Navigating the New Home Construction Landscape: a Q&A with Land Gorilla’s Sean Faries

MBA NewsLink recently interviewed Sean Faries, CEO of Land Gorilla, San Luis Obispo, Calif., about the new home construction landscape.

Under Faries‘ leadership, Land Gorilla’s construction lending platform has eliminated historically time consuming and frustrating inspection and draw disbursement processes, reducing draw times by 80% or more—while doubling and in some cases tripling construction loan volumes for banks, credit unions and mortgage bankers.

MBA NewsLink: What primary factors will drive demand for new home construction lending in 2024?

Sean Faries: Interest rates, material costs and existing home supply will continue to drive the demand for new home construction. In the U.S., most existing homes with mortgages have very low interest rates, in the 2-3% range. Because homeowners are reluctant to give up their great monthly payments, it won’t free up any significant amount of existing inventory. I don’t see this changing in the near future, even if rates come down significantly.

If the Fed begins to lower interest rates in 2024, and more significantly in 2025, I expect demand for new home construction will rise along with prices. The current housing crisis is about inventory and affordability, and it’s multi-generational–meaning our children will likely experience it, too. As affordability begins to improve, the issue really becomes housing supply. Homebuilders will play an enormous role in solving this issue. In fact, new home construction today already accounts for approximately one-third of all homes sold, and this will only increase as housing demand grows. Altogether, we should see momentum build for a 2024 market that favors new construction.

MBA NewsLink: What are the biggest challenges lenders face when looking to grow construction-to-permanent loan volume?

Sean Faries: The biggest challenge right now is qualifying borrowers at today’s higher interest rates. But as rates come down, we should see a flood of demand with more borrowers being able to qualify. At that point, the challenge will be obtaining the human expertise required to originate construction-to-permanent loans and navigate post-closing administration of these products.

To overcome this challenge, lenders looking to launch or expand a CTP program need to invest in the right people and keep leadership involved. This may sound like a simple answer, but it’s really the foundation of any thriving construction lending program. When you have experienced people who are passionate about construction lending, you’re better able to recruit great originators to sell these products. When done successfully, it’s like baking a cake—if you have skilled “bakers” and quality ingredients, you’ll have a great cake. If you skimp on expertise, or substitute the correct ingredients with cheaper options, you will be lucky to have a cake that is even edible.

A CTP program is not like other loan programs in which originators, processors and underwriters can pick up the guidelines and run with them. However, CTP programs not only generate revenue from origination fees but also from net interest income, referrals and other lines of business for banks and depositories. For a CTP program to succeed, it must have the support of top-level executives in the organization. This support helps other leaders understand the value of CTP programs and why they need them to be successful.

MBA NewsLink: How can lenders stay competitive, or even get ahead of the competition?

Sean Faries: Staying with the cake analogy, like baking, construction financing also requires the best tools or technology available. For instance, automation in the draw process has helped lenders shave days off the disbursement process and increase their net interest income. Each day you eliminate in the draw process is a day you can charge interest on the loan, making it a win/win for borrowers and contractors. Builders get their money faster and the lender is able to get a better return on the loan.

We also see more and more opportunities with machine learning and AI to help lenders make faster decisions and reduce risk. AI can also assist construction lenders with monitoring the covenants of a loan agreement and help borrowers stay in compliance with insurance obligations, surveys and other requirements.

MBA NewsLink: What type of potential regulatory changes might impact construction lending next year?

Sean Faries: Compliance regulations are confusing and constantly changing–in fact, it’s why some financial institutions shy away from construction lending. We continually monitor state level regulations that impact construction lenders. We recently released the Land Gorilla State Compliance Library, which features an interactive map that provides lenders with access to state lien laws, contractor licensing information, title practices and forms used in specific states.

Because we expect new home construction and CTP loans to increase in volume this year, we plan to continue expanding our Compliance Library to help lenders save time and money by making it easier to stay compliant.

MBA NewsLink: How would you describe the typical relationship between builders and lenders? Does it help or hurt the homebuyer’s journey?

Sean Faries: These relationships vary, and while they can definitely help the consumer experience, they can hinder it as well. Lenders, for their part, must be very careful how they represent the relationship between homebuilders and borrowers and refrain from making recommendations about using a particular homebuilder, which can create a liability issue. If the relationship between the borrower and the homebuilder goes bad during construction, the borrower will lean into the lender to resolve the issue. This is not a situation a lender would ever want to establish.

With CTP lending, lenders should remember their customer is the borrower, not the builder. The builder can be a huge referral source, but ignoring this fact can lead to trouble. For this reason, lenders should build a pattern of “accepting” the borrower’s choice of homebuilder and make it clear both in contract and in reality that the appropriate practice is taking place. If the lender provides great service and fast payment, they will see referrals from homebuilders and borrowers alike.

MBA NewsLink: Is there a way to improve collaboration between builders and lenders?

Sean Faries: It’s all about communication. Builders need to be part of the conversation between the borrower and the lender. Some of the best construction lenders make sure their origination team brings all stakeholders to the table and sets very clear expectations for the construction experience. That’s right–it is an experience. Unlike a traditional mortgage, the typical construction phase lasts the greater part of a year. If you do not set clear expectations at the very beginning, it can leave one party anxious or in a bad financial position.

We have seen inexperienced originators promise the world to close a CTP loan, only to have egg on their face when the builder requests their first draw and expects to be paid in advance for work that is not complete. Thankfully, technology makes it possible for the different parties in the construction process to communicate faster and more clearly through a single platform. If you hope to launch or expand a CTP program, being able to ensure seamless communication at all times is paramount.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)