Private Lending Resources

How to Set Up a Budget So Your Lender Likes It

September 5, 2023

Are you looking for real estate investment strategies? Details to help you take your real estate investment project from the idea stage to reality?

RoseRock, an experienced private money lender for real estate in Texas, knows how many details go into getting a real estate venture off the ground.

Once you've secured the type of loan you need from a private money lender for commercial real estate (i.e., Land loan, land bridge loan, short-term loan, etc.), it's time to do your due diligence in private lending and create your construction budget.

From the perspective of a direct private lender in Texas, here are some ideas for creating a construction budget your lender will approve:

First, let's look at some budget-building details that are more common to all construction projects.

Construction Development Team Discussing Construction Plans

1. Schedule of Values/Budget

  • It's very important that your budget is organized and detailed! It's crucial that your budget is clear, readable, and displays knowledge and understanding of the process. In addition, pay attention to organizing it professionally.
  • Your direct lender will want to see the budget detailed by line item, preferably by labor and material costs per line item, especially for commercial projects.
  • List projected start and completion date to show the general timeline.
  • Evidence of a way to track estimated costs and actual costs. Your private lender needs to see clearly where the funds are being allocated.
  • If there is a GC (General Contractor) managing the project, they should provide a bid to show the total budget and/or be listed on the borrower's final budget, showing all soft and hard costs.

2. Your real estate private lender will prefer a budget on letterhead from a general contractor when available versus an informal list of improvements estimated by the borrower.

3. Appraisers will use this information to estimate the as-complete value of a project, so it is imperative they understand the full scope of the work to be completed and all costs associated with the improvements.

Man Calculating Construction Budget
Residential New Construction:

1. The budget should include a General Contractor Agreement between the general contractor and borrower to confirm the total construction costs and payment schedule, and it should be signed by both the borrower and the GC. Make sure to pay attention to details such as obtaining the correct signatures, as small things like this can potentially hold up a project.

2. Include a timeline showing important project milestones and the estimated time to complete each listed item.

3. If the construction project involves building multiple units, the budget should be broken down by unit. For every line item, you'll most likely need to include a completely separate budget.

4. If you're building multiple units that will be sold separately to repay the loan, it's important to show the projected sales timeline and repayment schedule until all units are sold.

Construction Development Team Reviewing Architect Blueprints
Commercial Projects:

1. Schedule of Values/Budget

  • Should be supported by a bid from a general contractor and/or subcontractors to support the costs to complete the project.
  • Ideally, the borrower received several bids and chose from several options to confirm the selected general contractor is competitive with market pricing.
  • Depending on the type of project, the budget for your private lender should include soft costs for pre-development items such as rezoning, architect drawings, engineering reports, permit fees, etc., as well as hard costs, which are all tangible construction costs related to a project.

2. Include a timeline showing important project milestones and the estimated time to complete each listed item.

  • Simple estimated start and end dates are okay. It's even better to show as a Gantt chart or something similar to visualize the time needed for each and how they overlap.
  • The timeline should show some buffer time before needing to refinance in a project if things take longer to complete than estimated. For example: if permit approvals are slow, etc. This is very important to know for short-term loans since the time to exit the loan is shorter than a traditional bank loan.
Notebook with Deadline Information

3. Contractor's Agreement between GC and borrower to confirm the bid price for the project, payment schedules and expectations, and holdbacks in case there are mistakes during the project. This should be signed by both the borrower and GC.

4. Site and/or Build Plans

  • Drafted by a licensed architect with the borrower's name and project specifics listed.
  • Include project design, schematics, elevations, etc.
  • Also should include permit sets if applicable.

5. Renderings

  • These are nice to have but not necessary to show the style and finish out of the final product.

6. Application and Certification for Payment from the general contractor after work starts should directly align with the budget from closing.

7. Proforma Invoice showing estimated revenue and timeline if multiple sources of revenue, with soft and hard costs for the budget matching the SOV/budget the lender receives.

While it might seem like there are a lot of details to include in your construction budget for your private real estate lender, all those details serve multiple purposes. The main goal for these details is to prove to your lender you've done your due diligence and also to serve as a guide to help the project go smoothly.

There are a lot of variables with a real estate construction project, but careful planning in advance will make a big difference in the project being completed on budget and on time.

© RoseRock