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Thank you all for your advice, again it's encouraging that someone else has had some experiences and is willing to take the time to help.
Frank and Donna in Orlando, FL

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Nick's Forum Posts: 3

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By Nick in Goochland, VA on 1/16/2007


Hello,

Been reading this site a lot lately as well as having almost finished the book.

My wife and I recently purchased some land. We've had the soil test and survey done. Next week we should be getting our preliminary house plans. Once we get those we'll go to the county to get our septic system design.

Once we get our plans we'll also start getting real estimates. We've talked to a few people about pricing, but nothing concrete.

We're going to be selling our house fairly soon as well. Paying our current mortgage and a construction loan would be kind of tight, so we'll either buy a small house to rent afterwards or rent for a while.

Once we sell our house we'll have a bit of money. Would it make sense for us to go ahead and have the driveway, homesite, and drainfield cleared with that money?

Also, since we're not in a big hurry right now (waiting on plans and then on county) are there things we can do ourselves as far as putting in the driveway that will save us money? It's going to be a fairly long driveway (500ft).

I sincerely appreciate this site and all of the valuable information it provides. If there are any OBs in the Richmond or Charlottesville VA area I'd love to talk.

Thanks,
Nick
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Mat's Forum Posts: 39
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By Mat in Rome, NY on 1/17/2007


My opinion solely (and my loan officer's too) -

When you have extra cash - hang on to it. He said most people think they need to pay for things up front with any cash that they have, which can leave you short of cash flow once the project begins and you have your construction loan. His advice was to finance the land into the construction loan as well.

Cash flow is THE most important thing when you are O-B'ing the project. You can roll the items you listed into your loan. Yes, paying interest in those items will cost you a little more, but not as much as having to deal with not having enough cash on hand throughout the life of your construction project. This could lead to delays, which can easily cost you even more money.

My advice would be to stick left over money into an account, and use that as leverage for construction. Another good reason - some of my subs will give you a better deal if you pay them in cash. You can do that when you have cash on hand.


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By Dave in Coarsegold, CA on 1/17/2007


I would tend to agree with Mat. Most of the sources I've read say the same thing. If you are going to rely on a construction loan, keep in mind that the bank will usually require work to be complete and inspected by them before they release funds to pay for it. This can cause issues with your subs if you have no cash buffer to keep payments timely if the bank drags its feet.
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By Nick in Goochland, VA on 1/17/2007


Mat and Dave, Thank you both for the advice. There are days when I feel confident we can do this and others when I'm not so confident. I'm just hoping we can get the house we want for the price we want. Thanks again for your help, I sincerely appreciate it. Thanks, Nick
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By Kenneth in Lees Summit, MO on 1/17/2007


My bank would allow me to take draws whenever I wanted, on no set schedule. I kept the checkbook, I wrote the checks, I provided notice to the bank when I wrote checks (they would see them soon enough anyway), I provided copies of the invoices I was paying, and I also provided lien releases to them. If a contractor was giving me a discount for quick payment, I had no problems meeting this need. The bank did inspect the project site periodically to make sure progress was being made and they were adequately protected, but they certainly didn't inspect for every invoice I turned in (I saw the inspector three times, I know my subs saw him an additional couple more times, I have no idea exactly how often he inspected progress).

However, I do agree with the advice to save your money and use your construction loan. Using your personal funds to start a construction project (even if it is just land clearing and grading) prior to getting your construction loan will only complicate things, as banks don't like to loan money on partially completed construction projects - yes even if it is minor. I know someone who used their funds first, and then went to the bank to get a construction loan on a partially completed project, let's just say they couldn't get a bank to finance the project and were left with a very complex situation you don't want to be in.

As to whether you own the parcel outright, or want to roll it into the construction loan, my bank only loaned to 80% of the project cost, including land. I owned the land outright prior to any construction activity, and the bank considered this adequate to meet my 20% equity requirement. They said this was basically a wash, as they had no problems financing the land into the construction loan and leaving me with cash on hand. I guess it depends on when you want to start paying interest - planning costs nothing and better planning leads to a smoother project. I think if I were paying interest monthly (which I could also roll directly into my construction loan too) I might skimp a bit on planning and hurry up and get started, which might not be the best decision. Sure you only pay interest on the money you have used (in your case, the price of the land), but it is still a monthly cost. YMMV.


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By Michele in Stafford, VA on 1/23/2007


I agree with Nick and Mat, hang on to what cash you have. However, you may want to get some things started while you are waiting on other things, depending on your timeline.

In my case, I went ahead and got all my permits and engineering plats, etc., started before I closed on the mortgage. In my area, these permits are taking quite a bit of time, and you could run into issues, so if your mortgage company wants you to finish your project within 9-12 months, you could end up spending 6-9 months just waiting on permits. I did not want to risk this, so I fronted the cash for that up front. HOWEVER, when I put in my final building budget to the mortgage company, I specifically DID NOT list those items as prepaid, I listed them as part of the draws. Because IF I did, the mortgage company would have considered that as money down. So, I waited til the mortgage closed and then immediately requested my draw (with proof) for engineering studies and permits. So I got my cash back right away to use for other things I had to pay before work could start, but was still able to get my project started earlier. I'm glad I did, because my permit fees were astronomical. I had not anticipated them to be that much, the county only gave me an estimate; it was double when the permit came in.

As an O-B who is doing the interior finish work myself, I wanted my house up in four months after the loan closed so I would have 8 months to allow myself plenty of time (realistic time) to go at the interior stuff at my own pace, nights and weekends, without being rushed to finish everything in the time allotted by the mortgage company. How you set up your draws is very important early on. In my case I only had a small amount of working cash to start with, and I had to make it WORK.

Michele


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