Beyond the Blueprint: The Construction Loan Playbook

[00:00:00.000] - Chris Griffin
Welcome to Back to your Roots, a podcast that provides insight into all things farming, financing, and farm life, guiding you Back to your Roots. Thanks for joining us today on Back to your Roots. I'm your host, Chris Griffin. On today's episode, we've got Daniel Elrod, who's a mortgage loan originator over in our Cleveland office in East Tennessee. He does a great job. He had a phenomenal year last year, and he is super knowledgeable. Before coming to River Valley, he's got some great experience on the home side and hopefully get some great insight today. Daniel, just tell us a little bit about yourself and your background and your time here at River Valley.

[00:00:46.200] - Daniel Elrod
Chris. I'm Daniel Elrod here at the Cleveland, Tennessee office, which we are a little bit north of Chattanooga. Been with River Valley for right around three years now. I've been in the financial industry for a little over 15. My background is, of course, customer service and consumer lending, but been a Cleveland native and ready to talk I got some construction loans with you.

[00:01:16.300] - Chris Griffin
Well, Shea, who's our producer here on the podcast along with Chris Rogers, just slid me a note that says you were just recognized as best of the best lenders in that area. I had no idea.

[00:01:28.120] - Daniel Elrod
It's correct.

[00:01:29.180] - Chris Griffin
Yeah. Man, that That's big time, buddy.

[00:01:32.800] - Daniel Elrod
The readers of the Cleveland Daily banner, the local newspaper here in Cleveland, I was voted best of the best mortgage lender this year.

[00:01:43.980] - Chris Griffin
Well I know, I joke, but I can definitely see why you won that. I do some home loans here as well as some ag and working along with Daniel. Daniel is really knowledgeable. He's great with customers, so I can absolutely see why you won it and why you're considered that. So congrats on that. I had no idea. That's pretty awesome, man.

[00:02:03.820] - Daniel Elrod
I appreciate that. Thanks.

[00:02:06.740] - Chris Griffin
One of the first questions I'm going to ask you, and I know we do a lot of them here, and honestly, even from where I came from, the previous bank and lender I was at, we didn't do any construction loans. I basically just solely did refinances and purchases. Since I've been here, I feel like every loan I do is a construction loan. But a lot of it's because we have some great products here and people continue to refer us. When you're doing a construction, can you talk about the products that we offer and some of the steps that when somebody's wanting to get pre-qualified for that or starting that construction process, what they need to do.

[00:02:38.240] - Daniel Elrod
Whenever I'm talking with somebody about the construction loan process, I always tell them it's a little different than if you're going out to purchase something. You want to go ahead and have some stuff in line as far as with your build, such as your plans, your cost estimates, your contractor, especially, because sometimes it might be a few months before they can even start a build and just go from there with it. Because if you're looking at construction, we're looking at what it's going to cost to build that particular home versus how you're pre-approved for $300,000 and go look for something to buy. So it is a little bit different than purchasing something.

[00:03:23.320] - Chris Griffin
Well, and I know sometimes I get people that come in and they almost put the cart before the horse a little bit. They come in, they start meeting with a contractor sometimes, but a lot of times they need to sit down with you and just look at preliminary numbers on what they can even afford. Then that gives them a pretty good idea of, okay, well, this is about how much I could build. Then at that point, starting to meet with the contractor, seeing what their wants and needs are and what type of house they want to build, and then they get the ball rolling from there. Would you agree?

[00:03:51.560] - Daniel Elrod
Yeah, I agree with that, too.

[00:03:52.760] - Chris Griffin
Yeah, because it is hard. Sometimes they come in here and it's like, Well, I've already met with a contractor for a $500,000 building. They can only a four, 400. They're like well, heck, that's no good. Definitely meet with Daniel and sit down with him. I think the other question I get and want you to answer this, what is not covered in a typical construction loan?

[00:04:13.880] - Daniel Elrod
Things like furniture. I guess anything that's not considered an improvement to the property. So like your furniture or anything of that nature bedroom suits that would not be covered in a construction home.

