Owner-Builder (Or 'shell only' construction?) Loans in Arizona?

6 years ago

last modified: 6 years ago

Hello. Does anyone have any leads on owner-builder construction loans in Arizona? (Or "shell only" construction loans?) I own the land outright. Credit score is 790. My plan is to borrow money to pay a contractor to build a habitable watertight shell with plumbing and electric so that I can finish the interior of the home on my own. I need a $50,000 loan at minimum to pay the licensed contractor to complete the structural, electrical, and mechanical components of the home, which will then be inspected by the city to be sure it is up to code.

While I was able to find lenders who did finance owner-builder (As well as shell only) loans, they were not in Arizona. I have been unable to find any lenders in Arizona thus far, the ones I have found want me to hire a contractor to build the entire home, inside and out. But I have interior design experience and would like to do the interior on my own. I don't want to go into debt paying someone to do work I can do in my sleep.

Anyone have any leads, or are there any brokers reading who can help?

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B Carey

6 years ago

What you are asking for is not an owner/builder construction loan. A bank doing an owner/builder construction loan is still going to want the house completed in 365 days.

To get a $50,000 loan to have the shell done and then be able to finish the rest with cash as you go is going to require a different kind of loan. If you have the land paid for, maybe it has a high enough value to support a new land loan? Otherwise, a combination of a personal loan, maybe a loan against your vehicle? Or a Home equity loan on your current home? A 401K loam if you have assets there would likely the best option.

Without knowing your financial details, it's hard saying what type of loan would work. But a construction loan would only work if you currently have the cash for the rest of the house. (Then you would need to find a bank that allows owner/builder)!

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Comments (12)

just_janni
6 years ago
That's going to be near impossible. You will either need to borrow from your 401k (which you can borrow up to $50K for a home purchase / build), or do this as a personal type loan. No one will want a financial interest in a partially completed property, unless you have a really strong relationship with a local bank (and if your relationship was that strong - it would likely be because of large deposits, thus making the loan request obsolete!)

It CAN be done - but likely not with the property as security.
cpartist
6 years ago
Does that include the finished roof, doors and windows?

Does it include finished electrical and plumbing and electrical or just the rough in?

