Contractors and Hard Money Loan Lenders

By Will Heaton

Anyone that has flipped a home in our current market understands the trials and tribulations of dealing with contractors. The reality is contractors, and sub-contractors, especially the good ones that do quality work, fast and efficiently can charge a premium for their services. Unfortunately, contractors know this and higher demand means they can both charge a bit more for their services and dictate the terms of the construction contract. At the end of the day to ensure that your contractor is available to work on your project you may need to pay more and be somewhat flexible with your construction contracts, but time is money and getting a project finished faster means you earn more money.

Typically, in your construction contract, you are going to want set reasonable timelines for milestones and final completion dates whereby a certain amount of money is paid to the contractor. Ideally, you can build in incentives for the completion of work by certain dates and penalties if those dates are not met to cover extra carrying costs for insurance, taxes, loan extensions fees and added interest payments. The term reasonable will vary, but will depend heavily on the scope of work, contractors workload, time of year including both the ability to perform seasonal work like exterior painting and roofing and the optimal time to hit the market. A contractor that can finish the project on time (and hopefully on a budget) or even ahead of time will end up saving you thousands of dollars per project and allow you to turn your money over faster to move on to new projects. They say a good contractor is worth their weight in gold and for a good reason. The savings realized by reducing your construction times really adds up when calculating savings for monthly interest payments on a loan and loan extension fees.

Intrust Funding and most of the other local hard money lenders all charge extension fees if you are not able to pay off your loan during the initial loan term. The industry standard is 1% of the loan amount or 1 point for an extension fee for 45 days should you need to extend past the initial loan term. So while it is critical to be fair and reasonable with your construction contract, you also need to be reasonable with the expectations of how long it is going to take to finish a project and get it closed. Requesting a 5-month loan term for a project with a $200,000 construction budget is wishful thinking and the reality is that the project may take longer. The difference in percentage points between choosing a 5-month loan term and a 7-month loan term with Intrust Funding is 1 point. If you have a larger project, have to deal with some weather issues or plan on going on the market during the historically slow selling months you can actually save 1⁄2 point or 15 days of interest by choosing a 7-month loan term. Let’s say that you are planning on borrowing $400,000 for a flip project. That is $2,000 extra that you could be putting in your pocket just by choosing a 7-month loan term. Our loan originators at Intrust Funding would be happy to discuss any project you have and walk you through the process in order to help you fully understand the financial details in order to help you make the most money possible on your next deal.

Please Contact Carolyn Gossett at [email protected], 425.999.5203 or Justin Reed at [email protected], 425.279.3300 to learn more. If you haven’t been to our Investor 101 Class, please join us every other Monday to meet our team and learn about the investment process. Visit our website for more information.

About the author...

Will Heaton is a co-founder and managing partner at Intrust Funding. As the fund manager, he is responsible for investor relations, underwriting, and new business development. Will has over 10 years of experience in multi-family and residential real estate. Drawing on his comprehensive knowledge of renovation financing and construction management, Will uses a value-add approach to complete his multifamily and residential real estate projects. He regularly gives educational lectures to real estate investors and has been quoted on numerous occasions in well-respected publications. Will has been recognized by the Master Builders Association and Built Green for his work with LimeLite Development and Infinity Land Management. He is an enthusiastic member of the community and enjoys participating in various non-profit groups throughout King County. In his free time, Will enjoys adventures with his wife and their two children, classic cars, and fishing.

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