How to finance new construction project?

Livio and Eduard Gubarik join hands together to bring you a Webinar to help you decode the in's and out of Construction Financing.


Eduard Gubarik


Rob: All right. Ed, I guess this went live so folks are just now starting to join us. We'll give everybody a couple minutes here and then we'll kick it off, get Started.

Eduard: Perfect. Thank you, Rob.

Rob: Yep.

Eduard: Can you hear me now?

Rob: Yeah, I can hear you. I can hear you perfectly. Everybody is hopefully grabbing their lunch and making their way over to their computer screen. Awesome. We'll just give everybody one more minute and then we'll kick it off. First of all, thank everybody for joining. Yeah, we're excited to have you join our webinar. I guess this is probably like week six of this or so. So hopefully, for those of you who are rejoining us for maybe the second time or maybe even the sixth time or so, thanks for coming back. And we've got a really important topic. Probably one of the most important ones when it comes to making the decision to build a custom home is how are you going to pay for it, right? And thankfully, we've got a great partner joining us today and to walk us through it. I'll give ED an opportunity here to introduce himself in just a minute. But yeah, we'll get started here since we're a few minutes past the hour and looks like most folks have been able to join.

So, kind of just jumping into what we're going to discuss today, you'll hear me spiel for about five minutes about what Livio is. I'll give Ed an opportunity to discuss his background a little bit and the company that he works for and how long they've been doing it and give him an opportunity to tell you a little bit about himself. We'll then jump into kind of just getting started, you know, how do you kick off the loan process? What's that like? We'll talk a little bit about what are the different program types that are out there? I'll take an opportunity to ask some frequently asked questions that might come up that hopefully can get ahead of maybe some of the questions that might be on your mind. And then we'll jump into the draw process and ultimately how does that draw process work and what's the whole process like from loan initiation? Actually, drawing money from that loan. And Ed will walk us through that.

And then lastly, we're going to leave hopefully about 15 minutes there at the end for folks to ask any questions they might have. Just a reminder on the question side of things, you've two options. You can either type your question out there at the top or you can raise your hand. If you raise your hand, I then have the ability to virtually call on you and you can actually go on video and ask your question directly to either myself or to Ed, whatever question you might have. We'll be taking all the questions at the last 15 minutes so I'd appreciate if you, you can either type it out if it comes to mind and if you're like me and you forget what you're going to ask, that's a good way to remind yourself. Otherwise, I'll call on you when you raise your hand there during the Q&A session.

Without further ado, we'll jump into it. A little bit about us. Hopefully, I think most of you folks probably know who we are. But we're a general contractor in the Bay Area right now focusing on that market. And we build custom single-family homes. We do so by partnering with some great people all the way from the very inception, folks like Ed, to help our clients out all the way through the entire process to make sure that we deliver really a superior product to our competition. And we do that by having a very unique approach where we have a very integrated team, vertically integrated where we handle everything from introducing you to potentially on your loan side of things, assisting you through the entitlement and planning process, through the building permit process, running really advanced clash detection throughout the entire process, as well making sure that what's been designed will actually work when it's built. And making sure that we try to minimize as many of the questions that are otherwise would come up in the field in software first.

We're really a new age technology driven company. And as a result, passing the savings of time and hopefully coming in at a competitive rate as well too to everybody else out there. We do that vertically integrated system. We have an office here in Los Altos and then we have another office actually in India that handles everything you can think of, from procurement logistics, to engineering, to 3D modelling and VR renderings, the whole thing. Without that team, a lot of what we offer and provide to our clients wouldn't be possible. So, big shout out to the entire team. And yeah, with that, I'll pass it off to Ed to introduce himself.

Eduard: Very perfect. Can you guys hear me okay? Can you hear me okay, Rob?

Rob: Yeah, I can.

Eduard: Perfect, got it. I'm just playing around with this mute button here. As Rob said, this is just definitely a very valuable subject to be discussing, how and when to apply for financing, get into financing, shop for financing. I just want to kind of briefly introduce myself. I've been in construction financing for close to 13 years exclusively, just construction financing. And the reason that I picked this niche is because it's a niche that kind of, it's a program that changes very frequently, as often as on a monthly basis. That's really unfortunate because it's not the same way as if you were applying for a regular purchase transaction or a purchase loan or a refinance. Construction loans, they're very fluid because they're considered portfolio loans. And that's kind of why I chose to specialize in them because this is kind of my niche. I loved working with builders, working with borrowers, with architects, with the subs, and bring the program together and really understand how to make all the pieces work and finance a project from start to finish. And I'm sure a lot of you guys already tried to apply for loan and you get a loan officer that tells you one thing and then finds out from an underwriter that that is no longer applicable or there's an overlay and so on. So, my job is to really stay in the know and really understand the whole process from start to finish and... well, it took this long to understand this product. It's still a learning curve as I'm working in this field as well.