What about the HVAC?
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If I read your message correctly he may have offered you a better option than a construction loan. You stated that you need $100K to build given your other assets. He offered to loan you half the value of what state is an over $200K property you own free and clear. So if you take his loan you get a $100K check to put in the bank and pay your subs as you go. No bank draws to deal with, no bank inspectors to wait on. You also get to take advantage of cash discounts and incentivize your subs with quick payments. At the end of the build you would only need to refi if you wanted to pull equity back out to do other things. Otherwise you just pay off the $100K loan according to its terms. if you did need to refi I'm guessing the closing costs would be worth it, given the flexibility you would buy for yourself by avoiding a construction loan. I did my build similarly, although I was not positioned quite so favorably as you. I had enough cash along with a HELOC to build my new house on my property. It was very nice not dealing with a construction loan. At the end of the build I refi-ed and paid off the HELOC and the original first mortgage. The subs loved it when I pulled my checkbook out on the spot and handed them their money. Never underestimate the power of quickly paying quality subs for a job well done. You should reconsider what he offered. It may be a very smart way to go.
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I know you mentioned "owner financing" but I tend to be leery (both as a buyer and as a seller) of owner-finance deals. Do read the link below. We bought the land for our current dream house about five years in advance of starting to build our house so I learned a few things along the way that might be helpful to you and may suggest another avenue for you to follow. First and foremost, land only loans are notoriously hard to get - even for property within a neighborhood that is already developed in terms of utilities. There just are not that many lending institutions that make land-only loans. Plus, the interest on land-only loans is MUCH higher than on practically every other kind of loan. In 2003, we bought 4 acres in a development that, I suspect, is very similar to the one you're describing. Price was right at $50K for the 4 acres. In 2003 mortgage and construction loans for those with good credit were running around 4.5 to 5%, and we could get a loan to buy a car or even a motorcycle for about 7%. But every place we asked about a land only loan wanted 8.5% or more! I have no clue why this is. It's not like one can abscond with a piece of land, or wreck it in a crash and then refuse to finish paying it off. But that's the way the market is. On an owner finance for a land-only deal, I would not be at all surprised if the seller wanted a percentage point or two above what banks are currently asking for on land only loans. After all, if the seller originally purchased the land by taking a land-only loan and still owes something on that loan, he's going to want to get enough to pay back his own loan plus make something for his trouble. When we decided to buy our new land, we already owned a home and had significant equity in it. So we realized that we could do "equity out" refinance on our first home and use the money to buy our land out-right. Because interest rates had fallen significantly since we'd first purchased our house 18 years previously (a 30 year flat rate), even after paying the fees to refinance, we actually came out ahead. Our monthly payments stayed almost exactly the same (the difference was less than $10/month) and even though we had taken out $50,000 in equity, the total remaining pay-out period only changed from 12 years to 13.5 years. We then started making extra payments each month and actually finished paying off the original mortgage plus the additional $50K loan in just five years more years. So the upshot is that we basically got to "borrow" the $50K to buy our land for free. So, if you already own a home and have equity there, you might look into a home equity loan instead of an expensive land loan or taking the risks associated with an owner-finance deal. The other thing is that, when you are ready to start building, the bank that makes your construction loan is going to insist on having foreclosure rights on the land the house will sit on as well. (That's reasonable since it would be pretty much impossible to foreclose on a house without foreclosing on the land it sits on!) And the bank is NOT going to want to be the junior lien holder on the land. So yes, you will have to finish paying off your land loan either before - or concurrently - with getting your construction loan. Whether a bank will loan you enough to pay off the land AND build the house you want is pretty problematic. Banks now typically will only loan 70% of the value of the finished property (house and land) and they expect the homeowner to put down the other 30%. If you own the land free and clear when you go to borrow construction money, you can claim its value as part of your 30%. If you still owe money on the land, then you are going to have to ask for a bigger loan (so you can pay off the land) and will have less equity to apply to your 30%. The bank that is going to make your construction loan won't care if you pulled some of your equity out of a previously owned house in order to buy the land outright. As long as you own the land free and clear, it's value can count toward the 30% you'll need to put into the new deal. Of course, one of the questions the bank WILL ask in determining how much of a loan you can qualify for, is how much you are currently spending on mortgage payments on unrelated property. But they don't care how much or how little equity you have in the unrelated property because they can't foreclose on that property if you fail to make your payments on the new place. Anyway, it's just an idea. It worked very well for us and might work for you. Here is a link that might be useful: Pros and cons of owner financing for buyers.
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allofthecitylights
Original Author
6 years ago
last modified: 6 years ago
@Cpartist - Yes, a watertight habitable shell, with plumbing and electrical hook ups. I will be installing the fixtures, ie: showers, toilets, tubs, lights, etc. myself. I know how to do a lot of the interior work so I don't want to take out more money than I need and go into debt paying someone to do work I know how to do.

@ B Carey - I think what I am asking for is technically called a "Shell only loan," but I am finding that term is being interpreted differently by different people. So what I am looking for is the funding to complete phases of the project, even if I want to hire subcontractors to help with some of the work. I guess I want to go into as little debt as possible. I'd be willing to do a true "owner builder" loan that is financed by the bank by taking out a larger loan and just using the contractors for the really serious portions (Foundation, electric, framing, etc), and then using the rest of the money to finance the work I want to do on my own. That would probably actually be best. I am in my 20s, I don't have a 401k. I just sold the home I did have for $525k. I have gotten approved for a personal loan already, however, (1) The bank caps their personal loans at $35k, and (2) I would prefer to take out a loan that turns into a 15 year mortgage because the interest rates are a lot lower than they are on unsecured personal loans. I purchased the land for $50k but I do not know how the bank would value the land. Can you explain the thought process behind taking out a land loan on land I already own? Thanks for the response
cpartist
6 years ago
@Cpartist - Yes, a watertight habitable shell, with plumbing and electrical hook ups. I will be installing the fixtures, ie: showers, toilets, tubs, lights, etc. myself. I know how to do a lot of the interior work so I don't want to take out more money than I need and go into debt paying someone to do work I know how to do.

