How To Make Construction Lending Less Risky

August 14th, 2018

lending-8-14-18.pngWhen compared to the world economy as a whole, the construction industry lacks luster, at least in terms of its embrace (or lack thereof) of digital innovation. According to a 2017 report by the McKinsey Global Institute (MGI), the construction sector has grown by just one percent over the past two decades, while global economic growth has increased at nearly three times that rate. Construction was also the second-least digitized economic sector on MGI’s Digital Index, indicating a serious need for digitization, which could help boost the industry’s growth rate.

Another MGI report found a significant performance gap between industry members that leveraged digitization compared to those who don’t, “with the U.S. economy reaching only 18 percent of its digital potential.” The current lack of technology in the construction industry presents a clear opportunity for industry players establish industry leadership.

A Perfect Storm: Industry Growth Meets Digitization in a Burgeoning Economy
Despite political agitation and a series of natural disasters, 2017 proved to be a strong year for the housing market. Housing showed steady growth in spite of these external factors and a 10.5-percent decline between November 2015 and November 2016. Experts at Zillow believe the housing shortage will continue to drive housing market trends throughout 2018, swelling consumer demand for remodels and new construction.

Fueled by stable interest rates, a strong economy, and inventory shortages, the construction industry stands to enter a period of significant growth in 2018. As predicted by Dodge Data & Analytics, the industry could see a three percent increase with new construction starts in 2018 reaching an estimated $765 billion.

If the industry fails to digitize, it will likely struggle to keep pace with market demands. Currently, large construction projects take 20 percent longer than expected to reach completion and are up to 80 percent over budget. Not only do significant delays and expense oversights like these inhibit those working directly in the industry, such as contractors, sub-contractors, builders, and developers, but also those financing the projects. Missing project completion targets and budget goals makes improperly monitored construction lending a risky business. MGI lists improved “digital collaboration and mobility” as essential to the construction industry’s ability to meet its potential future growth.

Relieve Strain on Lender Resources with Digitization
Oldcastle Business Intelligence estimated in their 2018 Construction Forecast Report that construction, as a whole, would grow by 6 percent in 2018. This year is projected to see significant growth in single-family housing starts, estimated to increase 9 percent, with a predominant focus on Southern and Western regions. As housing and construction demands continue to climb, financial institutions stand to corner a substantial chunk of the growing market and increase revenue.

Historically, lenders have shied away from construction lending, viewing construction loan portfolios as administratively taxing and risky from both regulatory and credit decision perspectives. By bringing the construction loan administration process online through collaborative, cloud-based software, financial institutions can become industry leaders while relieving the burden on their lenders, mitigating risk, and improving the experience for everyone involved.

Reduce Risk with Construction Lending Software
The digitization of construction lending translates to less risk all around. Construction lending software streamlines the facilitation of compliance and regulatory timelines, reducing potential fines and penalties for non-compliance or loan file exceptions. In addition to the risks imposed on the industry by staunch government regulations, lenders also understand the high credit risk involved with traditional construction loans (and their many moving parts) due to their multifaceted, unpredictable nature.

Overseeing construction portfolios requires constant vigilance in tracking and monitoring cost estimates, advances, material purchases, labor costs, construction plans, and timelines, all while ensuring proper paperwork is filed and maintained for every transaction and correspondence.

Bringing the construction loan management process online gives lenders the ability to monitor their entire construction portfolio from one location. Real-time monitoring and alerts automatically highlight areas of concern, excessive advances, stale loans, maturities and overfunded projects. Digital oversight also allows lenders to foresee and correct potential problems with budget and timelines.

Increase Efficiencies Through Digitization
Financial institutions that implement a digital solution for construction loan administration drastically improve efficiencies, eliminating former portfolio limitations. By increasing efficiency, lenders can invest more time in bringing in additional business, approving more loans, and better serving existing clients.

Improve User Experience with Digital Lending
In addition to risk mitigation and efficiency gains, construction lending software also drastically improves the overall user experience in the construction loan administration process by providing a singular platform for communication throughout the life of each loan. Bringing the process online allows lenders, borrowers, builders, inspectors, and appraisers to collaborate and communicate in one place, preventing missed phone calls and the inevitable tangle of email correspondence.

smccarthy

Scott McCarthy is the Vice President of Sales at Built Technologies, leading Built’s sales organization in support of growing demand for Built’s construction lending software.