A little bit about me, I moved to construction financing so I've been in construction financing for that long and mortgage business just as long. And married, two kids, well, I keep forgetting the little one. I got a two-month-old as well, boy. Two girls, I got a 14-year-old and an 11-year-old. So, I definitely got a huge age gap there and trying to juggle everything with that two-month-old it seems like... [crosstalk 00:08:49] Yeah, yeah. I got a solid three hours of sleep, so I'm happy.

Rob: Yeah, thanks again for making the time out of probably what's a really busy schedule to hopefully inform folks who may be at different stages through the process. But hopefully, Ed, by you being here and being able to inform everybody about some of the options that are out there and why it's important to partner with somebody who's knowledgeable and a firm that's established and everything else. Hopefully, we can help assist in moving some clients along in the process.

Eduard: Yeah, absolutely.

Rob: Cool. Ed, before we move on the next slide, just curious, what areas do you guys serve and if you don't mind, just geographically?

Eduard: Sure. Right now, Oregon, Washington, Nevada, California, and we're going to expand into a few more areas. But it's like I mentioned, this program is constantly changing. We used to be able to do most of the West Coast and now we're doing half of it. And then, every now and then a state comes and goes. So, right now we're just doing California, Arizona, Washington, and Nevada.

Rob: Awesome. Okay, cool. Well, yeah, I think most folks are probably joining us today from the San Francisco Bay Area. So, it looks like... I know you've got a lot of experience in that neck of the woods. So, good to have you. All right, so we'll start with kind of an introductory slide, just kind of kick it off. But Ed, if you could just kind of walk us through... I'll act as the owner in this instance and asking you some questions along the way. But how does one qualify for a loan? And you can just kind of walk us through that process?

Eduard: Sure. So, qualifying, it's very similar to how you would apply for a regular purchase or a refinance transaction. A loan officer would obtain or I would obtain all your documents, your income, your assets, your reserves, and just kind of determine how you qualify as a borrower to obtain new debt. So, it's very similar to the project. The moment it becomes a little bit more convoluted and different is when we pre-qualify the project, we go prequalify the builder, we look at your cost, we look at the future value of your home. That's kind of where all the moving parts begin. But as far as how to like qualify, that's typically a 15, 20-minute conversation where I just go over all your debts, assets, reserves, expenses, anything possibly that can prevent you from applying for a regular purchase or a refinance transaction that's very, very similar up until we open the can of worms on how's the project look? When are you looking to build? When are you going to be ready to build? How far along in the permitting process? Who's the builder? Who are the subs? What is your cost to build and so on?

Rob: Got it. And what about when it comes to requirements from the builder side of things and qualifications that might be required? Ed, from the general contractor standpoint, I know it's a step and it'd be great if you could walk us through that.

Eduard: Yeah. And that's very important. And the reason why we're working with you guys, Livio, is well, we've done business in the past so we've definitely, we go through a pretty intense process of pre-qualifying our builders and rightfully so. And I'll get into that a little bit in more detail. It's important for us to hire or have a good builder work with us is because we look out for what are their experiences, how many projects they're handling right now? What is their cash flow? How are their vendors? Do they have good manufacturers or creditors that can vouch for them? And the reason why they're so important, we get a lot of builders that kind of require... I would say, we get about three calls a day from new builders and a lot of these builders can't handle the projects that they do. They're eager to get started. They can get through the grading process, maybe the framing process, but they can't handle it going forward because it requires more manpower, especially if they have two or three projects going at the same time. It's not the ability to project manage multiple projects, it's the ability to cash flow a project. And that's what we're going to get into too is, how is the draw work? How does the draw work? And I'm going to wait for that question to be asked.

But it's important to hire a builder that can carry multiple projects because of how the draw process works. And that's not just with us, it's with most regional and community institutions that are very, very similar. So, hiring a builder and making sure that vendors will vouch for them. Say, "Hey, you know what, he doesn't owe us more than 30 days of payment." Or a past borrower can vouch and say, "You know what, he doesn't have any outstanding warranty issues with me." We'll ask those questions too. On top of that, we want to make sure that the builders don't have any personal or business litigations against them. And the reason why that's important, we've had instances in the past where we pay $150,000 or $200,000 for grading, the framing, the rough plumbing, electrical, and then all of a sudden, half of that money's gone somewhere because of garnish wages. I mean, other business litigations against them where the primary builder is the guarantor, and that makes a big difference. And that's the things that a borrower would not know. They will not know about the builder because the builder is not going to devote to that information. How's my divorce coming along? Do I have any child support alimony that can possibly garnish my draws?

So, all those things, that's my job. It's to really go into that and find the right builder for you. Because trust me when I say this, we have a lot of builders over promising and definitely under delivering. Especially, if they're great at starting to pull permits, grade, put up the framing and then the timeline either extends or the budget goes cost overruns, contingency is already used up. It's because they just over-promised on a certain square foot to try to get the clients locked in at a certain price because they don't want to have to shop around anymore. But the moment the process started, that's when they say, "Oh, well, this is a cost plus contract. Or I didn't include this in my cost, I didn't include this material in the costs. And that's kind of why we spend a little bit more time pre-qualifying the builder more than the borrower.

