MYRTLE BEACH When Grand Strand builder Jeff Skelley thought it was time to rebuild his business from the dregs of the Great Recession a couple of years ago, he went to see his longtime banker.
The problem was, what Skelley was looking for was a loan to build a spec house, one he wanted on the ground to show prospective buyers what he could do for them. He didn’t already have a buyer for the house, and banks were still shy about loans to build homes that weren’t already sold.
Skelley’s request and others like it caused his bankers at CresCom to think there might be a void in the home construction business and they began moving to fill it, said Travis Minter, the bank’s senior vice president for retail mortgage.
Now the bank is reporting that its construction loans this year already equal all of 2012 and it has enough business in the pipeline to double last year’s output.
Jerry Rexroad, president and CEO of Carolina Financial Corp., CresCom’s holding company, said that the bank’s construction loans could triple or quadruple the 2012 total by the end of the year.
CresCom isn’t the only community bank in the area to report increases in construction loan activity.
BNC and Coastal Carolina National banks also say their construction loan business is up this year, although not at the level of CresCom. Laurence Bolchoz, president and CEO of Coastal Carolina, said his bank is seeing a 20 percent increase in construction loan business this year, and like CresCom, some of those include loans for spec homes.
It is just this kind of community bank lending for home construction that Martin Yun, chief economist for the National Association of Realtors, recently told Grand Strand Realtors is needed to turn a burgeoning real estate comeback into a full-blown recovery.
Skelley, president of Nations Homes, said being able to build spec and model homes is important to his business because buyers of his custom homes, which have an average price of $525,000, like to see what they’re getting before spending that kind of money.
“A lot of people want to see, feel and touch things,” he said. “To see a home already built gives them confidence.”
The position of local builders such as Skelley is different from that of national developers such as Lennar, Beazer and Ryland. While the local builders must get money from banks for what they build, the nationals can generate their own capital for constructing model homes.
Tommy Bouchette, president of BNC, said that while his bank has no spec homes in its portfolio currently, many of the construction loans it makes are for the kinds of custom homes that Skelley builds.
Like the other banks, Bouchette said BNC is seeing more construction loan requests than in the last three years.
But BNC, and other banks, want to make sure that builders or buyers who get construction loans have the money to repay them should something go wrong.
Skelley said CresCom made him put $100,000 to $200,000 in a bank CD before it gave him a loan for his first post-recession spec home loan, and he now keeps two spec or model homes either on the market or in construction at all times.
Minter said that Skelley’s request for a loan a couple of years ago didn’t spur CresCom to increase its lending for spec homes, but to realize there was a need for consumer construction loans.
Rexroad said that after the bank made a decision to move into the void, officials spent 2011 reviewing, enhancing and rewriting policies to offer consumers loans that would ease the process of building their own homes. It came up with three options.
The first was a traditional buyer construction loan, where the ultimate owner would borrow the money to build his or her home and pay it off with a second loan – mortgage – when construction was complete.
The second option, frequently taken by buyers who already own the land where their homes will be built, has an upfront construction loan that is automatically converted to a longer-term mortgage loan without a second set of closing costs.
And the third is where a builder finances the construction for a preapproved buyer.
Like other banks, Rexroad said CresCom isn’t interested in returning to the bubble-building days of 2007-08 where builders could get loans at one time for a whole group of spec homes and buyers/investors had to put little money down and give no information to borrow for the construction.
Verification of borrowers is extensive now and they need better credit scores to get money than in the not-too-distant past, Rexroad said.
Additionally, said Minter, “The borrowers (now) have real money to spend. I mean 20 percent down.”
CresCom requires a 20 percent down payment for home loans now, but Rexroad said it is thinking about lowering the minimum to 10 percent as long as the borrowers buy prime mortgage insurance to cover the loan if they default.
The revitalization of construction loans, however, doesn’t come without risks, Rexroad said.
One is when a buyer takes a construction loan but his builder doesn’t finish the job. Rexroad said CresCom is involved in the choice of the builder to help avoid that pitfall.
The other comes if a builder doesn’t try hard enough to sell a spec home and it remains on the market too long, potentially draining the builder’s capital to the point that the loan is threatened.
Rexroad said CresCom guards against the latter problem with a change of lending attitude. It does not lend money for spec homes anymore, but to builders it knows will construct homes and sell them within a couple of months.
Rexroad said that after the board approved the new policies, the bank began to market the consumer construction loans aggressively. At first, builders and the banks approached the renewed lending activity cautiously.
The bank, obviously, was worried about the safety of the money it was letting out of its vault. Builders, Rexroad said, were wary of a laborious pre-approval process or construction loans that were hard to get.
Coastal Carolina’s Bolchoz said his bank, like CresCom, has some spec home loans on its books now.
And he noted that the increased construction and mortgage lending by community banks will be felt throughout the local economy.
“We have to do our part to put money back out there to help facilitate the recovery,” he said.
Contact STEVE JONES at 444-1765.