Making Moves: Spec Construction Loans

Where there’s a real estate need, there’s an opportunity for investors— and in today’s economic landscape, America is in need of more single-family homes. From June 2012 to June 2021, 12.3 million American households were formed, but only 7 million new single-family homes were built. With household formations outpacing new construction, the gap between supply and demand is increasing.

This has created a new world of opportunity for real estate investors, particularly in the realm of spec construction. If you’re new to the world of speculative construction and development, here are some of the basics you should know about spec home lending.

What is a spec home?

Spec— short for speculative— construction describes a type of real estate investment where an investor will develop land without an upfront purchase or lease commitment. A spec home refers to a single-family residence developed by a real estate investor to be sold for profit.

Investing in speculative real estate is similar to buying and flipping homes— except instead of remodeling a building that is already there, investors will purchase an empty lot and start from scratch. Though they can take a year or more to construct, spec homes are not intended to be a long-term investment.

Costs of Building a Spec Home

Total project costs of constructing a spec home can vary depending on the size of the home, amenities offered, location, and current market conditions. However, here are some major costs you’ll want to consider:

• The cost of the land
• House plans and architectural fees
• Building permits and local fees
• Construction management fees
• Labor and construction costs
• Materials
• Cleanup

Spec home developers can fund their projects through a number of sources, including private investors, their own cash reserves, and non-regulated lenders. However, one of the most popular routes is real estate construction and development loans through a commercial lender.

Spec Construction Loans for Builders

Diving into spec construction investing will likely involve working with a lender to secure financing for your project. What type of financing you’ll need will depend on the scale of your project.

There are two ways that investors can approach spec building: investing in individual homes or investing in larger spec developments.

Investing in Individual Spec Homes

Interested in taking your investment one home at a time? Here are some commercial spec loan options that might fit your needs.

Commercial Real Estate Loan

A commercial real estate loan can be used to purchase real estate for investment properties. This type of loan, also known as an acquisition loan, can be used to purchase the land that your new development will sit on.

Commercial Construction Loan

A commercial construction loan is similar to a real estate mortgage but is designed to cover the costs associated with building a new structure. Another notable difference between a construction loan and a mortgage is that the borrower receives funds in a series of draws as development progresses instead of an upfront lump-sum payment.

Business Line of Credit

You may have money coming in from other sources and need financing to cover miscellaneous costs that may pop up throughout the construction process. A business line of credit allows you to draw funds as you need them. One of the perks of this type of spec loan is that you will only pay interest on the money that you actually borrow.

Investing in Spec Developments

If you’re ready to go all in and invest in a large development of several spec homes, your loan options will be a little different. You can use any of the loans above to fund your development, but with a bigger project, you’ll also want to consider a blanket mortgage loan.

Blanket Loan

A blanket loan is a single mortgage that is used to purchase two or more pieces of real estate. Spec builders typically use these to cover the costs of purchasing and developing land that will later be divided up into individual lots. This type of loan is helpful because it is a one-stop shop that saves spec developers the money and time it’d take to apply and close on multiple mortgages.

It’s important to keep in mind that not all blanket loans are the same. Some loans are crafted in a way that makes it difficult to sell individual properties, so be sure to discuss the details with your lender.

Applying for Spec Construction Loans

Start the process by finding a local lender that is experienced with commercial lending. Working with a local lender who understands the market can provide some major benefits. Community credit unions and banks will have more expertise when it comes to predevelopment in your area, permitting, and more.

Every lender will ask for a specific list of documents, but be prepared to furnish these basic documents:

• Copies of the financial paperwork for you and/or your business
• Tax returns for the past two years
• Information about your architects, builders, construction managers, and other key figures involved in the development
• Business plan or marketing plan outlining how you intend to market your properties after construction is complete

Once you’ve supplied the necessary paperwork, your loan application will go through the approval process. What your loan terms will look like will depend on a number of factors, including your creditworthiness, how much you’re borrowing, and your down payment amount.

Finding the Right Spec Construction Loan

Finding the right spec loans can be an intimidating process. You don’t have to approach it alone! When you choose a credit union like Amplify, you can count on commercial experts to lend you a helping hand and get construction started.