The soft side of things?

Since I left my last blog with a statement that sounds more like a Sears ad, I felt compelled not to wait till morning to explain what I meant. Which will also be an opportunity to cover a construction loan’s basic terminology early in these postings so that we can move on with the important stuff.

Every construction project starts with a series of actions, which are happening on paper, namely; architectural design or purchase of plans off the shelf, engineering of the design, survey, permits, utility connection fees, school fees and a whole host of other fees only limited by the imagination of your local authority. All of these costs are classified as soft costs or pre construction costs as oppose to the hard cost of construction or the actual cost of construction, which begins with digging!

Any time that you are not sure if a cost is “soft” or “hard” just remember the analogy; paper is soft where as dirt, concrete and wood are hard.

The main reason for separating the two is the fact that every construction loan’s guideline will require you to obtain building permit before funding or closing the loan. That means you will be out of pocket before you can actually borrow but the lender will still need to know by how much for two distinct reasons:

1- To calculate total cost so as to be able to calculate loan to cost ration. More on that late.
2- To calculate reimbursement, should the loan to cost and the loan to value allow. And more on that later.

I will follow this post by an other one, in which I will explain how I am going to try and maintain this blog and how I will try and make it as useful as possible for our readers.