Forward-thinking lenders know that construction lending is a vertical they can’t afford to ignore. New construction projects are going to grow nationwide in 2018 and likely beyond, and there is a lot of good money to be made for lenders that can get their construction portfolio right.
But for many lenders just beginning their construction lending operations, staffing a new department isn’t a possibility. They may feel they lack the internal expertise to manage the process in-house. Or they might choose to grow their portfolio -- size and profitability -- in order to afford the internal headcount required to manage construction lending full-time. In each case, their best option is to work with a third-party partner -- a draw administration or appraisal management company -- for the day-to-day management of their construction loans. Today we’ll address that specific challenge and how to make the most of that relationship.
Question: We work with appraisal management (AMC) and draw administration partners to manage our construction loan portfolio. Sometimes these projects feel like black boxes we just hope turn out OK. How do we make these relationships work so we can grow our construction loan portfolio?
Partner relationships are often of the love-hate variety. Without a doubt, there are numerous benefits of using a third-party administrator -- lower cost compared to full-time salaries, experience and expertise, and more. Yet, with each of those comes a respective downside -- less control over process, transparency and risk concerns, along with limited scalability at a profitable level.
Lenders often cite two primary concerns with their AMC or draw management company relationships: transparency and control.
On the transparency side, I hear that kicking off a new loan can sometimes feel like lobbing the information we have over a huge wall and hoping things turn out OK. Since another company is managing most non-lender communication, lenders aren’t aware of activities -- draw or title requests, etc. -- until a disbursement request comes through. At that point, they have to simply trust that everything is as it should be.
And all of this is a symptom of lenders’ lack of control. They can feel like powerless middlemen. As calls from borrowers come in, they have to contact their partner for an answer, sometimes waiting days for a response. They may receive information as their partner sees fit, often via numerous channels -- email, phone, and paper. Even profitable construction loans can feel like losers because of the time spent just managing one-off requests.
From a risk perspective, these two issues appropriately make some lenders nervous. Without complete visibility into their project and tracked documentation, Chief Risk Officers can begin to have visions of audits gone bad.
So how do lenders improve their partner and borrower relationships and also increase loan profitability?
Use technology as the partner that brings everyone together.
Construction lending software can bring transparency to projects that feel like black boxes by bringing all parties together, in one place. Lenders can work with AMCs to store documentation securely and safely. They can then work with their draw management administrator and inspectors to request, schedule and track inspections in near real-time. Finally, they can manage and respond to all lender questions from a single, secure communication platform. Everything is tracked and documented, forever.
Full transparency -- every touchpoint in one place.
Full control -- user-level permissions and secure tracking.
Full risk management -- bank-grade security to ensure compliance across the board.
For bank administrators and relationship managers, that means no more fielding phone calls or text messages asking about the status of a disbursement request. That’s all done on the platform. It means no more waiting a week between an inspection request and fund delivery. Draw request to funding can now happen in a day. Even better, it means lenders can spend more time on their highest value activities, allowing them to maximize the return on their loans and grow their portfolio successfully.
Finally, the right technology platform means that lenders can scale their construction lending portfolio without scaling headcount. Built’s customers achieve an average of 3-5x increased loan administration capacity after using our platform.
If you’re struggling to build and grow your loan construction operations, technology can help you increase efficiencies so you can keep up with demands. For more ways to reduce risk in your portfolio, view our 10-point risk checklist.