[00:04:33.820] - Chris Griffin
Now, a pool that would be part of that property and be considered some type of improvement or even landscaping, which obviously would increase the value of that property, that is included, correct? Or could be included if you wanted it to?

[00:04:46.390] - Daniel Elrod
Correct.

[00:04:47.160] - Chris Griffin
Okay. Well, that's something I get on.

[00:04:48.920] - Daniel Elrod
But you just got to make sure you have those cost estimates, though.

[00:04:52.660] - Chris Griffin
I think sometimes people come in. I know when I've sat down with people and I know you dealt with the same thing is they start going through it and you start asking them, Well, what about this? What about that? How are you making the driveway? Are you keeping the driveway gravel? Are you doing concrete? Are you doing asphalt? And those are things they really haven't thought about. They're like, oh, I didn't really think about that. Because obviously, that's going to change the value of that property a lot, too, when that appraiser goes and does that appraisal. If it's concrete or gravel, that could really change the value. That's good to know because honestly, I haven't had anybody ask about furniture yet, Daniel, but I'm sure I will. Actually, I learned something on that today, even though I've been doing this for three years.

[00:05:34.540] - Daniel Elrod
I've had some people, hey, no, that does not work.

[00:05:39.640] - Chris Griffin
Can I add an automobile purchase into that? Looking at our construction loans and the different options, what is the certain percentage? I guess the max loan of value that we can do on them. Kinda, when you explain that, explain the two different type of construction loans that we offer and some of the benefits and drawbacks of both.

[00:06:00.680] - Daniel Elrod
Depending on what you're wanting to do, if you're wanting to use a general contractor where it's a turnkey bid, we could look at financing a little bit more versus if you were doing it as a self-build where you're a self-contractor. With a turnkey bid with a general contractor, of course, we go up to 85% loan to value, which that would be the cost to construct plus the value of the property that you're building on. If you're considering doing a self-build, we can offer the same products and stuff, but the loan to value goes down to 80% of the cost to construct plus the value of the land at that point. The two different products that we do offer, they're both in-house products. Like you said, they have pros and cons to both of them as far as... Well, not pros and cons, but they're different, I guess, layouts as far as the products go. We have the 30-year fully dispersed construction loan. The 30-year, fully dispersed construction, it's a 30-year mortgage right out the gate. You don't have to worry about refinancing later on. It's a one-time close. It's a fixed rate, and it also qualifies for the note modifications that we offer on any of our in-house products.

[00:07:23.500] - Daniel Elrod
If interest rates start dropping, we reach out to you and say, hey, sign a few pieces of paper. We get interest rate lowered for you, which saves you money every month. The other option is like your traditional construction loan. It's a 12-month interest only. It is a variable rate, but you're only going to be responsible for the interest on the draws that are being made. That gives you a little bit of flexibility as far as payment amounts because you're just paying interest only during the build. But you would have two closings because you would have a closing on the construction and then one on the permanent financing side. The benefit to that is the payment structure because they're not going to be as much each month until towards the end of the build. But then you also run the risk of rates being higher whenever you have to go for the permanent financing.

[00:08:16.400] - Chris Griffin
Well, I think it's always interesting because that fully dispersed, I mean, that's probably, I don't know what your portfolio has looked like since you've been here, but let's say the 20 or so construction loans I've done, I think three of them have been a variable rate. One of them, they did the variable construction on it. Within five months, they decided to refinance into the fully dispersed because they thought they should have done it that way. That was one where they should have done it fully dispersed to begin with. The other guy, he's basically selling his house and paying it down and almost paying it off. That's the only reason he's doing the variable route. Most of the time, that fully dispersed, there is no one that I know, no other lender, especially in Western Kentucky. I'm not sure about East Tennessee, but that offer is something similar to fully dispersed.

