Episode 85: Construction Financing

Financing your build? Alisa Aragon-Lloyd (Bridgestone Financing Pros) explains construction mortgages—draws, permits, and cash-flow strategies every builder and homeowner should know. Listen now.

Listen to “Ep 85: Construction Financing” on Spreaker.

You will also find “Measure Twice, Cut Once” on iTunes, Spotify, Spreaker, and on HAVAN’s YouTube channel.

Alisa Aragon-Lloyd, Finance Expert, Bridgestone Financing Pros

Alisa’s passion is creating financial independence. Her extensive and varied experience stems from over 14 years of working with high-profile companies, including Polygon Homes, Ledingham McAllister, The Quigg Group, Pinnacle International, Maverick Real Estate, and Hollyburn Properties.

When she moved into the financing arena as a licensed Mortgage Expert in 2010, she quickly gained a reputation for finding creative solutions with sound strategy. She regularly contributes to the New Home & Condo Guide and is a past monthly contributor for the Real Estate Weekly (REW.ca). She was an expert panelist along with BC Housing, CMHC (Canadian Mortgage & Housing Corporation), and Fortis. Alisa has been an active member of Homebuilders Association Vancouver (HAVAN) since 2012. She is the current Past Chair on the Board.

In addition, Alisa volunteers at numerous HAVAN events. Bridgestone Financing Pros clients love her energy and caring personality, especially since she extends them beyond funding date. “It’s why we have so many repeat clients and quality testimonials!” Alisa gives back to her community by teaching high school students about financial literacy in the classroom.

Listen and like for your chance to win a gas BBQ compliments of our Podcast Partner FortisBC.

Ep_85_Transcript

0:00:03

Mike

Hey everybody, welcome back to Measure Twice, Cut Once, Season 10 if you can believe it. My name is Mike and after 10 seasons of doing this, I almost feel like I know enough to, you know, to do some stuff.

0:00:14

Jennifer-Lee

Yeah, and I’m Jennifer-Lee here to keep Mike out of trouble. And today we’re diving into something every builder, renovator and homeowner needs to know. Construction mortgages.

0:00:26

Mike

Yeah, absolutely. This is going to be a great conversation because all these things we talk about require one common element. Doesn’t matter we’re dealing net zero or passive or just conventional. You need money. to pay for it, especially.

0:00:40

Jennifer-Lee

Unless you’re wealthy and then you don’t have to.

0:00:42

Mike

Well, no, you still need money to pay for it.

0:00:44

Jennifer-Lee

Well, you don’t need a mortgage.

0:00:45

Mike

Well, you should anyway. But listen, we’re going to talk to somebody who knows a lot more about money than I do and probably a lot more than anyone I’ve ever met. Of course, our friend, Alisa Aragon-Lloyd.

0:00:54

Jennifer-Lee

And she’s our friend, yeah.

0:00:55

Mike

Absolutely, absolutely. It’s Alisa Aragon-Lloyd from Bridgestone Financing Pros. And I want to point out that not only is she going to break down what makes construction mortgages different from construction traditional ones, and how to make sure your projects get off the ground with the right financing. But Alisa is also chair of the board for the Home Builders Association as well. So you’re kind of wearing two hats here.

0:01:17

Jennifer-Lee

And she’s a mom too.

0:01:20

Mike

Well, we only have amazing guests here at Measure Twice Cut once, and today is no exception. Welcome back to the studio, Alisa. It’s been a while since you’ve been here.

0:01:29

Alisa

Thank you for having me. Congratulations. 10 years.

0:01:32

Jennifer-Lee

Not 10 years, 10 seasons.

0:01:34

Mike

But as we discussed earlier, we measure them in dog years.

0:01:38

Jennifer-Lee

So kind of, but yeah.

It feels like 10 years.

0:01:40

Alisa

Well, 10 seasons, that’s a huge accomplishment and you guys have done a phenomenal job.

0:01:44

Mike

So thank you. We’re happy to keep doing this because these are really important conversations. And, you know, one of the things we enjoy doing about this is demystifying certain elements of construction that really, you kind of had to be an insider to know about. up until recently. And obviously, I mean, I can go into my bank and say, give me a mortgage, and they’ll hand me a bag of cash, allegedly, and away we go. But it’s different if I’m going to build my house.

0:02:12

Mike

And I’d love to get into that and talk about what is a construction mortgage and how that might differ from a conventional mortgage that I might go to a bank and get on my own.

0:02:22

Alisa

So the difference between a construction financing, essentially that’s a short term mortgage or essentially a short term loan. And you pretty well have it during the construction period. So essentially while you’re building or doing an extensive renovation. The your typical mortgage that most people know about is essentially the lenders actually advancing you the full amount of the loan right away. And and then pretty well, you just make automatic payments, you know, based on monthly or biweekly, however you set it up. So essentially, that’s that’s the difference with the construction financing is really we’re going to go more into detail.