Rob: Makes sense. Makes perfect sense. How often do borrowers come to you where they have a builder identified versus not? If you don't mind. Do you typically advise somebody to come to you only once they've identified a builder? How do you go about that process?

Eduard: Most of the time, I would say eight out of 10 times a customer does come to us already he has somebody pre-qualified as a builder.

Rob: Got it.

Eduard: So, I'd like to see that questionnaire and I review it and then I ask the tough questions, have you contacted the vendors? Why is it important to contact the vendors? What about the manufacturers? And how many projects have they done in the last six months? Well, you know, it's my relative. He's built a home three years ago. Trust me when I say this is very different three years ago than it is today. As far as cost, as far as using the same crews that they've used in the past, very unlikely you'll be able to reuse the crews or the subs, what I meant, or vendors or manufacturers that you've used three years ago. Why? Because a lot of them are inundated with work. They have other projects, they will not give you the same rate that they've promised you six months ago, a lot of things have changed. So, when I get a builder, I get a borrower that brings me a builder and says, "Here's who I'm comfortable working with." I get on the phone with a builder and ask them the tough questions. How are you able to manage this project? How are you able to manage multiple projects? How many projects you have going? How many vendors have outstanding payment against you for payment that it's due to you? Those kind of questions?

Rob: Got it. Got it. Yeah, I mean, all really important information. Not just from your end but also, I guess anybody who's vetting their general contractor. Couple quick ones for you. Ultimately, how is a rate determined from your end? I know you mentioned a little bit about the pre-qualification process and what that looks like. I imagine it's largely a function of those factors you mentioned before, but maybe you could just reiterate that--

Eduard: ... question. The rate is determined on the strength of the borrower. A lot of institutions will say, "Oh, yeah, our rates are three and a half to four and three quarters, and how do you determine that? And they say, "Well, it depends on the value." So, your rate strongly determines on two factors. One, your credit score. Two is your future value of your home. The higher your value of your home in comparison to what the project cost is going to be, so that disparity determines how much equity is in the project and that determines how little risk the bank has against you. The higher the equity, the lower the cost. The higher your credit score determines what your credit score would be. Now, there are certain other criteria that kind of determine what rate you would get in that is, do you want a two-time close? Do you want a one-time close? How flexible of a draw system do you want? Do you want all payments to go directly to you or to the builder? And all those things we're going to get into but they play a very vital role in the type of construction program that you got or they type of construction rate you're looking for where you'd be qualified for.

Rob: Great, great, great. I mean, just from our perspective, if I can vouch for the competitiveness of the rates you've been able to provide some of our clients, I know it varies of course, project to project and everything else but it's done a phenomenal job at remaining extremely competitive and giving our clients really some of the best rates out there.

Eduard: I appreciate that.

Rob: So yeah, hopefully, I know it's hard to pinpoint it unless all the information is there, but definitely, highly recommended and it usually comes in very competitive. So, thanks for helping us out on that one, Ed. You mentioned it really quickly, but the application process now that we've kind of moved from, hey, we're just now getting started to, hey, I'm ready to move forward and hopefully get this thing going, when should a borrower get started and submitting an application through you guys?

Eduard: That's huge, Rob. So, the biggest misnomer is, "Hey, I'm going to apply when my permits are ready." Wrong. That's like the worst time to apply for a construction. Number one, because it's easy to apply just for, like I mentioned, it's going to take me 20 to 30 minutes to just do a verbal pre-qualification telling you exactly what the maximum loan amount that you'd qualify for. That's the easy part. The hard part is actually getting a loan. Unlike a regular purchase or refinance transaction, construction loans take about two to three times longer. Because we're not just pre qualifying you, we're pre qualifying the builder, we're calling these references, we're looking at the project appraisal takes 10 days now, 14 days in some cases. So, all those things extend the loan process. So, the short answer to when should I apply for a construction loan is two and a half to three months before you actually need one.

Now, let's just say your loaned funds before you're actually ready to break ground, that's fine, it can just sit there for a month or a month and a half before you actually draw. Because the benefit of that is the moment your construction loan kicks in, your payments turn into interest only payments. So, if you have a balance on your land, it becomes an interest only payment. If you've had a high payment to a private borrower or that seller financed for you, all of a sudden, your payment drops because you're only paying interest only on those funds use. So again, going back to when should I apply? Two and a half to three months because there's a lot that goes in outside of just pre-qualifying you as a borrower.

Rob: Got it. And you mentioned it briefly in the last slide as well, but can you explain a single close versus double close?