[00:09:02.220] - Daniel Elrod
It is a unique product, and it's a great product. I'm in the same boat as you as far as the loans that I've done, as far as the variable rate, it's been people that are in the process of selling their current home. They're like, well, I don't want a huge payment, but once I sell my current home, I'm going to pay off that line of credit. That's really the only variable rate ones I've done as well. It's like whenever they're in the process of selling one to pay off what they're building.

[00:09:32.200] - Chris Griffin
I always joke because you know you have a unique product when you've done two loans for people that work at other banks in Western Kentucky because they don't have that product. So that may be a feel pretty good when they call it. I was like, I'll keep this on the down low so nobody gets mad. As far as... You talked about the self-build, and I know that's something that's also unique here. If you're going to be your own general contractor or if you actually are going to self-build that property yourself, explain what does that mean exactly. You've gone in a little bit about the loan of value, but what are some things that if we went that route, what are some additional things that we need from the borrower besides just a normal bid from a general contractor?

[00:10:09.460] - Daniel Elrod
Are you talking about on the self-build?

[00:10:11.560] - Chris Griffin
Yeah, either one. If you're G-Cing your own project, I know we typically give those borrowers a self-build type worksheet where we get the bids from all the subs that they're going to use, or if it's a true self-build, similar situation. But typically, if a general contractor, and for the listeners, if you're just using a general contractor, We'll be really, We'll just get that full bid, and that's all we need. If you're going to GC your own project or self-build, there's some additional items that we need just to justify where you're getting those numbers from, correct?

[00:10:40.260] - Daniel Elrod
Because you would have to show us quotes from other contractors for your sheetrock, your insulation, your flooring, just phases of the build. You'd have to show, hey, this is what it's going to cost to do these projects. That's how we justify, like you're saying, what are costs of construction That's going to be on the self-built. It's one of those things that we do have to have so we can have those figures.

[00:11:09.700] - Chris Griffin
Well, I know sometimes people always ask me and they're like, what does that mean exactly? Even, for example, appliances that you're going to include in your build. I've had people go to lowe's.com and price out all their appliances, all their light fixtures, plumbing fixtures, all that, all the way to the cart. Not pay for them, print that off, and at least that shows me, okay, these numbers are pretty accurate. They're at least getting them from somewhere instead of just pulling them out thin air. That's the biggest thing, is just making sure you have something to show it. A lot of your big ticket items, and you can jump in on this, I know the big-ticket items, we've always been told, like your HVAC, things like that. If you're a GC in your own project, those are the type of items that will need a bid from some type of subcontractor because typically you're not going to have the experience to put those type of items in normally. That's great insight there. I know another question that we get a lot, and this has changed a lot with lending, and I know with your past experience and myself, too, with where we worked before, I know they weren't very popular then, but I feel like now there's enough comps out there that they're okay, but we're still a lot more flexible than I'll say a lot of places are.

[00:12:21.800] - Chris Griffin
But as far as bardominimums go and pole barn type structures that are going to be used as houses, can you discuss, does the loan of value change on those from that 85% or 80%? Then are there any additional specifications that we require?

[00:12:36.340] - Daniel Elrod
On a barndominimum, if it is a stick-built wood-built barndominimum, and we can find the comps whenever we order the appraisal and stuff. We have to have at least two comps with metal siding if they're using metal signing. Then we can treat it like a traditional built home, so we could go up to 85% loan to value. But now, like you were saying, though, earlier, if it's a shop house or just a pole barn type setup, we can go up to 75% as far as the build on that.

[00:13:12.120] - Chris Griffin
Okay. You're talking about that a little bit, the two metal comps. I think that's what used to happen in the past. There wasn't enough good comps. I know in our area, I'm not sure in East Tennessee, but I know here, there's a lot more-

[00:13:26.260] - Daniel Elrod
They are coming more common.

[00:13:27.840] - Chris Griffin
Oh, yeah, they're a lot more common. It's It's pretty easy for the appraiser to find some really solid comps for co-born or metal-sided structures now. That's changed a lot, I'd say, over the last probably 5-7 years for sure.

