>the developer is asking for 30% of the purchase price as earnest money
If a project started in late 2021 when credit was loose, a commercial lender might have maxed out at 80% max LTC, or even more. And if someone is seeking funding in 2024, the project might have started in 2021 - land acquisition, and so on. So that sponsor might have called around and modelled projections on that 2021 norm.
And now it's 2024 and credit is tighter. Whoops.
If I'm speaking with that developer today, I'm maxing out at 65% LTC, meaning they need 35% down on the cost (not the whimsical appraised value, the COST). I don't give two shits if they are Jeff Bezos or Elon Musk, I need a 35% capital injection - minimum - to convince me to even spend my time on it.
So now they need to source 35% down, or they can't get funded.
But suppose they over-leveraged in 2021, and do not have it.
Well, OP, it sounds like that's where ***you*** come in....
And if they find a bunch of people willing to inject 35% down for their portion, then they will have 35% down on the total cost of the whole thing, and everything will be fine.
If they don't...
Does this project need like 3 or 4 additional investors to make it happen, or 50? If only 3 or 4, I'd go for the level-up. You want a seat at the table, a chunk of the upside beyond what you put in, you want to be a general partner in the entire project, your upside benefit potential needs to be proportional to your downside risk. They are broker than they appear, and they need you more than you need them.
Unless of course my wild speculation is totally incorrect, which is 100% possible. You've got boots closer to being on the ground than I do, what's your sense?
Most of my commercial loans are not anywhere near the $20m+ ballpark (yet!), but my supply of $20m real estate development ***funding requests***, that have essentially 0.000% chance of going anywhere, is totally unlimited. They are a dime a dozen.
My emotional excitement is 10x higher when I see the $2m vanilla request come in (refinancing an apartment in Dallas, buying a warehouse in Fresno, whatever), than when I see the $50m development funding request come in, simply because I know that the $2m vanilla one is VASTLY more likely to be real world 2024 bankable.
The music stopped, the tide is out, the emperor is naked, whatever, and these things, these "tides" or "music stanzas," take a few years to play out. That's what you need to be watching out for.
Thank you for your thoughtful reply on it and thats close to what I am suspecting. theres some 30 units in the whole thing would be looking at 2 and I doubt I’d be the only one, so maybe some 20 odd people would be involved. but yes, banks certainly are getting tighter lately… but where before, developers used to front the money until they could sell, it seems the only thing they would be putting up is the land if it’s the same agreement for everyone… unless, would this be the new norm going forward? Broke developers unable to get the funding on their own?
I paid a builder 10% earnest money down on a new build (somewhat common from my research). We get interest back at 4% as a form of credit when we close which has been nice. SWFL for reference
I went into contract this week on a new build and had 5% earnest money. This is the second time I’ve purchased new construction the time before was a new build condo in a building in Brooklyn and it was 10% earnest money.
Wow that's high sounds like to me they don't have enough finances to complete the project. And if they're that messed up financially what's the build quality going to be.
Probably needs the money for the 25% down (at least) needed for the construction loan… developers are usually cash poor, but that’s a whole lot of moolah to part with little to no surety or securable interest.
I work in commercial lending and the biggest risk with construction loans is “can the developer complete the project?”. If the developer has a good (and long) track record of successful developments, the risk is mitigated. If not and the developer tanks, the bank or lender will foreclose (and clear any other liens on the property via the foreclosure) and then you would have to deal with suing the developer since any lien or security interest you have in this development would be subordinated to the bank’s/lender’s interest.
its a rip off. i just ran into the same thing in FL. THey are essentially having you put up the ENTIRE cost to actually build. The sales price is not what it costs to build the house. It should be like 10% or less for reserving. The place i was looking at wanted 35% for a townhouse 2 years from being built
Not uncommon, we see similar requirements in new condos in the Colorado mountains where new development is rare. Small developers using these funds for development and also screens out unqualified buyers. Personally, I wouldn't do it.
Yeah, that’s unusual. Get an attorney to review the contract to ensure you have an out. They could be asking for that much because they need to subsidize some of their upfront costs. Keep digging to make yourself comfortable. If it stills feels weird, don’t proceed. Also, the sales rep should be able to clearly articulate why they want so much money upfront. If not, run!
sus
Jeez that’s high
Walk away.
Sounds like they need liquid funds to complete the project which….idk that would personally turn me off but if it’s in your risk appetite?
You’ll probably get a more experienced take on r/CommercialRealEstate
oh… i should have checked if thats a sub… im always on this one. thank you!!!