Eduard: Yeah. So, there's pros and cons to a single close and a double close. Going back to the rate, let me give you guys a rate range of what a construction loan looks like. So, we're looking at, there's some programs start at 2.875 but they're going away fairly quickly because construction loans are very expensive for a bank to offer. And the rate range increases there from 2.875 all the way to 5.75 or in some cases 6.525. But at a higher rate there are other flexibilities that that program offers. For example, the draw process is easier. You can have a lower credit score, you can have less income to qualify. So, all those are kind of little factors that determine which program you want to go with the and what do you have as far as offsetting the risk for the bank. So, the benefit of a two-time close is, what if you don't plan to keep this home for more than a year after it's built? So, the moment it's built, you choose to sell the property. So, that's an option for you to have is possibly a lower rate, lower credit score, but it's only offered on a two-time close. The cons to having a two-time close Rob would be you're going to be paying double in closing costs. As soon as construction is complete, you need to refinance out of the construction because now that loan is due. It's only good for during construction. So, you end up paying closing costs or refinance out on that loan.

And in some cases, because the rate range like I mentioned is so different, it might be worth it for you to go into a two-time close because you're not intending to keep a rate of three and a quarter when you can get it 2.8% 30-year fixed after construction complete. But, I'm sorry I'm coming all down on this way is trying to educate you from all sides right now. So, the big thing here is after construction is complete, you do need to refinance. We don't know where rates are going to be 12 months from now. So, if you're stuck in a two-time close program and you think you're going to get a 2.875% by the time the construction loan is complete, it could be it could go sideways. But a one-time close program locks you in for the full 30-year term. During construction, you keep the same rate and then after construction, you have the same rate. So, you don't have to worry about what rates are going to be 12 months from now. Now, you have an option to refinance after this loan because we're not going to hold you, hey, you know what, we'll give you a 30-year fixed mortgage but you're going to refinance. We don't after that. We don't have a prepay penalty. But now, we do that to really protect you in case rates do go up.

Rob: Got it. And just to clarify, you guys, I know not everybody offers it, but you do offer both?

Eduard: Yeah, both. We offer both. For example, if you have a very low credit score, if you have a 680 credit score, I can't give you a single time close, I need a 700 credit score. If you have a 740 credit score then I definitely will qualify you under a single closed loan versus a double closed because there's many perks to that. You can always refinance, you can always pay down your loan, you can always find ways to reduce your payment. But you don't have any of those options on a two-time close. Your only option would be refinance. And what if something changes with your job? What if you were new while applying for a loan, you had two years history and you were a W2 employee and all of a sudden, a year later you decided to start your own gig? Well, you started your own gig, you won't be able to refinance because we need a two-year transaction history, especially if you're going from a W2 to a 1099. Unless it's in the same line of work. Now, you're stuck with a loan you can't pay off or refinance. That's a huge problem.

Rob: Got it. Got it. Well, it sounds like you offer certainly some good options and flexibility to those that are qualified so that's great. And the last one, which is kind of gaining traction, I guess as of late, but modular or ADU. Now, I'll preface by saying we're right now shifting... for the folks in the audience who had joined us a few weeks back when we went through and touched on our panelization process using light gauge steel, we're kind of molding this modular construction practice with what's the traditional build. But Ed, maybe you can touch on how, certainly I know it's a trend right now but if you wouldn't mind talking about the financing options that are there.

Eduard: That's huge. I have to stress for this one. So, ADU and modular is definitely a huge book for a few reasons. One, for the borrower, two for just the way you can build, the way you can offset your payments, the way you could... Well, let's just start from modular. Modular builds are very different material and I'm just a loan officer so what do I know? But the cost breakdowns and the material, the description materials that I've been seeing modular versus stick build is very different. It can be a little pricey but the product is done better. I don't know, some builders are able to offset the costs of a modular product versus stick build because it takes less time to build via modular than it does in stick build. So, it requires less subs, requires less management, and the product is made in a building.

So, the answer to the, can we offer financing for modular? Yes, but that is, it takes creativity. Here's the case with modular. A lot of modular or kit home builders, now, mind you, when I say modular or a kit home, we're not talking about trailer park homes or double wide or anything of that sort. We're talking about fully custom 7,000 8,000 square foot homes built with modular product. So, roof kits, framing, windows, doors, everything's in place and those are put together in a warehouse. So, they're done better, they're done streamlined, they're managed less. So, going back to why does it require creativity is because a lot of modular kit home manufacturers require large down payments on pre-order, to even pre order that material. Let's say for example 50%. A lot of banks will offer you a 50% deposit on those items. And we can get into how the draw process works we're still leading to that but modular banks will not give you a deposit or funds on work that hasn't been yet performed.

It wasn't always like this. Back in 2003/4/5/6/7, I've done loans where we'd write a check for $150,000 and we trust that that builder does a good job. We trust that that builder uses that money and applies it towards construction instead of buying a boat. And that's what actually ended up happening is a lot of builders would start up four, five, six projects for clients, will request all these draws and file for bankruptcy. We've seen a lot of those transactions. So, since then we've changed. Well, pretty much every bank they learned from their mistakes in this case. So, they do what they call either a voucher system or a reimbursement system where you do the work, you get reimbursed for the work that you've done. You have to show proof that that work has been done. Hence, why modular is a little complicated product to do and not every bank can offer that flexibility. Because if your kit home project is, let's just say, the roof, the frame, and this is just for the sake of numbers, $400,000. The modular manufacturer is going to require 50% of that. Product hasn't been delivered, product hasn't been installed, it's just pre-ordered. So, what are the chances of you actually getting 50% from the bank to pre-order, slim to none. So, it does take a lot of finessing to actually make this work. And we have a lot of experience in working with modular and that's kind of one of few things, few reasons why we stand out, and in our financing because we're able to work with modular manufacturers and offer 50, 75% deposit on some kit homes.