[00:13:40.780] - Daniel Elrod
Yes, and it has. It's picked up a lot here because we're actually getting a lot more contractors in the area that are building these things. They're coming up hot and heavy here.

[00:13:55.920] - Chris Griffin
Well, and I get a lot of them. It does save the borrower a lot money, where if... I've had a few people where one of the borrowers was actually in contracting, for example, may work as for a contractor or may not actually be a general contractor. They'll get the shell put up by a third party sub, and then They'll finish out the inside. Once you get that shell put up, it's amazing how much with them finishing the inside, how much it saves them. A lot of times, they end up for how much it's saving on that appraiser. A lot of times, it ends up appraising for a little bit more than what they actually can build for it because they get good comps and it costs that much now. It's definitely been nice here to be able to do some unique homes like that and have that opportunity for the borrowers. I know one thing we get a lot, and you were talking about the equity in your land. I won't go too much in detail because I want you to explain it. But basically, if you own a piece of land that's paid off, we can use that equity where you could not have to bring a down payment to closing, correct?

[00:14:58.200] - Chris Griffin
Because we're going to use that equity, combine the value of the construction, the land, and as long as that LTV is acceptable, that loan of value, then you could basically close that loan without a down payment, correct?

[00:15:08.600] - Daniel Elrod
You are correct. As far as that goes, you hit around on the head there. As far as If you own the property, say, free and clear, or even if you have it financed, you could still have equity in the land. But we can use the equity that you do have in the property that you're building on. We could use it towards that the 15% down payment requirement or the 20% down payment requirement. But if you have a current mortgage or a lien against the property that you're building on, we just roll it into the construction loan and we have to pay that off first because we would have to have just the one lien on the property at that point.

[00:15:48.340] - Chris Griffin
Now, one thing I will say about that, and I don't know if you've dealt with this, but if the other mortgage that's current on that land is with another lender, then yes, we would combine them. But I've had a few times recently where Some of these people bought some ag real estate back in 2021. Their rates like 4. 5%, which is amazing. They don't want to lose that. We have the opportunity to subordinate that. As long as we're taking a position behind ourselves, it doesn't matter. I've had a few lately where we'll put that construction loan in a first position. We'll allow them to keep that ag real estate at, let's say, 4. 5% or 4% and subordinate it, and the credit's okay with that. It's obviously a benefit to our borrowers when they do the construction with us because we're not going to make them refinance remaining balance, and they can pay a lower interest rate on at least a smaller portion of that real estate. I learned that about a year ago, and it's been, been pretty helpful. We talked about... next question, basically, you answer, we're talking about using the down payment, using that as that land as that down payment to get that loan of value where it needed to be.

[00:16:51.640] - Chris Griffin
But when you're trying to build a house and they're going to sell their existing home, what's the best route typically have you seen for a borrower to handle that? I know a lot of times it's hard for them to continue to pay full principal and interest on the fully dispersed and their current home. But can you explain? I know I try to tell borrowers this because I think it helps make their decision, but they will earn some interest on that construction account. They will gain some interest on that balance that we can use to help them make their payments, correct? Towards their payments.

[00:17:24.380] - Daniel Elrod
Yes.

[00:17:24.740] - Daniel Elrod
Because on the fully dispersed construction, it sits in the escrow account. You are correct. On average, that escrow account has been paying a pretty good interest rate as far as while the money is sitting there. But it helps out because the interest that it's earning, we're just applying it back to the loan to help make that payment.

[00:17:48.700] - Chris Griffin
Well, and the reason I bring that up is I've got one. It's going to be a pretty decent, pretty sizable loan amount. I think I may have them convinced to do it simply because they're going to earn that, whatever that interest, let's say four, four and a half % on that large construction amount. I'm like, You're going to be able to make... It's going to gain a decent amount of money and interest on there. So hopefully I've got them switched where they don't have to refinance it. So, we'll see. Time will tell. So, I know, I think the biggest thing, and this is what I've always run into since I've been here, and it's gotten better, but so many people, they think of River Valley Ag, especially the realtors here, and they automatically think of ag. So, they think, well, you can only do a construction loan or any type of home purchase. If you have some type of ag background, it has to be on some type of acreage, different things like that. Can you explain to the listeners what that would look like and who is eligible to do a home loan with us?