0:02:59

Alisa

But again, it’s just during the construction process.

0:03:03

Jennifer-Lee

And how much, because in a regular mortgage, we always talk about the down payment. Do you need to have a down payment for a construction mortgage? And if so, how much should you be putting down percentage wise?

0:03:14

Alisa

It really depends on the lender, but essentially you would be looking at about 20 to 25 % down payment. But that’s kind of like the down payment, but it’s not necessarily what you’re really going to need, because there’s a little bit more to it with the construction financing.

0:03:29

Jennifer-Lee

And what are some of the things that we need with it?

0:03:32

Alisa

Well essentially what happens is with construction financing essentially the lender wants you to use your funds first before they’ll advance more funds. So construction financing is really based on draws. So as you complete or the construction progresses then they will release more funds and it’s really based on a percentage of completion. So every item, or for example, like plumbing would be a certain percentage, the foundations, another percentage, landscaping is another percentage. So as you complete the different aspects of the home, that’s how the construction draw essentially happens. And that’s how much they will advance you based on that.

0:04:14

Mike

Is it different? I mean, obviously, we know what’s required to get a regular mortgage. We have to have appropriate credit. We have to have the income. There may very well be a stress test in place. How does it work with a construction mortgage or a lot of those same guardrails in place, or are there a different set of criteria that would be used to judge me?

0:04:35

Mike

I’m thinking about someone who, like myself, may want to do their own project, but maybe someone who’s newer in this industry or someone doing their first home. Do they need a track record of success in the construction industry to even qualify?

0:04:47

Alisa

Well, there’s two different things. One is who’s building the home, so we can talk about that in a minute. Essentially, if you’re applying, the homeowner is going to be applying for the construction mortgage, right? And yes, they will use somewhat of the same criterias when you’re just getting a regular mortgage. However, it is a little bit more in depth in the way that construction financings are actually one of the riskiest type of lending for any lender. And the reason is, is because when you actually do a construction, essentially you might be tearing down the house or the house is already tear down or you’re just going to be doing a major renovation.

0:05:25

Alisa

The lenders are their business, they’re in lending money. They’re not of building. So, for example, if you own a home and you don’t pay your mortgage, well, they can just come and foreclose to you. Essentially what they do is they just get a realtor, they list it and they sell the home, they get their money back. With construction financing or if the home is in construction, essentially now they actually have to go and hire somebody to finish building the house and then they have to do the same process. right?

0:05:50

Alisa

Like, you know, hire a realtor and all that kind of stuff. So again, they’re in the business of lending. They’re not in the business of building. So that is why construction financing is definitely one of the riskiest type of financing.

0:06:03

Jennifer-Lee

And they really wanna make sure that the client will have enough funds and will be able to actually complete the build of the home.

0:06:11

Alisa

And with it being complicated like that, then, Can you finance the land and this construction together or are they separate? Yes, you can actually finance the construction and the purchase of the land and the construction at the same time.

0:06:27

Jennifer-Lee

Again, it depends, too, because unfortunately, as you guys know, permits are actually taking a long time.

So that’s been happening a long time.

0:06:34

Alisa

Exactly.

0:06:35

Jennifer-Lee

That’s not new.

0:06:36

Alisa

It’s not new. So again, it really depends on the strategy of when you’re going to be having those permits. For example, I have a client, they’re buying a brand new house. Well, sorry, they’re buying. Okay, I have a client that essentially is buying a home, they’re going to be completely building a new home on it. But by the time they look at the permits and everything else, it’s not going to happen for two years.

0:06:58

Jennifer-Lee

So it’s way too early at this point to get them a construction finance, like a construction loan. And when they’re finished the building of this, and again, I’m just still trying to like, understand all of this. So if I sound naive, sorry, but when we finished the builders finished building, everything’s done or whatever. Do you have to pay everybody back?

Or can it be like another mortgage where you’ve got so many years to go? Or does it all have to be done? Yeah. So essentially, what happens is once the construction is complete, so you have to be at 95 % complete. and you have to have occupancy. At that point essentially what happens is that construction mortgage automatically turns into a long -term mortgage.

0:07:42

Alisa

So it’s with a 30 -year amortization. and set payments and that kind of stuff. The rate and everything else will depend at that time what the rate is at that time when it completes. Usually construction terms are usually between 12 to 18 months.

So they give you that to kind of complete the home. But yeah, once the the construction loan is done, the home is complete, then at that point, you will be able to kind of convert it into a long term mortgage.