Have you priced that all out yet because that part of the build was actually one of the most expensive parts and I can't imagine it only costing $50,000. Windows and roofing alone cost a bundle.

Also what about the exterior cladding? Will you be doing that too because most houses are not considered habitable until the cladding and roofing materials are also on.
allofthecitylights
Original Author
6 years ago
@cpartist - yep I priced everything out already. Ive received bids from contractors. It's a small 1,500sq ft home and it's a basic rectangular shape with a flat roof. Just a minimal modern design. The CDs call for some sort of rubberized coating on the roof but I can't recall the name.
BT
6 years ago
The reason cpartist doubted you... because some of us have to spend 1k in engineering and site survey, $2k for gravel, 1k toilet rental, 1k in permits, 3k in the hookups, 1k site prep, 0.6k backfill, 15k foundation, 1k waterproofing, 6k r/o plumbing, 10k framing, 20k rough materials, 1k rough hardware, 3k vinyl siding, 3k roof, 1.5k front door, 5k windows, 0.5k temp electrical and many others.
B Carey
6 years ago
The bank may give you a owner/builder construction loan. BUT, you have to have the balance of the funds to build the house above what you are borrowing AND the house has to be DONE in 365 days.

If you have all your bids together that the house is going to cost $150,000 and you have $100,000, you can do a construction loan for the $50,000. But if you only have $10, you need to qualify for the full $150,000 construction loan. You can't borrow $50,000 and then take the next few years to finish the house.

As far as trying to get a 15 year mortgage? The principal and interest on a $50,000 loan at 4% is $370 a month. You can always do a home equity loan after you are done to pay off the personal loan.

If you bought the land (versus being given the land), you may be able to do a secured loan against it for about half.

Even with a 790 credit score, you still have to follow lending rules. If you don't like the parameters of a construction loan, make a different plan that works...just don't expect the lower interest rate!
allofthecitylights
Original Author
6 years ago
last modified: 6 years ago
@ Brian - Yes, I know this can get pricey but there are many variables. I already have the architectural and engineering files finished, along with ALTA and topo surveys, drainage study, etc. I got a bid to do my watertight habitable shell for $40K and it costs $10k for me to bring utilities to the plot :)

@ B Carey - Thanks for the info! I was able to find a private lender who does owner-builder loans in arizona (For anyone who finds my thread via google and is also looking, here is their website: http://www.ownerbuilderloans.com ). I do need to take out a loan to cover the entire scheme of construction, though, so as you mention -- yes, I can not just take a portion out and then spend 3 years finishing it on my own dime. Works for me either way! I didn't have a set plan, I just wanted a better way to get a loan than taking out a high interest personal loan. Also I do like your idea of a home equity loan to pay off personal loan. Might go that route :)
freeoscar
6 years ago
you can also opt to just do a new mortgage once the home is finished. Obviously that will depend upon interest rates at the time, but even a home equity line will require the home to appraise out.

Rather than get a construction loan, we used savings to pay for our addition/renovation and then took out a new mortgage (technically it was a cash-out refi, though the bank's collateral went way up as we went from a 75% LTV on a 430k home to a 60% LTV on a home appraised at $850k). We just used that cash-out to replenish our savings.
allofthecitylights
Original Author
6 years ago
@Freeoscar - Unfortunately I am quite young and used the savings I had to buy the land. But I did that because I have a small vacation rental business and my savings I spent on the land will be replenished by the rental in 1.5 years, so I was not concerned about that.

The construction loan I finally found via a personal lender is different as it isn't like a 1 close construction loan that locks in interest rates and secures me with a mortgage when construction ends, I have to find lending on my own and do another closing..which sucks, but it is what it is. If I complete the home construction and have it appraised, am I able to take out a mortgage on the finished home in just the amount the construction loan was for? Say it appraises at 400k, but my construction loan is 100k, can I just do a mortgage at 100k? If my home appraises at 400k, does that mean I have 300k of equity in the home?
cschool78
3 years ago
Who did you find to build just the shell of your home?

Owner-Builder (Or 'shell only' construction?) Loans in Arizona?

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