan was and how we were going to get through this tough period."

Giving full disclosure also means not exaggerating the truth. It's never a good idea to mislead the lender by making positive comments about the future.

Step 2: Impress with a Good Reputation

Maintaining a good reputation in the industry is one of the best ways to impress a lender, say industry experts. That means you should pay your bills on time, maintain good customer relations, avoid bad publicity and, of course, not go bankrupt.

There are such lessons to be learned from previous housing downturns.

"There was a period about 16 years ago when the market just bottomed out and there just wasn't any job growth. We were in a recession, and I had a lot of commercial stuff sitting around. I found myself with a lot of debt my wife and I were in on personally. But we were determined to make good on our obligations, so we restructured our debt," says Earl Armiger, NAHB Area III national vice president.

"One of the obligations was I had to continue paying money to a bank long after we were out of a project. I had five years to pay it. The reporting requirement for the bank was I had to report monthly as to how I was doing. It required so much of our staff time that we paid it off in 30 months instead of five years because it was so onerous."

But the upside to that experience is that paying his debt off regularly, and even ahead of time, increased Armiger's credibility with other lenders.

Step 3: Remain Loyal

Stay loyal to your lender. Keep giving them business and good projects and good deals. In other words, you can improve your relationship with lenders by also bringing them business, i.e. home buyers.

"We look for ways to put the Chase brand on opportunities on site by providing mortgage lending services at the point of sale," says Sue Barber, senior vice president in Chase's builder group, a division of JPMorgan Chase & Co. "We look for marketing opportunities with some builders who may be customers of our commercial bank already."

Chase seeks out such builder relationships in a prospecting forum and business development group. Just recently it began the Premier Builder program. "If the builder is looking for spec home financing or construction financing, we can make it more attractive for them if we can make it more attractive for the end loan," she says.

One such example is Williams & Dame Development headquartered in Portland, Ore., with offices in the Seattle and Los Angeles markets. The group is a commercial customer of Chase. "They were introduced to the home mortgage division by the commercial group, and we were able to service them from both companies," says Barber.

Step 4: Be Prepared

Banks are in the business of lending money, not owning construction projects or land. Although lenders look to your collateral as part of their exit strategy for the worst-case scenarios, it is more important for them to understand how you are going to pay down the loan. They want to know the timeline, the cash flow forecast, the budget, who is on the team, what the product is like, what the market condition is and what the competition is. And you should be able to describe each with confidence.

Because you may never know when you might need to borrow funds for a project, it's a good idea to always be prepared for such an occasion, says Betsy D'Jamoos, chief operating officer of The D'Jamoos Group, a family-owned developer in Southwest Florida.

She offers other builders the same advice she heeds herself: "Keep your financial packages [financial statements, global reports, tax returns] up to date as well as all necessary documents [contracts, environmental reports, previous appraisals, bios and project summaries], so they are ready to go out as soon as you identify potential lenders for a project," she says. "The sooner you get them all your information, the sooner they can get the appraisal going and working their credit department."

To further impress the lender, D'Jamoos has the loan officers meet her at her offices. "We built our office park and they get a good look at what we do and how we do it," she says. "This works much better than photos." Lenders like details, so be ready to show them floor plans, elevations, renderings, marketing materials, articles and other documents so they know you are prepared.

Making a good impression also applies to your personal appearance, says Ed Harrison, CGB, GMB, who teaches a finance class on land acquisition and development for the NAHB's University of Housing.

"Jokingly I tell the people in my class: 'You may wear blue jeans and boots all week, but when you go talk to a new banker, at least clean you boots and wash your blue jeans.'"

The lender is looking for confidence from you, say experts. And that can be confidence in how you dress, confidence in your product, confidence in your company running the project and confidence in your honoring your obligations to them so that they in turn will have confidence in your making the loan a success. And obtaining that loan is the object of the game.

NAHB: www.nahb.org

Home Builder’s Institute: http://www.hbi.org

Author Information
Sheree R. Curry is an award-winning business journalist based in Minneapolis who specializes in management best practices and real-estate trends.


