Last November, Creedmore, N.C.–based Wynn Construction was planning to expand into Jacksonville, N.C., to build spec homes in a market dominated by the Marine Corps’ Camp Lejeune and Air Station New River. However, Bill Wynn, the company’s owner, couldn’t find bank lenders willing to provide construction financing for specs.

Three years earlier, the consultant Chuck Shinn had warned Wynn that Wynn Construction would eventually need alternative financing sources. And that prediction unfortunately was coming true. His company had already maxed out on its borrowing with three community banks and had lost its relationships with three commercial lenders, including Bank of America and SunTrust. And despite having raised “a couple million dollars” from high-net-worth investors, “we’ve been scrambling for the past 18 months,” Wynn told Builder. He’d still be scrambling except for Healy Capital, a mortgage broker based in Olympia, Wash., that has suddenly found a ripe niche providing spec builders with supplemental construction financing.

“There are dozens of builders in every market in need of capital,” says Michael Healy, a 15-year industry veteran, who for the past year has been focusing on providing production builders with spec construction loans. His capital source is Bismark Mortgage, a wholesale construction lender based in Bellevue, Wash., that also specializes in spec financing through its own private equity network.

James Minarsich, Bismark’s broker account manager, started this division 17 years ago, and he says he can’t remember a time when this kind of financing was needed more. “We’ve been shocked by our potential to grow. We’re getting 450 inquiries a month [from builders] and the quality of those inquiries is very high.” Indeed, Bismark has curtailed its consumer construction lending to concentrate on builders.

Minarsich says Bismark works with about three dozen brokers, although many of these provide financing for only one or two homes. Healy Capital, he says, is somewhat unique in that it has builder clients in several states. Healy describes his relationship with Bismark has being akin to an insurance agent and an insurance company. And he says that he would like to increase the number of builders he’s working with to at least 20 by this time next year.

The bank spigot closes

Certainly, there’s a crying need among builders for new capital at a time when federal regulators are still putting the clamps on bank lending for new-home construction, especially specs. Minarsich points to a Federal Reserve report last year, which showed that the vast majority of recent bank failures have been related to their exposure to residential construction financing gone bad. As a result, commercial and even community banks have been minimizing their residential portfolios and resisting new business, leaving the door open for brokers like Healy Capital.

For example, one of Healy Capital’s recent clients is a builder based in the Southeast that closes 300 homes per year. “Most of our homes are presold, but we like to put five or six spec homes in new communities we open,” says this builder’s CFO, who requested anonymity for himself and his company. “We’re one of the more profitable builders in our market, have a 3-to-1 leverage ratio, and are offering 20% IRR [internal rate of return] with very little risk on our specs. But two of our local banks have stopped lending to builders altogether. And the private equity people I spoke with at IBS [the International Builders' Show] are only interested in distressed projects they can take over.”

“There are so many builders in need, and Healy and Bismark are sitting on a gold mine,” this builder says.

Healy says his “marketing” to builders around the country so far has primarily been him calling and e-mailing spec builders cold from lists he obtains through HBAs. Indeed, his company had been e-mailing Wynn Construction for more than six months prior to Wynn’s expansion into the Jacksonville market.

Wynn says he learned of Healy Capital through a fellow builder in Wynn’s local HBA. At first he simply ignored the broker’s solicitations because “they were too expensive.”

Revolving credit

But Healy and Bismark, perhaps sensing the moment, lowered their rates. Minarsich says his company now charges 5% to 7% interest on its loans plus 2% to 2.5% in fees. Healy Capital charges another 0.75% to 1% for its services. “We’re more expensive than a bank but cheaper than private equity,” says Minarsich. Healy says the maximum construction loan his company will handle is equal to 60% of a project’s appraisal, and its biggest single loan so far has been $2.4 million to a builder in Maui, Hawaii. Healy and Bismark also want the borrower to own the land free and clear, although in situations like workouts, they will consider first-lien subordination by the bank or developer.

Under those terms, Healy recently struck a deal with Wynn Construction to finance up to 10 construction loans at a time. “Every time we sell a house, they’ll finance the construction of another,” says Wynn.

Wynn’s company, which increased its closings by 23% in 2010 to 106, is shooting for between 140 and 150 closings in 2011. “We’re excited about working with Healy, and we would not be able to grow without those loans,” says Wynn.

Healy concedes that, before the recession, builders like Wynn would have never even thought about using Healy Capital. “We’ve been blown away” by the interest among builders looking to grow, he says. And Healy doesn’t expect that interest to wane anytime soon, either. “I just don’t see banks lending again at the levels they once did for at least the next five to 10 years,” he predicts.

John Caulfield is senior editor for Builder magazine.

Learn more about markets featured in this article: Raleigh, NC, Olympia, WA, Seattle, WA, Washington, DC.