And now, the ADU part. The ADU is huge. A lot of borrowers build with ADU because it helps them do a number of things. Number one, you can move in the in-laws as close as you want it to be. Number two, it helps you offset your mortgage payment. So, if you build a home, now you have an accessory. ADU stands for accessory dwelling unit granny flats, in- law quarters wherever you'd like to call it. But it's a separate structure. Sometimes it can be attached by the roof to the house or it can be part of the garage structure or it can be it can be 500 feet away from your home in the furthest corner of your lot. But the ADU income helps you offset your mortgage payment. You can rent those space out and we allow you to build in the ADU. It wouldn't be considered two homes on one lot. It doesn't have to be R2 zoning or mixed-use zoning. You can just well allow for an ADU financing. And ADU has been very, very popular pretty much everywhere across California because it's going to help you offset your payments and somewhere to put your in-laws.

Rob: Yeah, no, absolutely. I mean on multiple projects we're doing right now we're doing an attached ADU and a detached ADU just because of the bonus density that we're able to provide to our clients as a result. So, definitely huge piece of it on the modular side of things. Yeah, we're really excited about all the panelization work that we're doing in a factory setting of using steel to make sure all our walls are 100% true and in 90 degrees and we're seeing tons of benefits from it that we're able to pass along to our clients. So, huge step in that direction as well for us. And it's great that you guys are able to work with us in that regard to make sure that the cash stays coming and our guys can keep working, which is what it's all about. I'm going to ask just kind of basically just some commonly asked questions that maybe is on the mind of some of our listeners right now. But do I make the payments during construction? And can you kind of walk us through the process?

Eduard: So, the short answer is yes. So, you make payments during construction. But the payments that you make are interest only on the funds that you use. Construction will work, let's just say like your line of credit or credit card. If you're approved for $3 million line of credit and you only use $100,000, guess what you're making payments on? Interest only on the funds that you borrowed. So, if you borrowed 100 grand, you're making interest only payments on that 100 grand. And the payments since they're interest only, they're a fraction of what a principal and interest payment can be. Let me just give you an example. A 4% interest, and I have my calculator handy dandy calculator here. $100,000 loan, let's just call it a three and a quarter rate, 30-year term principal and interest payment is $435. That's on $100,000 no or amount that you've borrowed. An interest only payment is $270. So, it's a fraction of your actual principal payment. So, it's not as scary as you might think. Well, Edward I'm making payments during construction. Now, I probably have a mortgage that I currently have also that I'm making payments on and this is going to be really tough. Not exactly, you're only paying interest only on the funds that you use. The largest portion of your payment, the largest part of your monthly payments could be towards the end of construction. Maybe the last quarter of it, the last three months, the last two months depending on how big your home is. And again, there's always ways that we can maneuver and that's kind of where my expertise comes in, pretty much in the ADUs, the modular, how we determine your value, and everything else to draw process and we'll get into that as well.

Rob: Yeah, having a builder who can move and keep the project coming and going along is [crosstalk 00:36:22].

Eduard: Yeah, that's super, super important. Because guess what, if your draw process, if your funds are delayed on the bank, if your subs are delayed, guess who's making those extra payments that you didn't have to in the first place? You guys. So, it's very important for a builder that has experience in streamlining their construction. Because it's not like, "Oh, well Edward, I don't care if it takes a year and three months or a year and six months," trust me, you will, you just pay $12,000 extra in monthly payments. You're paying for it.

Rob: Absolutely. By being able to provide our clients with some fixed timelines that we actually contractually agreed to, I think that it's a breath of fresh air for some homeowners who otherwise wouldn't be getting that from other builders and it's something that--

Eduard: Yeah, super helpful for a builder to have a team. Absolutely Rob 100%. I've seen builders that don't have a team and builders that do have a team. And just because a borrower, a client of mine says, "You know what, it's my uncle that's building the home. He's going to help me with this process and I'm going to save myself some money." By following up with those customers, I follow up with all my customers before, during, and after construction is complete and ask them how their experience is. It is terrible. Even though you may think you saved yourself, let's just say 15, 17%, it took you four months longer to build and the subs that said that they were going to give you a larger break, give your uncle a larger break during construction didn't, so your cost technically went up via either the project taking longer, materials going up because your uncle's a bit slow on moving the process along. So, there's a number of huge reasons why to hire a builder that has an amazing team that can move this process along and not everything is going directly to the builder.