Interest Rates on the Rise

Lenders, who are scrutinizing loan applications more closely, are also raising the rates on various loans to builders. Only single-family construction loans rates dipped slightly from 3rd Quarter 2006 to 4th Quarter 2006, according to the latest data available from the NAHB. But single-family rates are still up from a year ago. Here's the breakdown.

Type of Loan Q4 2006 Rate Q3 2006 Rate Q4 2005 Rate
Land Development 8.5% 8.1% 7.4%
Land Acquisition 8.3% 7.6% 7.2%
Single-Family Construction 7.8% 8.1% 7.3%
Multi-Family Construction 8.0% 7.3% 6.8%
Source: NAHB Builder Survey

5 Tips to Improve Cash Flow

The best way a builder can look good in the eye of a lender is to keep as much cash in his business as he can. To improve your cash flow, builder Chuck Breidenstein, who teaches finance banking and other financing topics for the Home Builders Institute's master builders program, offers these five tips:

  1. Cut your salary in half. About six months to a year before you might need the funding, reduce your salary and give that portion back into your company's savings. "If a lender can see profit, that means more than if they can see me get a good salary," says Breidenstein.
  2. Sell off equipment that carries a lot of debt. If you have a $100,000 piece of equipment with a monthly debt of $1,200 dollars on it, shed that equipment. "Take a loss over time with the business to get rid of that payment. If you do that in a lot of places, you can streamline your cash flow."
  3. Cash in your insurance policy. Life insurance policies, such as those taken out for buy-sell agreements, are a wealth of hidden cash. They accrue a cash value you can borrow against at a low interest rate. The banks don't even see it as debt because there is no loan application, no credit check. You don't even have to cancel the policy, and it shows up nowhere except in your insurance file. Just call your insurance agent and say you want to take some of that cash out.
  4. Take on side projects. The remodeling business is a great way to keep idle workers busy and create some extra cash. But don't be fooled by the high-ticket jobs, he says. An elaborate addition may look like a great high-margin product, but if it means you're eating up your company's resources and have to hire more workers to complete it, it's not the way to go. Some jobs may not have a higher-profit margin, but because they are a quicker turnaround they are cheaper on the cost side and add cash to your balance book a lot sooner.
  5. Turn to former clients. Remember the homes you completed two years ago? The owners just might be ready to finish off that basement now. Breidenstein helped one builder create a menu-driven basement finish program and pick up extra work from people who were already familiar with the company.
  • 10 Items You'll Need to Do to Obtain a Line of Credit

    Considering obtaining a revolving line of credit to pay unexpected expenses or tide you over until you can dig out of a home building lull? Here are 10 common requests from an application form your lender of choice will likely ask you to provide to determine your eligibility.

    1. SIGN A RELEASE for a personal credit authorization so the loan officer can verify your credit worthiness.
    2. CREATE AND SUBMIT A PERSONAL FINANCIAL STATEMENT for each officer or partner in the business. This PFS should detail your assets and liabilities, such as IRAs, child support payments, value of personal property or mortgage debt.
    3. DETAIL YOUR BUILDING EXPERIENCE, including number of years in the industry, prior developments, number of homes built per year, your license number, etc.
    4. SUBMIT the personal federal tax returns for the last two years for you and your business partners.
    5. PROVIDE at least three fiscal-year-end statements for the business.
    6. SUBMIT CASH FLOW STATEMENTS itemizing current projects (e.g. type of project; total number of units and units sold; percentage of project you own; etc.)
    7. LIST THE ADDRESS, land size, year developed/purchased, amount paid, total lots and other general information for any real-estate you will use as collateral.
    8. GIVE GENERAL INFORMATION on vertical construction (e.g. square footage, cost, materials, target market, etc.).
    9. OFFER MARKET INFORMATION on the competition and comparison analysis of other projects in your specific market and the price points; highlight the economic environment.
    10. INCLUDE REFERENCES from suppliers, contractors or subcontractors.
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