Financing 102

There is hope for our project yet. I recently met Damian from a mortgage broker firm that also self-finances projects like ours. Their rates are higher than a conventional lender, at 8-10%, but they also offer more flexibility. For example: with 25% equity in our existing house, they could provide us a loan that covers the entire property during the construction phase – the existing house mortgage, the improvements to the existing house, and the new house construction.

A conventional bank will offer better rates, but is likely to lend for the new build only, and only after the new subdivided property is registered.  If we have to move the existing house in order to register, we may find ourselves in a tight spot financially.

I confess that some aspects of the financing still mystify me. I did, however, leave my meeting with Damian feeling confident that we will be able to finance our project with the money we have. Exactly what the financing and construction sequencing will look like remains to be seen.

Here is a snapshot of our current budget. The total number is higher than I want to see, but it is a conservative starting point. It includes both the new house build and the existing house renovation. The larger line items – like General Contracting – are currently very round numbers that will be refined with their own detailed budgets as we move forward.

Pre-Construction Budget:

1. Site Survey
2. Preliminary Design
3. Design for Rezoning Package:
   1. Architectural design and plans
   2. Landscape design and plan
   3. Site servicing plan
   4. Structural engineering (as needed)
   5. Tree preservation plan
   6. Planning guidance
4. Rezoning Application Fees

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Pre-Construction Subtotal: $30,350

Construction Budget:

1. Hazmat Survey
2. Additional Site Marking
3. Existing House Lift
4. General Contracting (new build + exterior work on existing)
5. Existing House Interior Renovation
6. Architect Services During Construction
7. Legal
8. Financing Costs

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Total Budget: $677,350.

The Pre-Construction subtotal is critical to get a handle on because no one will lend us any money until our rezoning application is approved. This up-front investment is out-of-pocket, and therein lies the risk in a development project.

The “financing costs” item is also an important one, and it ties back to my initial discussion about financing options. We need to understand the total interest we can expect to pay for a construction loan. In our “worst case scenario” the initial draw is high because we would have one loan for everything (existing mortgage, reno and new build) and we’d therefore be carrying the mortgage for our existing house from Day 1. In this case, we are looking at ~$42,000 in interest for a 10-month construction period – not an insignificant amount of money!

Another potential option would be selling the new house after we have received all approvals but prior to construction. In this scenario, we wouldn’t need any financing and we’d pay for the existing house renovation with funds from the sale. An attractive option, but not one that we want to count on just yet.

So we have some options and it feels good to have options!