And that's where I get a lot of people saying, "Well, you know what, give me a builder that's just one person that can answer, that can show up on those sites, that move my process along. Those are the worst builders to kind of hire because they're not going to give you first priority, they're not going to show up to this site when you need to, they're not going to make multiple calls to multiple subs to get multiple bids because they don't have the time to do it. So, whoever it can show up at that site the first gets the job. And that's where I've seen the cost go up from a $2 million transaction, all of a sudden, they're giving me a call and saying, "Hey Edward, we can you extend another $75,000 because we went way over on simple stuff. On subs that are just not willing to do favors anymore because that builder... And here's another thing that I want to touch on. Subs don't owe a borrower any favors. That's something you guys got to remember is that if you think that somebody owes your favor or you know somebody that can come out and do your electrical work because you've known them for a very long time, trust me, they're the ones that are going to stall your process, slow things down, where it kind of cost you a little extra.

Now, subs do owe builders favors because a builder doesn't just have one project. He has multiple projects and multiple projects for the last few years. So, when that builder calls and says, "Hey sub electrician, I need you on site and here's the prices that we've been working with you on and that's the price that we're going to pay you." So, if you think you're going to save more money hiring somebody one stop shop, one individual handling your whole flow, it's not from our experience, not in the last 10 years. We've had one or two bars that came close. That's because they were in the construction industry and they pretty much took a huge pay cut, personal pay cut to manage their own project. They really didn't save much money.

Rob: Right. Makes total sense. We'll try to breeze through these last three since we're running a little bit out of time.

Eduard: Sorry about that.

Rob: No, no, no. No worries at all. Down payment. How about down payment?

Eduard: Huge. Sorry, I'm glad that we are talking about this, so I'll be quick. We determine your down payment requirements based on what your project costs and your future value of your home. The larger disparity between the cost and the value, that's your down payment. So, let's just say hypothetically, your cost to build is $2 million, your appraisal came in at $2.5, there's a $500,000 of equity. Some banks don't even care about that. They just say we want skin and we want sweat equity in this deal. We want 25% with us, we look at your actual equity in use as part of your down payment. So, if your equity is $500,000, if your project costs is $2 million and you have $500,000 equity, that's 20% down. That's your down payment. So essentially, how to finance 100% of your project, no money down because you have equity. Now, well use that as your down payment, essentially financing 100% of your project.

Rob: That's huge. I mean, that's phenomenal. I know, especially around here even with the price of building being as high as it is, I mean, thankfully there's definitely that value. That's there for folks who are going about it the right way making some smart decisions. What about paying off land? As a borrower, would I have to pay off the land?

Eduard: Don't do it. Don't you do it Don't even think about it. A lot of people think that, "Hey, you know what, some banks told me that I don't have enough equity in the project so I need to pay off land. You don't. Because remember, we don't care what your balance is on land, we care about what your value is in the project. Now, let's just say, going back to that example of two and a half million-dollar future value, and what if your cost to build was two and a half million dollars and your value came in at two and a half million dollars? Then if you need to bring in 500 grand and your balance on your land is 500 grand, guess what you're doing, you're paying off land. But you don't want to do that prematurely because you don't know if you need to commit. What if because we're able to finance 100% your project, you use that extra equity for landscaping, the backyard, pool, solar, the ADU we were talking about? So, that's why you want to keep as little down payment in the project as you can and you can always apply it any excess cash that you have left over after construction, towards the end of construction, and we will basically do a free refinance for you. It's not a refinance. It's called a recast option, where we just change your future payments based on that principal payment that you made.

Rob: Got it. And last one, and again, this might be a little bit subjective to the borrower. But you have to sell the home you live in in order to qualify for the new build? You're on muted.

Eduard: All right. Just figured how you got to get back. So, yes or no. Do I have to sell your home to qualify to a build? No. The reason why this question is even being asked is because of what your financial eligibility is to cover two mortgage payments, your future build and your existing mortgage that you live in. Now, if you're renting, this question doesn't even apply. If you own a home that you're living in and now you've purchased a home and now I'm telling you, you have to make interest only payments during construction, that kind of hurts you because now you're making two mortgage payments.

Rob: Sure. And that's all something you're considering during the call?

Eduard: Absolutely. It's 100% now. If you have good credit, I can help you offset that payment that you have with what we call a rental [survey 00:44:24]. So, we will send out an appraiser, he derives by the property says based on my [inaudible 00:44:29], "We believe that you can rent this home for $2,000, what if your payments were only 1,500 bucks?" Well, there you have it, you have no mortgage payment and thus making it easier for you to qualify for a mortgage for the construction loan. So, the short answer is no, you don't have to sell your home, call me first before you start selling your home, moving into a rental and moving in with your in-laws into their ADU.

Rob: Got it. We're going to breeze through this one pretty quickly. I know this is kind of an overall mean slide maybe for some, but draw process, how you actually go about pulling money out of the loan and keeping the project moving through. One thing you mentioned, what I want to touch on is funding before you pull the permits. One question I have before we jump in anything else is, if we fund before the permit, can any of those funds be utilized for permit fees? Sometimes people underestimate just how much some of those soft costs end up being. Can you touch on that, Ed?