0:08:10

Alisa

You don’t have to pay everyone. as soon as you drop the last hammer. Well, everybody means what?

0:08:16

Alisa

The lender or it means the builder, because definitely the builder wants to get paid. I meant like pay the remainder of your mortgage.

0:08:23

Mike

So what happens? Like you said, there could be a period of two years between when we apply for a permit, we start getting shovels in the ground. Correct. Would I be well advised to get approval for a construction mortgage before starting that? Obviously. But what happens is, and we’ve seen this happen over the last few years.

0:08:41

Mike

So say I want to build a home that’s $2 million. You give me approval for $2 million. We fast forward 18 months and now there’s been say 5 % to 10 % increase because of things that we can’t control, market conditions and things like that.

0:08:55

Alisa

What happens at that point when I’ve been approved for $2 million and it’s actually going to be a $2 .2 million project? Or are there there’s something unexpected that we found as we’re excavating, or the city said, hey, there’s this new rule that you have to follow, sorry, and you need to put a, like, how do we deal with the gap between what we initially thought and what actually is? Is there a provision for that? Yeah, again, we go back to how long it’s going to take for you to kind of start doing the construction, right? So if it’s going to take two years for you to get a permit, Essentially, you just have to get regular financing. And that’s what I was mentioning with one of my clients.

0:09:30

Alisa

He’s buying this property, but essentially he’s not going to be building for two years. So we’re looking at actually just get him a shorter term financing mortgage. so only for a couple of years. So then at the time it comes up for renewal, he doesn’t have to pay a penalty because he might switch lenders at that point for the construction financing. and then at that point he will apply for a construction mortgage. Essentially they will not advance a construction mortgage until you have a building permit, so that’s the key.

0:09:59

Alisa

So essentially you just have to wait until the permit is pretty well close to you getting the permit before.

0:10:07

Jennifer-Lee

I mean we could do it probably I don’t know, four, five, six months, depending on the lender.

0:10:12

Alisa

But essentially, they will not advance any funds until the construction permits in place. So the first straw will happen at that time. And obviously, interest rates have fluctuated over the last few years, we are getting construction mortgage, is there a higher interest rate for that? Yeah, so typically, again, because construction mortgages are one of the riskiest types of lending, yes, the interest rates are a little bit higher.

Typically, they’re at prime plus 1%, and you’re making interest payments only during that term.

0:10:43

Alisa

So right now, for example, prime rate is at 4 .95, hopefully, in the next i guess tomorrow hopefully they will actually reduce rates which it looks like they will the bank of canada so in that case essentially it’s uh 5 .95 as of right now what they would be paying and it’s interest payments only depending on the lender there is some lenders that they will actually already set the rate now and you would pay it based on the interest rate that they set So again, it depends on the lender. And again, because construction financing is really specialized. Risky.

And risky, yes. Even some banks have actually pulled it from their branches. So they just have specific people dealing with it. But it sounds interesting. So I come to you and I say, hey, I got my building permits approved. I hand them to you.

0:11:30

Jennifer-Lee

You hand me a big check for $2 million.

0:11:32

Mike

And I go, what, go to the casino and turn it into four? pay it out to somebody, or put it in a bank account? Like, how does the process work once they’ve been approved?

Alisa

So essentially, once you have the construction permit, and this is where it really works, I work with quite a lot of builders that I work with their clients, and I’m with them through the entire process. Because essentially construction financing is really based on draws. So like I said, the difference between a regular mortgage is they give you all the money in front with the construction financing is based on draws.

0:12:00

Alisa

So it’s typically between four to five draws. And And as you proceed with the house, again, they want you to use your own money first before they advance your money. And then once you complete that percentage, then they will advance more funds. Essentially, the basic draws, usually sometimes, like if you already own the property, and you’re going to be taking equity out, which there’s a lot of homeowners that have pretty well almost no mortgage or barely any mortgage on it. And they’re going to be building something now. It’s happening a lot where people are doing multi -general living, essentially, you know, the parents and the kids, the parents on the home, the kids are going to be helping qualifying and everything else.

0:12:45

Alisa

So they’re going to all be living together. And essentially, there’s not there’s a very small mortgage or no mortgage on the property. So the construction mortgages are really based on draws and they’re typically four to five draws. You can request more if you like, but typically there’s about four or five. The first one is usually the land draw. which is the first key draw.

0:13:05

Alisa

Then you have like framing, sorry, foundation, then you have framing, you have lockup.

0:13:11

Mike

Lockup essentially is when you have the roof, the windows, the doors, and the house is kind of locked up, right? And then you have completion. So at that point, once you get 95 % complete on the occupancy permit, then the construction mortgage is pretty well paid out on that point. Is there anything that isn’t covered?

