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CAN I AFFORD TO BUILD A HOUSE | Construction Mortgage Secrets Revealed - YouTube
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- You wanna build a house and you have
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no idea how you're gonna pay for it.
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In this video we're gonna talk about
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the many ways that you can
finance a new home build.
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(rockin' synthesizer music)
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Dan Nagy here, Founder
of Emmett Leo Homes,
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a luxury home-building
company and your insider into
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the world of building and
designing luxury homes.
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Quick reminder, if you haven't already,
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make sure to head over
to EmmettLeoHomes.com
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and download our free
planning guide which gives you
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tips about what you need to
plan when building a home
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and some of our professional design
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boards from our favorite projects.
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So some of my videos have
been blowing up lately,
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and I'm getting a lot of comments about
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different facets of the
home-building process.
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One of the questions that
kept coming up was about
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how to finance a new home build,
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but that's a loaded question because there
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are many different ways
to do that depending on
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who you are, what you have,
and what you wanna do.
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The first perspective I'm gonna go over is
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from the point of view
of someone wanting to buy
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a new home build or build
with a home builder.
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The second one is from the
point of view of someone
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that wants to general
contract their own home,
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and the third is from a real estate
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investor point or that of a spec builder.
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So let's dive right in.
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The most well-known way
to finance a build is
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through a construction mortgage.
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Now, construction mortgages
are broken down into two types,
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the draw mortgage, which is
generally used if you are
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building a home from scratch
by yourself or with a builder,
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and the completion mortgage,
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which is used when you are buying a home
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from a builder which is almost done
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or about two months away from completion.
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Most of the big banks are
quite similar in their approach
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to the construction
mortgage where they require
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a 20 to 25% down payment
on the cost of the home
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and proof that you own the land.
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The money is advanced in
draws during construction
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with a schedule that
shows you how far the home
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has to be built in order
to access the money.
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In order to release a draw most banks
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send out an appraiser to make sure
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that the work has been done as required.
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Here in Canada you can simply look up the
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Appraisal Institute of
Canada draw guidelines
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to get a better idea
of what the percentage
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of completion on your home looks like.
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Normally, I've found that most
banks wanna stick to about
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four draws, one at around
16%, 35, 65, and 100%.
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You'll get many different variations
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of this from different lenders,
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but know that it's usually
around three to four draws.
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Once the construction is
complete the draw mortgage
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changes over to a normal mortgage
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or ends with a new one when you pay
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the existing construction mortgage off.
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A very important point to
consider is that conventional
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lenders will not combine
your draw mortgage
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with the purchase of the vacant land.
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You'll have to buy the
land separately or get a
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completely separate loan in
order to purchase the land.
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And be warned, you'll
probably need a larger
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down payment than for a house at
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around 30 to 35% of the cost of the land.
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Most banks don't like bare land,
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and some won't even finance them.
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You can buy the land outright,
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use lines of credits or HELOC,
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also known as a home
equity line of credit,
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or, and here's a pro investor tip,
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negotiate with the seller of
the land to pay them after
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you've built and then refinanced
the new home on their land.
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Tricky, but it can be done.
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A completion mortgage, on the other hand,
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is the second type of
construction mortgage
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and is used when you are buying a complete
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or almost complete house
built by a home builder.
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This is really just like
setting up a normal mortgage,
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however, it may have different terms
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if the home has not
completed construction.
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Okay, now let's move
on to financing a build
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if you're wanting to be your own GC,
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or general contractor,
or build your own house.
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If you're building your
own place or you just need
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structured place to
record ideas for planning,
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make sure to check out EmmettLeoHomes.com
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to get your free building planner guide
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as well as our design boards
from our favorite projects.
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Now, I've been getting lots
of feedback about people
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wanting to build their own
home without a builder,
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and that's awesome and completely doable,
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but there are some things you need to be
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aware of when financing a self-built.
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Most banks require that you
build with a licensed builder,
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which is registered with a
new home warranty program
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or a certified general contractor
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that also carries similar insurance.
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If you are acting as your
own general contractor
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you might have to pay much higher premiums
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or down payments as the
bank sees this as more
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of a risk that the home
will not be built properly
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or have major deficiencies that they'll
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have to deal with if
they have to foreclose.
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If you're building it yourself,
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there are different
financing products available
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like the Self-Built Program from Genworth,
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which is not one of the five big banks,
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but a dedicated mortgage insurance company
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and may be able to work with you if you
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don't qualify for a typical
construction mortgage.
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I'm not affiliated with Genworth at all
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and only included the link for you
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as value and to have a starting point.
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I'll put it in the comments section
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so you have a good place to start.
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If you're in the States,
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make sure to look for a
similar product where you are.
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Also, credit unions are generally smaller
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and willing to look at
smaller deals and base their
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decisions on the person and not just
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the numbers presented or of the build.
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Another way, if you are
building it yourself,
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falls into the same
category as a real estate
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investor building a home
on spec or a home builder
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trying to finance his next project.
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This means that they are building
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it to sell and to make money.
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I originally started my career
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in building and flipping spec homes.
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I still do luxury residential
spec projects right now.
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I do these projects without an end buyer
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and plan to make a profit
after I am done building.
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The way that I structure
most of my big deals
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is a combination of raising
capital from private investors,
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from private lenders, and
going through professional
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mortgage brokers that
have great connections
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with people looking to set
up second or third mortgages.
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If you're thinking about raising capital,
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make sure to learn how first.
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I believe in shrinking timeframes
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by hiring the right people to teach me,
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mainly because I'm impatient
and I wanna learn as much
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as I can as quickly as
possible, so I pay people.
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I pay coaches, mentors,
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I've taken courses and
learned from some of the best.
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If you are in the same
mindset, then that's great.
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If not, that's cool too,
just be ready for a long
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and arduous journey of not
knowing where the landmines
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are in raising capital
and wasting a lot of time
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trying to figure out what
works and what doesn't.
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Hit me up in the comments if you want some
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direction about the
coaching that I've taken.
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The general rule of
thumb for raising capital
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is to find someone with money,
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offer them either a
negotiated fixed return
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between eight and 12% on their money,
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or cut them in as an equity
partner on the profits.
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If you are able to find a private lender
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that is willing to lend on
ARV, or after-repair value,
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then it's your job to make
sure that you create a
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successful track record for
them to see and base it off of.
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Haven't done any deals or built before?
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That's cool.
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Show them the learning that you are doing,
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the deals that you have analyzed,
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and exactly how you are going to build
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the spec home without wasting money,
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going over budget, or going over time.
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There are a bunch of ways
to finance a new home
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build regardless of your position.
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If you have any questions,
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make sure to ask them in the comments
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and I might make a video answering your
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exact question if I
can't answer it quickly.
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Thanks for watching.
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(rockin' synthesizer music)
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