Eduard: Yeah. So, let me answer this question and then we'll get into the draw process. So, can you fund without permits being ready? Absolutely. We can fund the construction when before permit is ready and then when permits are ready, you send me an invoice and I write you a check. So that takes care of that. And we want you to apply for a construction, going back to the beginning of the conversation is, you want to start applying for a loan two and a half to three months before you actually need it for a few reasons. And the biggest reason is to control your costs of your construction project. Because if you're delaying on the builder because you haven't applied for a loan and the builder has already permits waiting for him, trust me, the subs that he had lined up are going to have a problem with that. They're not going to show up on site at that scheduled time because you didn't start your loan soon enough. My suggestion is, even if you don't have permits, apply for the loan. Because your cost will go up, the sub that Rob has lined up to do your framing, he's going to say, "Hey, you know what, I held on to that price, I can hold on to that price for another two weeks. That's it." And if your permits won't be ready for two weeks, and of course you start to do grading, staking, surveying, and everything else, your month's past due. He's going to change prices on you.

And now, how the draw process works. This is pretty accurate, that picture, but with us, it's a little different. I would say this is what 90% of the banks out there, this is exactly how it works. Lien releases, unconditional lien releases, invoice, change orders, invoices on work, labor, and material all have to be separate and lien releases, conditional and unconditional have to be signed with each individual vendor. Now, this is a lot of bookkeeping. I'm telling you this is a lot of work.

Rob: You've only described four, it is a lot of work.

Eduard: It is a lot of work. Builders will actually hire a bookkeeper to do this, all this stuff. And one reason why Rob loves working with us is because we don't require any of those things. We don't require unconditional lien releases, we don't require invoices, we don't require change order forms and all these things. Now, the only thing that we require is that if I see your cost breakdown, and it says grading $60,000, all I require you is to request a draw for $60,000, no more. As long as it matches. Whatever Rob is requesting to be paid matches the lineout and that was from the very beginning when you first applied for loan, I don't need any of the other items. Because Rob's going to do the work first and then ask to be paid? So, if he says, "Hey Edward, I need 100 grand," I'm going to reach out to the builder and I'm going to say yes, the line that matches, should we release payment? Yes. And then we send an inspector to verify. Yes, the job has been done. Great. There you have it. So, the job's been done? Now, Rob's been paid. Now, if Rob asked for $100,000 and the job hasn't been done, that's a whole different animal. We won't front load or give you a blank check to do the job. There are exceptions on some items just like we talked about the modular. There's other exceptions for pre-order items like appliances like windows and a few other items.

Rob: Yep, that's a really, really good point. You guys also act as... kind of a you're in the same court as the borrower in that sense and kind of help keep everybody in check and in line which is also, I think, kind of an unforeseen benefit, I think to borrowers as well that actually somebody else is looking out for their interest.

Eduard: Absolutely.

Rob: Just one question actually that came from the audience that might be a good time to ask this one is, how long does this process take, this draw process that we're looking at here? I know it varies bank to bank. We've had some terrible experiences in the past in some instances, but not with you, Ed but with others. But can you walk us through? How long does this process typically take from your side?

Eduard: Good question. Traditional process based on that diagram right there, it takes about four and a half days. So, it might not seem like a bad draw process. But if you're accounting four and a half days times every time you request to draw, which at minimum is like once a month times that by 12. That's 48 days of waiting on payment. That's a month and a half and you might think no B, it's just a month and a half. That means you have a month and a half of extra payments, you have a month and a half of construction delays, and possibly a change order because in a month and a half a lot can change as far as prices. But with us, it only takes 24 to 48 hours because everything's done. We don't do any of the paperwork. That saves the builder and the borrower a ton of time. Because we don't have to verify all these document and paper trails, it cuts the time a lot.

Rob: Awesome. Awesome. That was one question, but I'll jump into kind of open Q&A at this point. We have about eight minutes here to let folks ask any questions that might be out there. I'll remind folks that you have the ability to click on the button and ask a question via just typing it out. Or alternatively, you can, if I can figure it out anyway and you can find this window, you can virtually raise your hand and we can call on you that way. So, either option is out there. Ed, I'm going to start with one question right off the bat, which hopefully you can help us with. Vacant land versus if you're buying a house that is a tear down essentially, are you able to fund either? How does that work? And can you walk us through any sort of discrepancy that might be there between those two options?

Eduard: The same option for me. Some institutions are going to say that's a remodel versus a ground up. And a lot of institutions won't finance tear downs because of the amount of risk, therefore insurance risk. Because it's an existing structure, who knows if a sub goes in there to tear down something happens. There's less risk to finance something from ground up versus tear down, then go vertical. So, with us, it's the same exact thing.

Rob: Got it. Makes total sense. Let me pull up one other question actually before I blabber on and waste more time and we don't get through everything. I'll actually go to any questions that might be there in the audience. Of course, I own a builder, right? Where it might be a family member or something else. But this question is more pertaining to, if an owner actually has the ability to act as the builder during the build. I know we already talked about maybe some of the risks that might be out there as a result. But is that something that you guys do offer?