0:13:28

Mike

Like as an example, can I say, a construction mortgage and then go, say, buy a theater system for my basement or buy a new car for myself? Or are there provisions where it can only be used for certain things in the home?

Alisa

Well, I mean, sure, you can go and buy a car if you want, but then you’re not going to be finishing your home. But no, essentially the way it happens is, again, the lender wants you to use your own funds first. And then once you complete it, complete, because it will actually send an appraiser to go and see the house and see at what stage it is.

0:14:01

Alisa

And then eventually at that point, they will release more funds. There is a schedule that is provided to lenders. And I do work with sorry, it’s provided to the homeowners and I work with them along the whole the whole process that essentially is in determining what percentage it is. So sometimes, for example, like I mentioned, the maximum amount, the key draw that is very, very important is the land draw. And depending on the lender, they will lend you up to 65 to 75 percent of the land value. A lot of people are like, well, I don’t need that much money.

0:14:36

Alisa

Right. So, for example, let’s just say it’s going to be a million dollars. So they will advance the land is worth a million. I know we all wish that was it, but essentially it’s one million. So they will advance you, say, up to 750 ,000. Right.

0:14:52

Alisa

Out of that amount, that’s a maximum you can have. So if the client says, well, I only need right now 200, I always tell the clients, pull everything that you can get as the first land draw, because once the land draw goes through, they will not advance you any more money until you have completed the project.

0:15:10

Jennifer-Lee

And unfortunately, There’s been several clients that have come to me, they already have construction financing in place, and they’re like, the bank won’t advance me any more money.

0:15:20

Alisa

And I’m like, yeah, like the land draw is key. And they said that never told me that.

0:15:25

Jennifer-Lee

And I said, yeah, and that’s why sometimes like it’s really important that you work with somebody that knows what they’re doing. So essentially, what we had to do with these clients is we actually had to pay out their existing bank, and then get them another lender because the lender will not advance any more money.

Wow and you mentioned before there’s usually typically four draws, does that change from project to project like depending on what size of home you’re building or no?

0:15:41

Alisa

I mean the client can request more draws typically there’s like four draws that are covered so if the clients want more money then absolutely but then they will actually have to pay for it it’s not very expensive but it is an additional cost because essentially what happens is the lender will send an appraiser see how much is completed and then based on that they will release the funds to their solicitor and there has most lenders do do a hold back so out of whatever money they get 10 is held back by the solicitor and then the funds are released. So every time there’s a draw as well, what happens is essentially they’re paying legal fees as well because the funds are sent to the lawyers.

Mike

And during the draws, have you ever seen anybody do a few draws and then they stopped and that’s it? They’ve stopped the project and not continued onwards?

0:16:36

Alisa

I haven’t seen it, but I heard of it, yes. And it’s unfortunately, and typically that happens is because They just run out of money and there were a lot of issues. Unfortunately, it also has happened with big developers that essentially they just run out of money and they can’t finish a project.

0:16:57

Mike

So it’s not only, you know, somebody building a single family home, it also extends to developments. Speaking of releasing funds, we should probably take a couple moments to thank some of the amazing partners we have who help us bring this podcast to life. So we’re going to take just a couple minutes to thank our awesome sponsors and we’ll be right back. And we’re going to start talking a little about risks and challenges that go with financing. your construction project. Measure Twice Cut Once is grateful to our podcast partners FortisBC, BC Housing and Trail Appliances.

0:17:28

Jennifer-Lee

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0:18:51

Mike

All right, welcome back.

We’re talking with Alisa from Bridgestone Financing Pros, who’s just going to have a quick beverage before we continue our conversation.

0:19:00

Mike

And for those of you watching at home, this is a great time for you to have a delicious beverage as well. It’s just water. It doesn’t matter. It’s refreshing. It feels good.

0:19:09

Alisa

It is refreshing.

0:19:11

Jennifer-Lee

So now that we understand some of the basics of financing and project, obviously there’s going to be some challenges and some risks that come up.

0:19:19

Alisa

Some we can avoid, some we can’t.

0:19:21

Mike

What happens, say myself as an example, so I’ve gotten financing to start building a home.

0:19:27

Jennifer-Lee

And either I go too crazy with the electronics in my house, spoiler alert, that will happen.

Which, yes, I can see that happening.

0:19:35

Mike

It’s already happening. That’s going to happen. Knowing you, Mike, yes.

0:19:37

Alisa

Or more likely is that there’s delays waiting for materials. Which will also happen. Yeah, exactly.

