After 42 years in the home building business, Patrick Neal knows where to find money to buy land and build houses. That doesn’t mean it’s been easy for the past few years.
“We think it’s time to buy land,” he says. “We have financial partners, some banks, community development districts, an eight-figure balance in the bank and [son] John [Neal] and I work hard to make new (financial) friends every day.”
Neal’s even trying to tap into a source of capital that has been all but extinct for the past six years: “We have put in our first A and D loan application,” he says. “That door has been closed since 2006 for national and regional banks.”
Whether Neal successfully gets that loan to acquire and develop land may well be a bellwether indicating whether other private builders stand a chance of getting bank loans in 2013. Neal’s well-stocked capital stash and recent record of off-the-charts home sales make his business a better risk than many private home builders.
While private builders’ access to capital continued to be all but blocked in 2012, public builders tapped into cheap bond money and sold stock, creating sizable war chests many have begun to deploy to buy land and lots for what they hope will be a continuing industry recovery.
And public builders are paying less than 4 percent interest on many loans, while the cost of money to private builders can be 6 percent to 16 percent, if they can get it, and most can’t.
However, if the market continues to improve in 2013, financing for private builders should loosen. Wells Fargo began lending to builders again last year. But the loans go to the best builders working in well-performing markets. And they are scrutinized to the extreme. “We count every pebble,” says Bird Anderson, executive vice president at Wells Fargo. He thinks more capital will be available in 2013 as long as demand continues to improve.
Steven M. Friedman, partner and national director, home building, at Ernst & Young, agrees lending to private home builders will increase in 2013. “Banks are coming back carefully, but they are coming back,” he says.
Private equity investment in home building as a source of capital is likely to continue in 2013. While many builders have shied away from the more expensive source of funds, for some builders, even after giving returns of 20 percent-plus back to the investors, it has been the ticket to success in the past and will be in the future.
“Private equity is working great for us,” says Eric Lipar, CEO of LGI Homes, the entry-level powerhouse Texas-based builder that grew to 1,000-plus closings during the depths of the recession.”Without private equity we would still be at 400 units a year,” Lipar says.