Winning the Banking Game

Not too many custom home builders are constructing spec homes these days, nor getting financing for them. David Werschay of Werschay Homes in St. Cloud, Minn., however, is an exception.

“I didn’t realize this was such a big deal,” he says of his financing struggles. “I was thinking it was just me, but it’s a national thing; nobody’s getting money.”

Werschay, who worked for 13 years for a production builder, started Werschay Homes in 2003 in part to bring a more personal, hands-on approach to the building process. His wife Mollie provides interior design services to clients.

Werschay’s approach to spec homes is straightforward: “I can’t sell cars if I don’t have cars on my lot,” he says. “If I don’t have a house out there to drive traffic during these promotion times — or any other time — I’m not going to sell lots and I’m not going to sell houses,” he adds.

Dealing with Banks

Banks, he found, were not nearly as enthusiastic as he was about spec homes. In fact, Werschay approached three banks to finance a model home. All three turned him down. “We’re just not lending money to builders; our underwriters won’t allow it,” he was told.

Not one who takes no for answer, Werschay broached the subject at an annual meeting with his suppliers and vendors. Telling them that banks were not willing to loan much money, he suggested he pay suppliers and vendors 60 percent on their invoices and they would hold on to the 40 percent until Werschay closed on the house. He reasoned that at 60 percent they could pay the majority of their hard costs and wait for their profit.

He asked them to let him know within a week, but by the time he returned to his office he had messages from a majority of the vendors saying they were in. Werschay went back to the bank — and he hastens to add that when he says “bank” he is referring collectively to the three banks he dealt with.

He presented the proposal outlining the agreement with his vendors and suppliers, and he detailed why he wanted to build this particular house. He cited extensive research into the homes on the market at that particular price point, showing that of the 12 homes only two were two stories and they were 12 years old. He also provided a profile of his clients, demonstrating that 95 percent of them were young families building two-story homes.

“I’m thinking this is a slam dunk,” Werschay says, “but the bank said, ‘No, we just don’t think this is a good home to build in this market.’”

Werschay wasn’t about to give up. He persuaded a partner in one of his developments to be a guarantor and went back to the bank thinking this time it surely was a slam dunk. The bank agreed that Werschay’s guarantor was solid, but they weren’t granting the loan. The guarantor’s main strength was in real estate and the underwriters weren’t comfortable, the bank said.

Now we’re Rolling

Feeling as though he were back at square one, Werschay asked the bank if he would have a better chance of getting a loan if his guarantor were someone outside the real estate industry. “Probably not,” was the answer. While a guarantor is good, a co-signer is better, was the message. “I didn’t know there was a difference,” Werschay says.

A few weeks later, he found someone outside of the building industry who was willing to co-sign the loan and who agreed to accept 1 percent of the loan value for his signature. He went back to the bank with the new proposal — and got his loan.

Werschay notes the process took months. He was planning to start building the home in June or July 2009, and construction began in November. Loan committees, at least in the banks with which he was working, usually meet once a week so a builder has to wait a minimum of one additional week to return with a new proposal — and Werschay was dealing with three banks.

In spite of everything, Werschay’s model home is finally complete and has been sold, and he has two other sales in the neighborhood, one of which is nearing completion.

The importance of persistence is the lesson to be learned from his experience, Werschay says. In this case, persistence is about finding out what the bank wants. Just as a custom builder must be persistent in determining the wants and needs of his clients, he must satisfy the wants and needs of a bank loan committee. When the loan committee says “no,” it’s not time to say goodbye; it’s time to ask “why?”

Werschay suggests that builders look at banks as their partners; another lesson learned. “All my suppliers and vendors are my strategic partners; they’re not subs,” he adds. “I couldn’t have [secured the loan] without them.”

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