0:19:43

Mike

Or the city has changed something or we found something. What happens when I get approval and that happens? How is that dealt with from your end? So if the construction has already begun and essentially there’s a delay with, say, an inspection or something else, essentially, again, the lender looks at it based on what is being completed.

0:20:04

Alisa

So if there’s a delay, unfortunately, you won’t be able to get any more funds until you kind of get the next stage going. Right. So that’s typically what happens. And what about if I’m Like, as an example, I’ve got an approve for $2 million. And by the time we figure out what we want to do, and then there’s this has happened, and that’s happened, now I’m looking at, say, 2 .5. Can I go back and revise this to get more, or is there a secondary option that is available?

0:20:35

Jennifer-Lee

Like, I’m just trying to figure out how someone might navigate some of these challenges, because certainly these are things that happen in the real world, and your experience might help people who are in the middle of it right now.

Alisa

Yeah, so, I mean, construction costs do increase sometimes or things come up that you’re not expecting. That’s why yes typically for example we talk that you would need 20 to 25 percent down payment. The reality is I would really budget more about 35 percent because things are going to come up. There has to be a contingency fund that lenders actually look at as well and the builders should have it as well.

0:21:16

Jennifer-Lee

So because things do come up, right? Costs come up or certain things and I have a client right now where the construction budget was actually a little bit higher than what they qualified for. So essentially, we had to go back and said, OK, well, like, what are your priorities here?

0:21:31

Alisa

So again, this is where it helps working with myself and the builder and the client. Obviously, the client is my he’s my client.

The homeowner is my client, but it’s also working with the the the builder and kind of saying okay like what can we actually how can we make this work because that was the maximum amount they would be able to qualify so if that’s the maximum amount you’re able to qualify and it’s going to cost say $200 ,000 more either you cut the budget by that much or the clients have to come up with a difference because the lender won’t advance them more money and the client the bill sorry the lender decides how much the house is going to be worth. And that’s where we actually do request an appraisal once the home is complete and what the value of that home is going to be once completed.

0:22:21

Mike

And that brings me another thing, because we all have high hopes. We all love our homes and especially something that we’ve built. What happens if the lender appraises it lower than expected?

Alisa

So if the appraisal comes lower, then it’s the same thing. If that’s the maximum amount, like if the clients need, say, 2 .2 and the maximum they’re going to get is $2 million, essentially, they’re going to have to come up with the $200 ,000 difference or they’re going to have to make adjustments to their budget. That’s the hard thing is the mortgage broker period either you’re dealing with construction or regular mortgages for home purchases.

0:22:56

Alisa

It’s always learning how to set those expectations for your clients. It is and it’s kind of figuring out different strategies and figuring out and that’s why it actually works. It helps to work with somebody like myself because I have so many different lenders that I can go to and figure different things out. We have a client that they’re actually building a net zero home and it was actually very very challenging find comparables because especially with some net zero homes they’re not for sale. They’re owner occupied. And it was very challenging. So I actually had to find a lender, sorry, not a lender, I had to find an appraiser that really understands it, because there’s a lot of appraisers out there that don’t really understand net zero. And that was really important too, right? Because essentially, they were coming with the value of a home with a regular home and a net zero home, it actually costs quite a bit more money to build. And also in that case, that’s where having additional funds is important for the client, because there’s going to be a point during the construction process where there’s going to be a peak of capital required and they won’t be able to get that from the lender.

0:24:09

Mike

So they have to have cash available from their own sources to be able to finance that part.

0:24:15

Jennifer-Lee

This is good information.

0:24:16

Mike

I’m writing down a lot of notes. One thing that we should talk about, you know, we tend to look at mistakes as negative. And I guess they can be if we don’t learn from them. But you’ve done this a while, and you’ve seen the good, the bad, and the ugly. What would be some of the mistakes that you’ve seen out there that you’d advise people to avoid specifically? Obviously, taking all your money up front when you’re allowed to is a big one, but there’s more to it than that.

0:24:45

Jennifer-Lee

Take the money and run, Mike. I would say it’s really important to work with pretty well your builder and the lender or somebody like myself from the very beginning. Don’t get the conservative or the budget all done and your home all designed and everything. And then you’re like, OK, now I’m going to go for financing and then you’re not going to be able to get it, get that amount of money.

0:25:09

Alisa

So there’s going to be changes. I have another client that really I’ve been working with her and her mom for about, I would say, close to two years. And it’s been like figuring out kind of what they’re going to be building and the size of the home and what kind of works for them.

0:25:26

Alisa

And we they’ve been going back and forth with the builder and the designer and trying to kind of figure out the financing and seeing how much they could kind of qualify for, and that’s what I do too with some clients is like, okay, yes, you’re not gonna be getting your building permit for a couple of years, but at least we can run some numbers and see how much you would be able to qualify right now. So at least we have a bit of a ballpark on what they’re gonna be using, right? So those are some of the things that we kinda look at.