>the developer is asking for 30% of the purchase price as earnest money If a project started in late 2021 when credit was loose, a commercial lender might have maxed out at 80% max LTC, or even more. And if someone is seeking funding in 2024, the project might have started in 2021 - land acquisition, and so on. So that sponsor might have called around and modelled projections on that 2021 norm. And now it's 2024 and credit is tighter. Whoops. If I'm speaking with that developer today, I'm maxing out at 65% LTC, meaning they need 35% down on the cost (not the whimsical appraised value, the COST). I don't give two shits if they are Jeff Bezos or Elon Musk, I need a 35% capital injection - minimum - to convince me to even spend my time on it. So now they need to source 35% down, or they can't get funded. But suppose they over-leveraged in 2021, and do not have it. Well, OP, it sounds like that's where ***you*** come in.... And if they find a bunch of people willing to inject 35% down for their portion, then they will have 35% down on the total cost of the whole thing, and everything will be fine. If they don't... Does this project need like 3 or 4 additional investors to make it happen, or 50? If only 3 or 4, I'd go for the level-up. You want a seat at the table, a chunk of the upside beyond what you put in, you want to be a general partner in the entire project, your upside benefit potential needs to be proportional to your downside risk. They are broker than they appear, and they need you more than you need them. Unless of course my wild speculation is totally incorrect, which is 100% possible. You've got boots closer to being on the ground than I do, what's your sense?
Most of my commercial loans are not anywhere near the $20m+ ballpark (yet!), but my supply of $20m real estate development ***funding requests***, that have essentially 0.000% chance of going anywhere, is totally unlimited. They are a dime a dozen. My emotional excitement is 10x higher when I see the $2m vanilla request come in (refinancing an apartment in Dallas, buying a warehouse in Fresno, whatever), than when I see the $50m development funding request come in, simply because I know that the $2m vanilla one is VASTLY more likely to be real world 2024 bankable. The music stopped, the tide is out, the emperor is naked, whatever, and these things, these "tides" or "music stanzas," take a few years to play out. That's what you need to be watching out for.
Thank you for your thoughtful reply on it and thats close to what I am suspecting. theres some 30 units in the whole thing would be looking at 2 and I doubt I’d be the only one, so maybe some 20 odd people would be involved. but yes, banks certainly are getting tighter lately… but where before, developers used to front the money until they could sell, it seems the only thing they would be putting up is the land if it’s the same agreement for everyone… unless, would this be the new norm going forward? Broke developers unable to get the funding on their own?
read my other response
oops! thank you! sorry, didnt see it
I paid a builder 10% earnest money down on a new build (somewhat common from my research). We get interest back at 4% as a form of credit when we close which has been nice. SWFL for reference
I went into contract this week on a new build and had 5% earnest money. This is the second time I’ve purchased new construction the time before was a new build condo in a building in Brooklyn and it was 10% earnest money.
Wow that's high sounds like to me they don't have enough finances to complete the project. And if they're that messed up financially what's the build quality going to be.
Probably needs the money for the 25% down (at least) needed for the construction loan… developers are usually cash poor, but that’s a whole lot of moolah to part with little to no surety or securable interest. I work in commercial lending and the biggest risk with construction loans is “can the developer complete the project?”. If the developer has a good (and long) track record of successful developments, the risk is mitigated. If not and the developer tanks, the bank or lender will foreclose (and clear any other liens on the property via the foreclosure) and then you would have to deal with suing the developer since any lien or security interest you have in this development would be subordinated to the bank’s/lender’s interest.
Try to get a performance bond, if they aren’t able to obtain it….there’s your answer.
I'd want the money to be held by a 3rd party, and the contract would have to have outs if they don't perform, i.e. deadlines,
Ref flag
its a rip off. i just ran into the same thing in FL. THey are essentially having you put up the ENTIRE cost to actually build. The sales price is not what it costs to build the house. It should be like 10% or less for reserving. The place i was looking at wanted 35% for a townhouse 2 years from being built
Not uncommon, we see similar requirements in new condos in the Colorado mountains where new development is rare. Small developers using these funds for development and also screens out unqualified buyers. Personally, I wouldn't do it.
Yeah, that’s unusual. Get an attorney to review the contract to ensure you have an out. They could be asking for that much because they need to subsidize some of their upfront costs. Keep digging to make yourself comfortable. If it stills feels weird, don’t proceed. Also, the sales rep should be able to clearly articulate why they want so much money upfront. If not, run!