At GROUNDFLOOR, we’re always looking for ways to better serve our investors and borrowers. That’s why we are thrilled to introduce a pilot of our new construction loan offerings.
This exciting pilot program is currently underway in the Raleigh, NC area with three loans now open for funding on our platform (be sure to log in or sign up here to view them), and they’ve already begun to generate some buzz.
We sat down with our Lending and Risk Management team to chat about why we decided to enter the new construction arena, how these loans are structured, and what value they bring to all of our customers.
Q: First things first. Why new construction loans?
A: New construction loans are a natural extension of our existing product line. For some time now, we have noticed a strong demand for loans to fund new construction projects in the residential real estate field. Whether it was from folks writing in to us on Facebook or calling our borrower team, it’s been made very clear that our audience is looking for this product.
And this makes sense from a financial standpoint as well: with the current state of the real estate market, profitable buying opportunities for fix and flip projects are becoming more and more limited. As a result, in order to maintain acceptable profit margins, renovators are turning to larger-scale renovation projects, and thus to higher price point exits. At some point, it simply makes more sense to start from scratch with a new construction.
Moreover, data from studies of housing supply and demand over the past few decades indicates that housing demand has outstripped housing supply. After lagging behind long-term averages through the recession in the late 2000s, housing supply is finally beginning to trend upwards again to meet demand. This indicates that a new construction loan program is timely, has ample runway, and has an excellent foundation for release.
Finally, the current market for these types of loans is wide open -- for the most part, builders have to turn to banks or larger non-bank lenders in order to receive loans for their new construction projects. True to our mission of creating a radically open, decentralized, and accessible capital market, we saw an opportunity for GROUNDFLOOR to step in and change the game.
Q: Why was North Carolina chosen to host the new construction loan pilot?
A: In short, because we had a connection there! We partnered with Professional Building Supply, a long-established and highly reputable building supply company, to identify builders who would be good candidates for our new construction loans. As one of the top five building supply vendors in the country with a vast network of experienced builders, they were a natural referral source for us, and they greatly facilitated our entrance into the market.
Additionally, the market conditions in the Raleigh area make it an ideal location for this project -- with a growing local economy, several prominent universities, and a burgeoning technology and job scene, Raleigh and its surrounding suburbs provide a perfect place to test out our new construction loan program.
Pending the successful completion of our pilot program, we will begin offering new construction loans in the southeast region first (specifically in Florida, North Carolina, and Georgia), with the intention of scaling the program into different states and regions in the future.
Q: How are these new construction loans structured?
A: Our new construction loans operate slightly differently than our renovation loans. Let’s begin with the borrowers.
Borrowers must have new construction experience to be eligible, and they are classified into tiers based upon their experience. The loans fund different percentages of the construction based upon the tier in which the borrower falls.
Once a loan is approved, the borrower is able to access the full amount of the loan in a series of draws. Interest accrues on the loan as it is used. As with our traditional fix-and-flip loans, the borrower may choose to defer monthly payments in favor of a balloon payment at the end of the loan’s life.
The investor has a slightly different experience as well. Rather than investing in the loan as a whole, investors can choose to invest in a specific draw of the new construction loan. Regardless of the draw you invest in, each investment will be in the first lien position and will share returns on a pari passu (pro rata) basis. All investments in a particular new construction loan will yield the same interest rate across all draws.
Q: What is the rate of return on investments in these new construction loans?
A: The annualized rate of return on the first three Grade B pilot loans is 8%.
Q: What is the advantage of investing in new construction loans?
A: As is the case with all loans we offer, rates are risk-adjusted based on the creditworthiness of the borrower and value of the collateral relative to the loan balance. In general, we have found that borrowers who take out a new construction loan are more experienced and have a greater financial capacity than a typical renovator. Furthermore, new construction overall is less risky than a renovation because it is essentially a clean slate -- often with renovation projects, you run into issues that you were not expecting, whereas with new construction, you are more aware of all contingencies because you are starting from the ground up.
Additionally, given fairly equivalent properties, the demand for new construction may exceed that for a renovated property. Accordingly, there may be more support for new construction in a falling or flat market. As a result, new constructions may be more able to adjust to changing market conditions.
With more entry points, a different market position and a new borrower segment, new construction loans provide a great way to help diversify your GROUNDFLOOR portfolio.