0:25:50

Jennifer-Lee

I don’t really wanna ask this question, but I know it’s super important because I should know better being a daughter of a builder, but I know that there’s a lot of people out there that might not know this. It’s important. But when we’re going through this process with construction loans and construction mortgages, can I cut some costs and hire myself as a builder or should I be going to a professional builder? Well, the reality is you should be hiring a professional, right? I know that I don’t know how to use a hammer.

0:26:27

Alisa

So my house would not be great. But yeah, so there’s going to be two parts to part two. There’s going to be two answers to this question.

0:26:38

The first one is, yes, I do recommend that you do hire a builder, especially somebody that knows what they’re doing, because some people what they’re saying is like, oh, I’ll just, you know, hire a general contractor, I’ll take out the permit myself.

0:26:55

Alisa

And I will, so technically be a self built, and they just hire a general contractor to kind of, kind of sort of do some of the work, right.

There’s actually a huge liability for an owner to do that. And the reason is, when it’s actually a self built, you’re actually liable for about 10 years, if something goes wrong in the home.

0:27:14

Jennifer-Lee

Whoa.

0:27:14

Alisa

So You might decide not to sell the home, but life happens. And what if something you do have to sell it? Do you really want that liability? Right? So that’s one.

0:27:25

Mike

It makes me nervous already thinking about it. I was like, couldn’t do that. I don’t want to say anything. And I have had clients that have done it.

0:27:31

Alisa

And again, everybody’s going to do what they want to do. And a lot of people, they want to do it because they’re saying, well, I’m going to save quite a little bit of money by doing it myself.

0:27:40

Alisa

But there’s a huge risk that comes to that. So you have to assess what is the right choice. Just think about how long our members take to qualify to become builders in this association and how little time any of us as, for lack of a better term, homeowners, know about this. And so I get asked this all the time, should I do my own construction?

0:28:04

Alisa

And I usually say replace the word builder with dentist. And the answer is still yes, go for it, because you don’t have… Or even a doctor, like, would you actually do surgery on your own child? Like, probably not. No, I don’t know. I do know people that, again, have gone out and done it, and their homes are beautiful.

0:28:20

Mike

But being from someone that was raised in the construction industry, I just know that it’s probably better to have a professional doing it. Because in the long run, you will save money if it’s done properly. The industry is also changing so quickly. And so even between when you start the design process and you pull a permit, the methodology changes.

0:28:39

Mike

That’s why our builders go through so much education in this organization. So I didn’t mean to go off on a tangent about you shouldn’t try to build your own house. But I’ve seen the good and the bad. in 10 seasons of doing this and having these conversations. And, you know, I don’t come from a construction background. I would never think I could do that.

0:28:57

Mike

And I would also be cognizant of the fact that if I tried to do it myself, it would cost way more to hire a good builder to come in and clean up my mess than it would be to hire someone in the first place. And if we can get anything across is one, make sure to talk to you about the financing and two, when it comes down to it, Get a good builder. Yeah.

0:29:16

Alisa

And then here’s the second part of the answer.

0:29:20

Alisa

Essentially, there’s two things that happened. So when you’re applying for a construction mortgage, and we did talk already that it’s one of the riskiest type of lending, the lender wants to make sure that whoever’s building the home has the credibility, their reputation and has the experience to be able to do it. Right. So one of the things that the lender asks, even before when we’re determining how much they would qualify and everything else, essentially, we need We need floor plans of the home that they’re going to be building. So the floor plans and the front elevations.

0:29:52

Alisa

We need to have a budget from the builder, essentially, of how much the home is going to cost. We have to have a builder contract and we have to know who the builder is, as well as all the income documentation and everything else and information about the property. But essentially, that’s what we need to do. That’s what is required.

0:30:11

Alisa

Do you need a builder license? They will again, they will look at who’s building the home because you do also if it’s a new home, there has to be the new home warranty.

0:30:18

Alisa

So who’s going to be applying for that?

0:30:20

Alisa

So, again, there’s quite a lot to that as well. So it’s again, we go back to is like the liability and what do you want to do? Right. And definitely lenders, especially with what’s going on with the industry right now, even more so, it’s more important and they will lean toward there’s lenders that won’t lend if it’s a self -built.

0:30:45

Jennifer-Lee

Fair enough. And that being said, because we talked about the fact that builders need to know so much nowadays because every municipality has its different rules and stuff. When we’re going forward, and I know Mike and I have talked a lot about this on the podcast, but is there anything like step code or anything that needs to be considered for a construction mortgage or is that not affected?

