KEY TAKEAWAYS:
- Here’s how to avoid some of the most common pitfalls in construction financing:
- Budget Realistically: Avoid underestimating costs by including every possible expense and adding a contingency buffer for unexpected costs.
- Conduct Due Diligence: Ensure site viability and compliance with zoning and environmental regulations to prevent costly setbacks.
- Align Timeline with Reality: Set a realistic schedule with your team to avoid interest increases or added fees due to delays.
- Vet Your Contractor: Choose a contractor based on experience and reputation to help manage budgets and timelines effectively.
- Track Spending Closely: Monitor each expense and keep your lender updated to stay within budget and avoid loan disbursement issues.
- Prepare for Final Appraisal: Understand appraisal requirements to ensure a smooth transition to long-term financing once the project is complete.
When it comes to commercial construction, there’s more on the line than just laying down bricks and beams. Whether you’re building a retail space, office building, or even an industrial complex, construction financing can make or break your project. However, even with the perfect loan in place, some common pitfalls can lead to delays and budget overruns. We’ve seen it happen too many times! So, let’s break the silence around this subject. Let’s talk about some of the most common mistakes people make with construction financing.
Lessons from the Field: How to Avoid Construction Financing Pitfalls
1). Underestimating the Budget Needs
One of the biggest missteps people make is underestimating the project’s total cost. It’s easy to get caught up in the excitement and overlook expenses like permitting fees, unexpected site conditions, or even costs related to safety inspections and infrastructure improvements. While lenders do account for a contingency buffer in your loan, having a detailed, realistic budget from the get-go can save you from headaches down the road.
To avoid this pitfall, work closely with your lender and builder to outline every possible expense, and then add a bit of padding for those “just-in-case” scenarios. A thorough pre-construction budget review with your team is the best place to start!
2). Skipping the Due Diligence Process
Before breaking ground, conduct an exhaustive site survey, environmental assessments, and any necessary market research. You want to ensure the land you’re building on is viable and meets all necessary zoning and environmental regulations. Failure to do so can result in costly setbacks or even halted construction if issues arise.
Think of due diligence as your project’s “insurance policy.” A little extra time here can save you significant money and stress down the line.
3). Ignoring the Timeline Reality Check
In commercial construction, the timeline is everything. Construction financing is typically structured with a set draw schedule, where funds are released at specific project milestones. If your project starts running behind schedule, the entire loan process can get thrown off course, leading to interest payment increases, additional fees, or the need for bridge financing to cover delays.
To prevent timeline headaches, set up regular check-ins with your construction team and lender. Staying flexible but proactive with your timeline can help you navigate unexpected delays, whether due to weather, labor shortages, or supply chain issues. Your lender and builder can help craft a timeline that factors in a little wiggle room, which can be a lifesaver if things don’t go exactly as planned.
4). Not Vetting Your Contractor Thoroughly
Who you choose to work with can make a world of difference in your commercial project’s success. Selecting the right contractor involves more than just choosing the lowest bid; it requires a look at their experience, reputation, and ability to handle the scope of your project. A trusted contractor not only keeps the project moving but also manages your construction financing disbursements wisely, ensuring you’re staying within budget and on schedule.
Make sure to review the contractor’s past projects, ask for references, and evaluate their experience with commercial projects specifically. Vetting thoroughly will help avoid costly mistakes and make sure your contractor is on the same page with your lender’s requirements.
5). Forgetting to Monitor and Document Spending
Construction loans are structured in a way that funds are released over time as your project progresses. However, it’s crucial to track every penny throughout the build. Failing to document your spending not only risks going over budget but can also lead to issues with your lender, who will likely want regular updates on where the funds are going.
Keep a close eye on every dollar spent and communicate with your lender about each project milestone. Clear documentation and regular financial updates can prevent misunderstandings and ensure that your loan disbursements stay aligned with your project’s needs.
6). Overlooking the Final Appraisal Requirements
Construction financing usually requires a final appraisal once the project is complete to confirm the property’s value. This appraisal can affect your transition from a construction loan to a permanent mortgage, or influence any refinancing decisions. Ignoring the final appraisal requirements or underestimating their importance can lead to complications in securing long-term financing for your completed building.
To avoid this, work with your lender throughout the project to understand appraisal requirements and ensure your property’s value aligns with the loan’s end goals. This keeps your loan on track and ensures a smooth transition to permanent financing.
Let Us Help with Your Construction Financing
At Hammers Construction, we make commercial construction a seamless process. Not only will we help you obtain construction financing, but we’ll also handle every aspect of design and building. With everything managed through one trusted team, you can focus on your business while we take care of the details, from funding to finishing touches. Ready to make your project a reality? Let’s build it together!
