By Francie Healy
Financing your renovation can be one of the biggest steps in your journey to a bright new space.
In many cases financing works well through a mortgage company, particularly with “projects that don’t fit with bank financing,” says Andrea Haines, Eastern Ontario Regional Manager for Magenta Investments.
But, like everything else about your project, financing means you’ll need to do your homework.
One of the first things Andrea urges people to do is to find a good contractor.
“We sometimes get called in because a bank construction loan has gone off the rails,” she says. “The project has stalled or the renovator doesn’t have the funds to complete the project, or the project has been taken over by someone else.”
One way to avoid a project “going off the rails” is to find out if your contractor can handle the scope of your renovation. Will the job be done well, and will it be done on time? If a renovation company is on shaky ground financially – if, for instance, says Andrea, it doesn’t pay its suppliers – there can be unexpected delays. And delays cost money.
She advises looking for a good renovator listed with the Greater Ottawa Home Builders Association (www.gohba.ca) and going to the Ottawa Construction Association web site (www.oca.ca) to get as much information as you can before deciding on the one who will do the job for you. More than that, she says, check references. Talk to people.
“That’s what we do,” she says. Before they commit to financing, her company also needs to know there will be reputable renovation companies involved.
The next thing to do is to make sure your lender thoroughly understands construction loans.
“It takes a long time to understand,” she says, “because every deal is different. Every construction project is its own ball of wax.”
After 18 years in the construction loan business, Andrea knows what she’s talking about.
She explains that normally banks will lend money when a project is at 33 per cent completion, again at 66 per cent, and finally when it is about 90 per cent completed.
“But if something happens in between and the bank can’t give you any more money to keep going,” she says, “niche construction lenders have the flexibility to get you to the next stage.”
And these specialized lenders don’t have to follow some of the same rules as the banks, she adds, so “we can go to a higher loan-to-value ratio.” That means money can flow more quickly, and the project can finish more quickly, too.
Rates are something to consider when choosing your lender, of course, but it’s not always about rate, says Andrea: “Does your lender understand the scope of the project?”
She adds it’s a good idea to get a couple of opinions from different lenders who understand construction. And then set up a meeting: get to know that lender, because your lender is as much a part of the project team as every other player.
And it’s got to be a strong team because it’s a long-term relationship.
“Some people think construction is like a purchase transaction,” she says. “But it can last several months, so you’d better know who you’re working with and trust them.”
Communication is the other critical point.
“If everyone’s on the same page,” she says, “from the borrower to the broker to the lender, if everything’s clear and transparent, those builds just fly. Construction that starts well ends well.”
Conversely, she adds, “If there’s miscommunication and confusion at the beginning, the build can be a nightmare.”
Your lender and your renovator should have the knowledge and experience to guide you to good choices when you’re considering whether the work will add value to your home. Often it does; sometimes it absolutely does not. Sometimes it depends on the neighbourhood. Both renovator and lender, if they’re worth their salt, know the neighborhood and what is marketable. Your lender knows this well, because they do equity lending, especially among self-employed people, and they’re constantly studying appraisals, current projects, and real estate values.
This is another area where you should do your own homework, however, says Andrea. Read; ask; investigate. She suggests, as a start, an article by Gerhard Linse called “Which renovations offer the best payback?” on the GOHBA web site. (www.gohba.ca/component/content/article/91)
Not everyone is a good match for every lender. Andrea often gives people four or five different names of other companies that specialize in construction loans.
“Make sure you talk to someone who can present three or four solutions for you,” she says. “Every project and every deal is unique.”