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Expert Tips

Six Construction Lending Pitfalls to Avoid

By Keith Schlemlein, President, NWCC Inc.

  1. Using the wrong Cost Breakdown form on your construction project.
    I don't know how many times I have seen this one. We will be working with a lender on a new construction project. We get the Cost Breakdown / Inspection form and it is the bank's standard form with standard percentages for each line item component. Many times these standard forms do not reflect the costs for the project they are being used on. The result is a frustrated borrower and builder trying to make the form fit without much success. It has been our experience that it is best to use a customized form that you can plug the builder's numbers into and that the builder can use for reference later. Our software, The Construction Manager, allows the lender to make a form easily fit an individual project yet also comes with a standard form in which you can simply enter dollar values for each line item.
  2. Inconsistent inspections.
    Some lenders will use different inspectors in their various areas of operations. The problem here is in consistency of inspections and results. If a lender has inspectors that are not all consistent in their inspection methodology then the result can be delays in draws and upset customers. At NWCC all our inspectors are trained to follow a set procedure for doing inspections. This results in consistent and reliable inspections for our customers.
  3. Not requesting photos.
    The old adage is true: "A picture is worth a thousand words" - especially when it comes to trying to solve discrepancies between what a builder is requesting and what the inspector gave them credit for. It is our belief that the more information you can give to the draw processor the better able they will be to resolve these types of problems. Photos are one of the best ways to do this. At NWCC we provide two photos of each inspection, one interior and one exterior.
  4. Allowing multiple inspections throughout the month.
    This can turn into a major cost issue for a lender. We have worked with some banks that allowed the builder to take several draws per month whenever they wanted one. We have mainly seen this with banks that are new to construction lending and are trying to build market share. The problem is twofold: First, this can drastically increase the costs to the lender to administer the construction loan, and second, your builders will be resistant to change when the bank decides to do draws only once a month. We at NWCC advise our clients that it is best to put your draws on a once-a-month schedule. Most builders, if they pay their bills by the 10th of the month, can get a discount from their suppliers so all they really need is one draw a month. Besides, you would want to work with builders that have the financial strength to make it at least 30 days before they need funds and not with contractors that have to get money every week.
  5. Not getting verification of materials installed.
    The construction loan is partially based on an appraisal, which in turn is based on a new home's plan and materials. If these specifications are changed during the course of construction the appraised value can change also. For example, substituting T-111 siding for 6" beveled cedar siding is a significant downgrade and leads to a reduction in value of the home. Part of our inspection process is to verify that roofing, siding, floor coverings, and other items installed on the house are consistent with the materials list, and if they are not, to inform the lender.
  6. Using loan officers to do construction inspections.
    Loan officers are hired to make loans. Sometimes a bank will think they are saving money by having their loan officers do their construction inspections, but this practice actually costs them more in the long run. I once talked to a banker that had four loan officers working for him. He informed me that they each spent about one week a month doing construction inspections. In reality, he had three loan officers and one construction inspector when you added up all the time they spent doing inspections. Some have told me that they like to have the loan officer out doing the inspection because he gets to see the builder and touch base with him. The truth, however, is that you rarely see the general contractor on site, and with the short time involved to get the inspections done you don't have time to spend with them anyway. I suggest that the loan officer take the builder out to lunch or meet him to give him his check personally. Using a third party inspection service like NWCC saves you money. We free up your loan officers to do what you hired them for-making loans.
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P.O. BOX 1110
Sumner, WA 98390