If you’re planning out a residential or commercial condominium project, remember that the single most important element of an application for construction financing is going to be the pre sales you have in hand and the marketing plan you have in place for the remainder of the units.
Of course the lender is going to look at the plans and post construction appraisal which will also be important, but without a significant number of presales, its unlikely that your project will get any serious lender consideration from construction financing sources providing the better rates.
How many presales will depend on the project and the amount of resale mark up that is built into the resale price. A general rule would want to see the total value of pre sold units to exceed the projected cost of production plus 20%. In this way, both the builder and the lender know the project can cover its cost before construction even begins.
So depending on the percent market up over cost, there can be some significant variation to the number of pre sale units a lender wants to see.
This example is far from a hard and fast rule for establishing what amount of presales are sufficient at the outset of the construction phase. Some lenders may have an absolute percentage sold while others will assess on a case by case basis.
And presales that count are ones where signed documentation between the seller and prospective buyer is in place and a deposit held in trust. Construction mortgage lenders will also be interested in the terms and conditions of the pre-sale agreements to get comfortable with the level of commitment that is created.
The on going marketing program for the remaining units will also be of interest so that a comfort level can be achieved as to how much effort will continue to be applied into the sales process until all or most of the units are committed.
By having the construction project well mapped out in terms of costs, contracts, drawings, time lines, permits, and pre sales, the construction financing process will be completed much faster and you’re going to be in a position to be considered for better terms and rates.