Eduard: We do. That program is offered but let's just say be careful acting as an owner builder. Not all the time you get save money. Some borrowers say, "Wow, I can save myself 25%. I've met those borrowers and I've followed up with those borrowers, borrowers that build that have no construction experience, just have construction family that are in the construction industry. We do allow for owner builders and that's a whole different discussion. In short, you can act as an owner builder and still use Rob or Rob's company as the builder. And the way we're able to do that is we can arrange for all payments to go directly to you as a borrower. And that's huge. And this is something that I definitely want to spend a little time on in just a minute, Rob. I have a minute, right?

Rob: You do.

Eduard: So, owner builder, if I made payments directly to you and you have good credit and your financials are strong, I will not 1099 you nor the builder. And that's huge. Here's what that actually means. What is a 1099? 1099 is an IRS form that says we paid the builder $2 million in construction costs. And guess what the builder is going to have to do. He's going to have to offset with expenses. And whenever he wasn't able to write off that's claimed as income. But if I don't send you nor the builder a 1099, this is essentially a cash transaction. And we all know that with cash transactions, subs and builders are more flexible with their pricing. That's how you can still control your pricing, reduce the cost of construction, and it's still beneficial and doesn't hurt the builder because he's like, you know what, I can go down 5% or whatever the case may be, that will pre-negotiate the rate because he's offered me a cash price or he's cash payment, that is what I meant to say. And you can do that to vendors, you can do that to manufacturers, you can do that to your subs, everybody likes to be paid cash because nobody likes to pay taxes. So, that's one way to pretend to be an owner builder and still have the benefit of having a whole crew like maybe you and still control all the funds during construction.

Rob: Other question pertaining to kind of controlling funds that you touched on briefly, but long lead items, items that you... and it kind of relates back to the modular construction. But especially with COVID, I feel like it's a question maybe more important now than ever just because of some of the lead times that we're seeing as a builder for items like appliances, for example, it can take 20 weeks right now or upwards of that. First of all, would a borrower have to pay out of pocket for those expenses? And how does that draw process work? And would they be able to be reimbursed only at the time of install? How does that process work with you guys?

Eduard: Good question. And that goes back to their pre-order items, deposit items. Whether it's a kit home, a modular kit home, or it's trusses, cabinets, flooring, windows, and more importantly, appliances. Those are high ticket items and they do require to be like 50% deposit on those items. We'll allow for it. Now, based on acception. If your builder has cashflow problems, and will know that early on if they have more projects than they can actually handle and ask for pre-paying on a pre-order item might allow them to pay their subs on other projects. We're not going to offer you a deposit on a pre-order item. But if we've vetted the builder and we know that this builder is worth it, then we'll allow you to pre order all items without having the borrower pay for any of them during construction. But it all depends on more or less the builder and the borrower's financial strength. Now, here's what I mean financial strength. If the borrower has, this happens a lot, if my borrower has $10,000 in the bank and he's building himself a $2 million home, we might not be excited to do pre-order items because we know that money might be appropriated somewhere else. So, case by case basis.

Rob: It makes sense. I think that it's always a tough one because it's definitely varies, I'm sure borrower to borrower but an important one to touch on nonetheless just through the lead times that are out there right now. Another question that came in, acquisition financing. We didn't really talk about that but is that something you can facilitate if somebody is looking to...? Let's just say land, for example. Is that something that you can also help clients out with? And can you walk us through that process?

Eduard: When you're saying acquisition, Rob, you're talking about land acquisition or you're buying an existing structure?

Rob: I guess, you tell me. Maybe if we have time, we have about maybe one more minute.

Eduard: One minute. Short answer is, yes, we will give you a land loan. Again, case by case basis. So, if I ran qualifications and say John Smith only qualifies to purchase a $500,000 land purchase and he qualifies for a $400,000 loan, John's going to say, "Yeah, I qualify for a $400,000 mortgage on a land loan," but he doesn't qualify anything more than that. No construction, nothing, then we will not lend him or give him a loan for the land. Oh, my gosh, that was a mouthful. The short answer is we do have land loans for borrowers that qualify for more than just land. I should have started with that.

Rob: Got it. No, I mean, that certainly helps. Yeah, definitely from being able to provide folks options, I know that's definitely an important piece. You've talked about paying off, being a one stop shop where you are able to provide some guidance as to whether to pay off the land first and things like that that you mentioned. There's definitely some advantages to partnering with somebody who's done it before like yourself. But anyways, we're just at the top of the hour. On this screen I've got Ed's contact information for anybody who maybe didn't get an opportunity to ask a question and is interested in following up with him directly. Feel free. Ed, do I have your right phone number on here and everything else?

Eduard: Everything looks good.

Rob: Good. Good. And yeah, I want to thank you again for taking the time and hopefully send some clients your way who can ultimately build their next beautiful home.

Eduard: Absolutely. It was a pleasure, you guys. Thank you so much. It was a pleasure, Rob. Thank you, guys.

Rob: All right. Thanks so much, Ed. Take care.