Over the last decade, fix and flip loans have gained more popularity in the real estate industry. The private lending business filled the financing gap left by the bankruptcy of sub-prime lenders and regular banks’ tightening of lending requirements. Ready and willing to fund the acquisition of homes and properties for real estate investors, private lenders capitalized on the opportunity in this newly redefined lending space.
Ground-up construction lending offers a tremendous opportunity with an upside that often delivers a greater yield than traditional fix and flip financing as private lenders look for new markets to participate in. Construction loans can be profitable, but there are advantages and disadvantages to every opportunity. In writing, construction lending appears to be very risky. Still, with proper evaluation and understanding at the start of the process, it can turn out to be an extremely lucrative one.
The first (and most crucial) step in underwriting a construction loan is determining the feasibility of the proposed project. To avoid foreclosure even before the loan is drawn, the lender needs to take a critical look at the project’s specifics, ask the difficult questions, and be certain of the project’s success. In addition, the lender needs to be quite certain of the contractor’s competence involved in the project before agreeing to move ahead with the loan.
During the evaluation process, attention to detail is key, particularly regarding the scope of the work and the loan to be taken. Ensure the provision of accurate valuation that will protect the lender, understand the importance of the project and ascertain that necessary details have been provided.
In avoiding pitfalls in construction lending, the funds’ control process is an important factor that needs to be considered. Do you want to know more about construction lending and how to attain a higher yield? Click here to find out.
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