Construction loans are financing arranged for the construction of real estate; generally a short term, floating-rate debt repaid with the proceeds from permanent financing. Construction loans with a permanent financing commitment are designed as loans “with a takeout commitment” and those that do not have permanent financing are loans “without a takeout commitment.” May include an interest carry and/or a very small permanent component to see the property from the post construction phase through full absorption.
Construction costs are the costs to build, particularly an improvement; includes the direct costs of labor and materials plus the contractors indirect costs.
Construction loans, just like purchase money mortgage loans require an appraisal report. But clearly there must be a difference as there is no property per se to appraise. A construction appraisal is complete “subject to completion,” and consists of a number of relevant information including but not limited to:
- The general specification of the property and the area where it is located.
- The replacement cost analysis; which is a calculation of the total of lot cost, construction cost of the main structure and the construction cost of the out buildings.
- The comparative sales analysis; where the subject property is compared to similar sales in the area.
- Important factors regarding functional utility and zoning.
The replacement cost analysis is very important in construction loans guidelines as this cost is compared with total cost of construction presented in the line item cost brake down of the project. The normal variation in the cost allowed is around 15%, beyond which the underwriter needs to be provided with an explanation as to why the variance is to such a degree.
In the comparative sales analysis section the appraiser will use sales data from the immediate area, or designated market area, and compare with the property that is going to be built according to the plans provided.
Construction loans use the same standardized appraisal report that all mortgage loans use, except they are prepared “Subject To” as oppose to “As Is”, where the subject to caries the explanation; Subject to Plans and Permits. Higgins & Welch Appraisers are experienced in valuing both residential and commercial new construction properties large and small.