Construction to Permanent Loan and Tear Down Real Estate

The real estate market has really picked up steam over the last several years, driving prices up across the nation, but the number of properties available for sale has significantly decreased. This home sales downturn required that real estate investors and prospective home buyers use more creative ways to attain new properties, spurring a phenomenon known as teardown real estate. It permitted people who could normally not have afforded to buy into real estate markets to be able to do so. More pertinently, it has triggered the demand for an increase in home construction loans offered by various lenders.

The Advantages of Teardown Real Estate

Two distinct buyer groups gravitate toward teardown real estate. The first group includes those who are specifically seeking out residence in a particular neighborhood, a goal driven by several typical reasons including (but not limited to) proximity to desirable destinations or attractions, high-quality school systems, and other aspects important to their needs. These buyers are typically operating within limited financial parameters, so they tend to seek out nice land plots with old homes that can be torn down and rebuilt with a newer one, or a fixer-upper that has good “bones” but will be remodeled and converted into a space more suitable to their needs.

The other interested group includes deep-pocketed investors who are actively scoping out high-end market properties, seeking to construct a brand-new domicile to offer for sale or to use as a rental property in the future. 

Regardless of the buyer type or their reasons, finding the funding to finance the construction or renovation project is always a monumental factor in teardown real estate endeavors. Securing the funds necessary becomes one of the primary aspects of anyone getting into this type of real estate venture.

Construction Loans and Teardown Real Estate: An Ideal Pairing

It goes without saying that teardown and rebuild projects, as well as extensive, remodels come at expensive costs. It costs money to purchase the land where the home will be built, the tearing down of any existing structures, removal of demolition materials (sometimes including hazardous waste), performing the construction itself, and finally the final cost of the mortgage itself. Although that is already a handful, the costs do not end there. Other costs include:

• Holding costs: The construction project will take months, and in the meantime, the buyer needs to live somewhere. Very seldom are they living somewhere with no expenses. Typically, the costs need to account for rent/mortgage payments of a current residence, as well as the bills, taxes, and insurance costs on that property.
• Indirect costs: Building a new home carries a slew of smaller fees, which, added together can be costly. These fees (sometimes referred to as “soft fees”) include architectural and engineering costs, permit acquisition expenses, and other costs not directly linked to the physical construction. 
• Closing costs: When a buyer closes on a house, they are responsible for closing costs on top of their construction to permanent loan, including the costs of the property’s title, appraisal fees, inspection fees, and what the lawyer overseeing the property acquisition will charge for his or her services.
• Extraneous costs: A construction can be planned for a particular time period, but it hardly ever runs exactly on schedule. Weather is a big factor in delays to construction projects, as well as the need for extra materials. All of these push the project’s completion back and could cause it to overrun even a generously estimated timeline. 

With so many expenses to consider, anyone not working with unlimited funding will need to take out a loan. However, traditional loans would not cover many aspects of construction. Luckily, construction to permanent loans are now available to cover the costs of the project from its property purchase stages, through the construction period, and into the actual traditional home loan life of the loan. Lenders leverage these loans to simplify the process on the home buyers by taking care of paying the general contractors when pre-arranged and agreed upon milestones of a construction project are reached.

The following are the particular aspects that a construction loan will cover:

• Acquisition costs: Paying for the property lot, as well as paying off any current loans in a refinance scenario.
• Soft costs: Covering architectural, engineering, and permit costs.
• Construction costs: Coverage of the costs associated with the actual construction of the property.
• Interest reserve: This will include payments disbursed specifically during the construction project to cover the construction costs as project milestones are reached.
• Contingency reserve: These funds need to be available in order to cover the costs that are associated to project longevity overruns or other unforeseen circumstances.
• Calculating construction loan amount. This is somewhat more involved than a regular mortgage. A Construction loan calculator, found here, will help you do that.

Most buyers of such properties will be interested in financing the construction of the home and then the mortgage itself. Most lenders, therefore, offer construction to permanent loan options that combine the construction loans with the mortgage payout that follows. 

The construction loan portion covers the project during the construction phase, but once that is completed and all the building/remodeling costs have been settled, the loan converts to a traditional home mortgage loan at a pre-agreed period, 30-year fixed, 15-year fixed, etc.

Final Thought

The teardown real estate is complicated, lengthy, and involved, as any buyer entering it quickly finds out. To simplify the financial end of the process, home construction loans are an option to get the buyers the funding they need to proceed, accounting for all aspects of the construction process. This simplification eases the confusion on the financial end, allowing buyers to have more focus on building the home they have always wanted.