In part one on this topic we covered the concept of a draft budget versus a final budget. In this follow up we examine the roll of the draft budget in getting your loan. If you recall from the last discussion, this entire budgeting process can seem a bit “out of order”. You need to spend $100,000 or more on plans and many months of work before you can truly determine what your project will cost. You often need the cash from a loan to pay for those plans, but the bank wants to know your budget to approve, close, and fund your loan. So how do you go about this process, getting the data you need and ordering the steps correctly? 

One critical element is selecting the right bank. Trying to select a bank based on basic terms such as interest rate, loan term, and loan to value percentage can cause you to miss some of the much larger factors. One such factor is a bank’s experience lending on group up, owner occupied real estate, and their methodology of setting up such a loan. It is critical that a bank understands that they might be approving and funding the loan based on a draft budget and incomplete sets of plans. 

Here is how this works. As always you will go through the tedious process of financial underwriting, where the bank relentlessly probes into every aspect of your life and your business. It’s never fun, but with ever increasing scrutiny from the Fed on banking practices, it’s just a necessary evil. The bank will also want to understand the design, concept, and pricing of your new facility. It’s like a business plan for a piece of real estate. If a bank requires a full set of plans before funding your loan, you will be shelling out the up-front costs of civil engineering, architecture, design, and more. This might be acceptable, as it will apply toward your down payment, or “equity”, and if you are putting down 10% these up front costs will almost always be less than 10% of your total project cost. But many of our clients prefer to draw from their loan to cover these costs during the pre-development phase of the project. In that situation it is key to work with a bank that will approve and fund a loan based on plans and pricing data that are not final. 

In addition to selecting a bank that will work with you as described above, you need to select an experienced developer to create this “real estate business plan”. That means you are bringing in a coach, and not just relying on a player or two for this process. The developer creates the entire plan, putting each player in their position and coordinating their responsibilities. When these individuals all bring their talents to the process very early in the project timeline, the developer can create this business plan, including a draft budget. 

Finally, realize that in spite of all the players on your team, from engineers to architects, and general contractors to subcontractors, it is typically ONLY the developer who regularly borrows money from banks to build ground up real estate. Use a developer experienced in your type of project, and one who puts their own money into real estate developments. That way, you are dealing with someone who really understands what it is like to be a principal in a real estate project, with skin in the game. Leverage their talents to help you build your real estate business plan and secure your loan.