[00:18:46.420] - Daniel Elrod
As far as eligibility to be a member or a borrower of River Valley AgCredit, what we primarily want to deal with is rural America. If you live in the county, we don't have an acreage cap, a minimum or anything like that as far as what you can build on or what qualifies you to be a member with us. But now, as far as if you want to build something in the city, we would have to qualify you as some farmer or have farming income or schedule F income. But as far as qualification, really just in the county limits of the area that you're living in, because we consider that rural America. There's really no thing saying, hey, you have to be a farmer to do something with River Valley AgCredit. Even though we are part of the ag credit system and stuff, it's not a disqualification or a qualification if you are a farmer not to do something with us?

[00:19:50.040] - Chris Griffin
My typical spiel is always to the realtors, I say, I feel like we're able to do anything that any other home lenders can do. We can do secondary market, different things like that. We can do city limits on a secondary market. We can do construction, all that. But there are some things that typically we can't, that other lenders can't do. If you're building a house on 60 acres, a lot of lenders will make you survey that house in a smaller track off because they just feel like the land carries too much of that value, which I don't understand because the value is still... I've never understood that, but those are things they don't have to worry about here, which is obviously a positive. The one thing I've always laughed about since I've been here is everybody Everybody's pretty familiar with Fannie Mae, Freddie Mac. There's something called Farmer Mac, and there's actually a dwelling limit on the ag side for homes. What is that dwelling limit? Do you remember?

[00:20:41.200] - Daniel Elrod
I know they raised it this year. It was like 479 or 4.

[00:20:44.660] - Chris Griffin
Yeah, something like that.

[00:20:45.980] - Daniel Elrod
489, somewhere around that range. It's in the upper fours. But yeah, there is a dwelling limit.

[00:20:53.880] - Chris Griffin
Now, is it true that, in the way I've always been told, is if you own 15 or more acres or If you have some type of schedule F income, it doesn't matter how much it is that that dwelling limit is no longer applicable to that loan, then if you needed to build a $700,000 house, you could.

[00:21:11.220] - Daniel Elrod
Because you have the potential of generating ag income, correct?

[00:21:15.760] - Chris Griffin
Yes. Okay. Well, a lot of times that's helpful because I do feel like a lot of loans that we get, especially construction, typically it is people building on 15, 20 acres a lot of times. That's either been gifted to them by their family or they it for a while or whatever, and it's going to be their final home. A lot of times, it's their forever home. But we typically try to make sure we, and I know you do a good job, just try to making sure we tell the borrowers that on the front-end and make sure it doesn't get out of whack on the construction side.

[00:21:50.420] - Daniel Elrod
For some reason, the dwelling limit is like the 490 range as far as what we can do. Even if they don't have the 15 acres and stuff, and they are planning on farming because sometimes people, they can farm on 10 acres, 5 acres if they can. If they show that income, and of course, we'll have to show a farming plan as well to show them what they're planning on doing. There's a good possibility that we could still do the loan if they don't have that 15 acres or the schedule left because they plan on doing something with that land.

[00:22:31.760] - Chris Griffin
Yeah, because I think I had one time that was 13 acres, and they were actually... She was going to do a little hobby farm and do some stuff at the farmer's market and stuff like that. We were able to do a farm plan. Typically, we don't have to do that very often, but there are times where, like you said, if it's super close like that, then a lot of times they're going to do something on that land a lot of times. So that's always an option there for the borrower. I think as we wrap up a little bit, Daniel, and I appreciate you taking the time because I know you're super busy. He's getting ready to go on vacation next week. So, he's trying to get everything tied up before he leaves. So, I appreciate you taking the time. But what are just some words? I know you've been here for a long time, okay? And I know you've seen, as far as interest rates, you've seen good, bad, ugly. You've probably had deals that have gone terrible and great. You've seen some mistakes that were made by borrowers. What's some just quick words of advice just for people wanting to build?