0:31:03

Alisa

Yeah, I mean, definitely, because there’s a lot more changes and everything else. And again, because sometimes when you do the step code or energy efficient homes and everything else, you have to order a lot of the material and product a lot beforehand, but lenders are not going to give you the money until it’s installed. Right.

0:31:21

Mike

And that’s where the difference is. So until it’s actually installed, it’s great.

0:31:25

Alisa

You put an order on it. Well, but it’s not installed in the home, so it doesn’t count, even though you had to already shell out the money for that product. Right. Like, say, the windows. Well, the windows are not going to be counted for the lender until they’re installed. Is that to stop people from, like, taking the windows and selling them?

0:31:41

Alisa

Like, they have to be like, proof in the house before you can like get the money back? Well, again, it’s a very time -preferenced lending, right? So they will only advance money because they want you to use your money first until it has been installed. So if the window hasn’t been installed, well, they’re not going to give you the money for it, right? So we’re coming to the end of our time together, which is my least favorite part of the conversation.

0:32:07

Mike

But before we start to wrap up, are there anything Any other points that you’d like to share, anything you wish everybody knew?

0:32:15

Alisa

Well, one thing that we haven’t talked about is actually soft costs and hard costs, because that’s actually a really important one.

Because soft costs essentially is everything that happens prior to you building, right? So hiring the architect, engineering reports, permits, everything else.

0:32:32

Alisa

So those soft costs, a lot of times, yes, it can be sort of financed, but they have to be looked more into the whole overall process. But most times they’re really financed by the client ahead of time.

0:32:44

Alisa

If we need financing on that, we could definitely look at that. And then the hard costs, the hard costs is like labor, sorry, labor and the actual materials going into the home. So essentially, the hard cost doesn’t happen until you actually put a shovel in the ground, right? So essentially, those hard costs, and that’s primarily what the construction mortgage happens, because again, the construction mortgage won’t kick in until you have a building permit. So you have to do everything else before that. So you do have to have the capital for that.

0:33:14

Mike

Well, Alisa, as we’ve come to expect, great conversation, right?

0:33:19

Mike

Thank you. You came with high expectations based on your last visit to us, and we’ll hope you’ll see you again soon. It’s been a while. It has been. I know. Thank you for welcoming me back.

0:33:27

Jennifer-Lee

You know, what’s great, because this is one area we don’t talk about nearly enough, is sort of the mechanics of what it takes to get one of these homes built. Yeah, it takes a great designer. Yeah, it takes a great builder. And it takes a lot of other things, but it also takes money, just the way it is.

0:33:41

Mike

And, you know, I mean, it’s gonna take me a half hour to summarize all the great points you made, but here’s the deal.

0:33:47

Mike

Here’s what I got from this episode. Tell me if I’m wrong.

0:33:49

Mike

A construction mortgage differs than a regular mortgage. So it’s designed to build the house, not to pay for the house. It applies when the permit is pulled.

0:33:57

Mike

So I can apply for funds now, but I don’t get any of it until it’s permit time.

0:34:01

Mike

It’s a short -term loan to cover us until essentially we’re done and we have occupancy or 95 % complete. You also recommended keeping a contingency fund of 35%, which I think is a great number. Sorry, the 35%, I would say, you don’t need a 35 % contingency.

0:34:23

Alisa

You need about 10 to 15 for contingency. But I would say you would actually, when we’re talking about how much money you would need of your own sources to be able to do the build, whether it’s with equity or cash that’s coming in, essentially I would say about 35%. Okay, perfect. Even though the lender will finance between 20, like you’ll need 20 to 25%. So I would, to have a better budget and overall, I expect to have about 35%.

0:34:49

Mike

Okay, perfect. And the final piece of advice, I mean, this goes without saying is, you know, if you’re gonna apply for this type of financing, you may wanna work with a, accredited builder to make it easier to get financing. It’ll make the process considerably smoother as well. Absolutely, yes. Yeah, because I’m just sitting here and I’m like, this feels complicated and scary. So we need someone helpful like Alisa, because now I feel better at the end of the conversation.

0:35:13

Jennifer-Lee

I feel good.

0:35:14

Alisa

Thank you. And that’s what it is. It’s really important for clients to work with somebody that understands, like I said, the banks, you can walk into your bank.

0:35:22

Alisa

But if they don’t really understand it, like I said, these other clients, they had the financing, it was all set. And then, you know, they’re like, okay, we want more money. They’re like, we can give you more money.

0:35:31

And they didn’t tell them this at the beginning.

