How to Finance a Model Home

For builders, a model home can be a valuable selling tool for future home building projects. As a result, builders are often encouraged to construct fully equipped model homes that will allow potential buyers to visualize their home. Many lenders actually require builders to provide model homes, particularly in newly developed neighborhoods. Acquiring the financing for model homes, however, is not necessarily as simple as getting the bank's approval. But a few simple steps will provide builders with the information they need to get the financing they need to construct their model home.

Difficulty: Moderately Challenging

Instructions

1. Make a business plan. This plan should include as much information as possible regarding the model home that you want to build. Know the details so that you can present the lenders with all of the information that they need to finance your loan.

2. Contact various lenders. Not every bank will provide the financing for a builder who is planning to develop a model home, but more and more banks are expanding their financial services to include this option. Be sure to contact a number of lenders to be sure that you are getting the best financing available for your situation.

3. Ask your finance company about the required initial investment. Lenders may ask builders to invest anywhere from 25 to 75 percent of the cost, so be sure to know what your investment will be up front. Many builders work with investors who fund their buildings projects, so your investors will want to know what their cost will be.

4. Present the lender with as much information as possible to show that you are reducing risk for the construction of your model home. In any economy, lenders are conscious of risk, and building a model home is usually considered a speculation project. Focus on elements such as the time in which you plan to complete the project, the materials being used and the plans to keep overall costs down.

5. Find out about the number of draws or disbursements that your lender provides for your loan. The disbursement is essentially the advance on the loan that is provided for the builder at specified intervals. The number of disbursements for a model home will likely be less than for a conventional construction project, but it will still vary by lender. This is the money that will be needed for construction, so you should be sure to find out how often you will be receiving it.

Tips & Warnings

• Ask your lending agency if they provide representatives to sit in the model home during walk-through hours to talk with potential buyers. Some banks will offer this service, so don't be afraid to find out.

References

• Building Systems Magazine