In the construction business, time is money. But the reverse is also true: leveraging the right assets can help you complete projects more efficiently. Unless you are in a position to pay cash for a project, you will need a loan.
A common mechanism for construction projects is a speculative property or “spec construction” loan. These are more complex than traditional mortgage loans. This is in part because, by definition, they are for an asset that does not exist.
Spec loans can be a valuable tool for construction companies. The key is determining when they are the right fit for your particular industry and project.
The information below will tell you everything you need to know about spec loans. Read on to determine if spec loans are the best choice for your business.
What Are Spec Construction Loans?
Spec loans are short-term loans meant to help developers and homebuilders get up-front funding for projects. Since they are riskier to lenders, they are harder to attain than traditional loans. But they afford many benefits.
The underlying issue is that, if you are planning to convert the spec loan into a mortgage once construction is completed, the bank wants to be certain that the total value of the project is high enough to support the mortgage. This means that the bank needs to have more information about the project before they can agree to fund it.
For this reason, you may want to focus on local banks. They are more likely to have an investment in the community, know you or your business, and have a better grasp of the “big picture.”.
Spec Construction: Types of Loans
One major factor that comes into play with spec loans is the timeframe in which you plan to repay it. There are different types of construction loans, but there are two main categories that you should be familiar with: one-time-close and two-time-close.
One-time-close, or “all-in-one” loans, combine the spec construction loan with the mortgage. The advantage is that the loan has a single approval process and closing, which simplifies things and keeps closing costs down. (That does not mean that the lender will not charge different rates for the construction and mortgage components of the loan.)
A two-time-close construction loan separates the construction and mortgage phases of the project. During the construction phase, you will only accrue interest and owe payments on the loan amount paid out for construction. There is often a maximum duration set for this phase, such as 12 or 24 months.
The downside is that closing costs will be higher for this project since it will involve two separate transactions. However, you are likely to get a better rate for the mortgage since these tend to be much lower than your standard construction loan.
What type of loan you choose will depend on your unique project. But spec loans can be the boon you need to get your project off the ground. Take a look at this link to learn more about how they work.
Learn More About the Best Loan for Your Business
Now that you have an idea of the ins and outs of a spec construction loan, you can decide if it’s right for your project. The important thing is to spend some time crunching the numbers unique to your particular project. If you can accurately speculate the timeline of construction, then you have a serious advantage that you should leverage.
We hope you found this information on spec construction helpful. If so, be sure to take a look at some of our other posts on home improvement, interior design, real estate trends, and many other topics.