[00:23:28.920] - Chris Griffin
As far as worried about interest rates or different things like that, what could you say just to give them some nuggets to think about?

[00:23:37.160] - Daniel Elrod
Words of advice that I could give on current market rates and everything. Is you can always date the rate, but marry the property. Especially with River Valley, because we do offer note modifications. I mean, times are different right now as far as with rates and how things are. But we do have that capability in the long scheme of things of saving borrowers' money by not having to refinance whenever rates do hopefully drop in the future. There's not a crystal ball saying what's going to happen, but the potential of it being there to drop and lower the interest rates is a great thing because that save you thousands of dollars right there whenever rates do start fall and you don't have to pay closing costs, refinancing fees and stuff. That's my quote and termed as, marry the property, but you can always date that rate because you can refinance it. Or like I said with us, note modifications.

[00:24:46.100] - Chris Griffin
Well, that's a great way to end it because I just don't think people realize not only is the fully dispersed construction loan really unique here, nobody else does rate modifications in our area. You tell people that and you explain it. Sometimes they're like, Well, what's the catch? There's no catch. It's free. We can do it once every 90 days if you're eligible. To have that opportunity, it's a huge benefit to the borrower. They can do that as many times. If rates dropped every 90 days for 30 years, which they're not, but if they did, they could keep doing it all the way till the very end. When you tell people that, a lot of times it makes their decision so much easier to go with us, but then also to decide on what product that they're going to use for their construction.

[00:25:33.160] - Daniel Elrod
Because it's a fixed rate. I mean, it's not variable, it's not an adjustable rate, it's not an arm. I mean, it is a fixed rate. If we lower it and rates go up, you're still at that lower rate. I mean, it's not going to adjust back up. I mean, it's a pretty slick deal as far as that goes.

[00:25:50.900] - Chris Griffin
The other thing you're talking about, marrying the property, dating the rate. It's funny because I feel like when rates were higher last year and they really weren't starting to come down until later last year. I had so many people for about an eight-month stretch call in wanting to do construction loans. It's almost like they had waited so long that they got tired of waiting, basically. Honestly, if they had gone ahead and done it a year prior when rates were at X, they waited too long and the rates were actually probably, let's say, a half a % higher. But they finally were like, most of the time, the wife was like, I'm tired of waiting. We're doing this and we're just going to do it. It is interesting you say that because it is funny for how high rates have been, and obviously, they're coming down, and hopefully, we'll come down through the remainder of this year. But how many people decided to do it when rates were at their peak, it's just interesting. But anyway, Daniel, I really appreciate you taking the time. I've always had a lot of respect for you.

[00:26:50.720] - Chris Griffin
I know you've got a ton of knowledge. You're phenomenal with customers. You do a great job on loans. Again, congrats on getting best of the best out there in Cleveland. You absolutely deserved it, and we enjoyed having you today.

[00:27:04.890] - Daniel Elrod
I do appreciate it, Chris, and I appreciate the time for you. Let me just speak to our listeners and borrowers, and hopefully, we have some potentials for some new home stuff coming to us. I appreciate it.

[00:27:18.020] - Chris Griffin
If you're in East Tennessee, call our boy Daniel Elrod. Anyway, thanks for joining us today on Back to your Roots, and we'll see you next time. Thanks for tuning in to Back to your Roots, where we dish the dirt on all things ag. Be sure to never miss an episode by following and subscribing. While there, leave us a review about what you want to hear next. Stay in the know between episodes by following us on Facebook, Instagram, Twitter, LinkedIn, and TikTok. For more resources, go to our website at rivervalleyagcredit.com.