Feasibilities vs Budget Reviews
by Chris Wood
It’s been said before and we’ll say it again– construction lending carries unique ‘risks.’ In fact, no other word more aptly describes construction finance and the associated trials lenders may face.
Whether considering a new construction or renovation project, many variables are involved that can ultimately affect the project’s successful completion, including inadequate planning, delays, errors, or change orders. However, it’s easy to say the most important component of any construction project is its budget. Construction loans are complex and considered higher risk because the loan isn’t secured by an existing structure, so the need for an accurate budget is critical. Once the budget is set and the loan is funded, no do-overs are allowed without creating an entirely new loan because a credit decision is made on existing loan parameters. Analyzing and ensuring a correct budget the first time is imperative to minimize lender risk and protect investments.
To create the budget, typically a Developer or General Contractor estimates the amount needed to complete the project, and lenders study the value of a proposed project compared to the requested amount of the loan. Using an independent review to verify the proposed budget helps proactively preventing costly mistakes and ensures everyone is on the same financial page.
At Trinity we offer two pre-closing tools to help lenders proactively identify any red flags of the submitted budget before the formal closing of the loan. A residential feasibility is a comprehensive analysis on the achievability of the renovation budget for a planned residential renovated property, and a residential budget review is similarly used for a new construction project. While the products are similar, they clearly assess different property types.
See a comparison of each below:
Smart lenders don’t simply measure risk for the sake of it. They create plans and strategies to build successful portfolios while reducing the impact of risk on their business. For lenders, a feasibility analysis (for renovations) or a budget review (for new construction) protects interests and projected funds, giving them the confidence in the project viability and investment value.