For larger construction projects where the exit strategy for the builder or developer to pay back the construction is through the sale of finished residential or commercial units being built, then the key to not only getting approved for a construction loan as well as getting draws advanced will be your ability to pass the construction lender’s pre-sale test.
First of all, each lender is going to have their own way of assessing the number of pre-sales that are going to be required to get construction funded, but typically the proceeds from presold units will need to equal the construction costs.
Its also not uncommon for a builder or developer to have most of the pre sales in place at the time of loan approval, but still requiring additional sales prior to the first draw advance. But just because you have a construction mortgage commitment in hand, does not mean that the lender will have any leniency if you’re short a unit or two when money is required.
Even if you have all the required sales in place, you need to make sure that you can verify each sale to the satisfaction of the construction loan provider. And when I say each sale, please take me literally. Bank and institutional mortgage lenders are very much by the book in most cases, and will go through the supporting documentation for each sale you pledge as a pre sale to cover the construction covenant.
And while all lenders will have their own requirements and verification process, here are some typical things you can expect to be required. First, the pre sale agreement must be binding upon the buyer via a pre-approved sales agreement with a material deposit held in trust for the committed obligation. The amount of the minimum deposit may also be established by the lender. Second, the sales are going to have to be at arms length in order to avoid any contrived sales that are put together to make the presale quota. Third, block sales for several units will under go a higher level of verification to make sure the sellers intention is to truly purchase multiple units and that sufficient funds are being held to support the claim.