0:35:33

Alisa

It’s like the land draw, the first draw is key. and they actually had to go and this this by having to go through all this process it caused huge delays for them it cost them more money because they were renting as well it delayed the construction we had to get new appraisals we had to like it was a huge process right so things do happen i understand but it’s again having the right person in place and being able to help you and guide you again not everybody knows construction financing is very specialized there’s a lot of brokers out there that actually don’t do it or they don’t even know about it right or they don’t understand it. Because again, it’s very, it’s more complex. And it’s really having somebody there with you through the entire process. It’s not because a mortgage, construction mortgage gets, you know, the first draw, draw happens, and then I disappear. I’m actually there with the client through the entire process.

0:36:22

Mike

That’s so helpful.

0:36:23

Jennifer-Lee

Because I was like, I just, I would want someone like you if I was to do this, either for construction or regular mortgage, because again, scared, but you’re making it better.

0:36:34

Jennifer-Lee

Before we go, one more piece of advice you could give to maybe the consumers out there.

Alisa

I would just say really ask questions and make sure you’re comfortable and if you don’t really understand something just stop and say no like I really want you to understand like explain this to me so you understand it like this is this is a big deal building a home is fairly stressful because there’s a lot of moving parts to it.

I remember my parents building, you know, their house and it’s like every weekend, it’s like, oh, you know, I was young and it’s like, oh, this weekend, we’re going to look at tiles. Yay. But I didn’t really see the other aspect for for my parents really going through all the finances and stuff. So and it’s a very big deal, because if you don’t have the money you’re going to need, you’re not going to be able to finish that home or things can happen.

0:37:21

Alisa

And things do happen, like you said, permits or higher costs and everything else. So it’s important that you’re comfortable and you’re comfortable who you’re working with and you you get all your answers to all your questions answered and you’re happy with the decision. If not, just stop. It’s not worth it.

0:37:32

Mike

And I think something else that I want to add on to this, I’d like your opinion on it is I think a lot of times when we have professionals like yourself in an area that maybe we don’t all feel super confident in, I think it’s great if we could be more honest with the professionals, because I think a lot of times we want to go in and hide our situation, obviously to find out when it comes to finance. But I think a lot of us are like, well, I don’t want to tell her because she’s to tell me no I can’t afford this or no I don’t do this or whatever but it’s like sometimes you’re able to help people too.

Alisa

Yeah and it’s really again it’s asking the questions and there’s no dumb questions there’s no silly questions and you can ask the questions 20 times and that’s what I say to my clients like you can ask me the same thing 20 times it doesn’t matter to me I just want you to be comfortable there people are very good at what they do like you guys are

0:38:25

Mike

are amazing what you do. Yes, construction financing is your area. No, but that’s why. But you know, that’s the thing. Like, you’re very good at what you do. So just, you know, seek out the persons that you feel comfortable with, and you’re going to get the answers that you’re happy with. And if you’re not comfortable with it, go somewhere else or keep asking more questions until you are, just don’t feel like you need to actually go ahead with it, right?

0:38:35

Mike

I think you just justified this entire podcast, ask lots of questions, talk to professionals and the bottom line is it doesn’t matter what we do, whether we’re a technology consultant, a podcaster, a financing pro, VP of Haven or any of the other number of things that we do, It’s a symbiotic relationship, but we all need each other to get ahead. And, you know, being able to pay for it allows all these other amazing people we’ve had on over the years to do what they do best as well. So at the end of the day, that homeowner, our audience, gets the best possible experience and the best possible home. And actually, you know, one of the things that makes a home amazing is a barbecue.

0:39:37

And we would like to give someone in our audience a barbecue, as we do every season. We love it that you watch our episodes and listen to our episodes.

0:39:46

Mike

And we’d like to do something nice for you. So all you have to do is like and share this episode for your chance to win a Napoleon Prestige P500 stainless steel natural gas barbecue valued at $1 ,600.

0:39:57

Compliments of our friends and our podcast partners at FortisBC.
www.havan.ca/measuretwicecutonce . That’s all you got to do. And for notes and links to everything mentioned in today’s episode, including resources shared by Alisa, head to www.havan./ measuretwicecutonce. And don’t forget HAVAN, the Home Builders Association of Vancouver is proudly affiliated with CHBA BC and CHBA. That means our members and the homeowners we work with benefit from three different levels of advocacy and education supporting anyone looking to build or renovate.

0:40:29

Which is exactly what this podcast exists to share knowledge and connect people across the industry. Of course, we couldn’t do it with our partners, Trail Appliances, FortisBC, BC Housing, Rami Films, jPod Creations, and AI Technology & Design. It takes a team to build a home, so does it to build this podcast. Thank you for joining us. We’ll see you next time on Measure Twice, Cut Once. Thank you.

0:40:51

Thank you.