In addition to periodically inspecting each house during the course of its construction, the Bank should ensure that it obtains periodic reports reflecting progress on the entire project as compared to budgeted projections. These progress reports are usually provided on a monthly basis and should summarize inventory lists maintained for each section or phase of the project. The inventory lists should identify each lot number, the style of house, the release price, the sales price, and the loan balance. The inventory list should indicate advances and the balance outstanding for each house, the date on which construction on each house was completed, the date each house was sold, and the date paid.
The progress report also should reflect the overall status of the project and whether advances are being made in compliance with the loan agreement. This report should indicate the number of homes under construction, their stage of construction, the number completed, the number sold during the month, and the total number under contract. Because most tract financing loan agreements restrict additional advances if the builder begins to accumulate a number of completed but unsold houses, the progress report also should age the builder’s inventory.
Slow sales or excessive inventories relative to sales, excessive costs, and unprofitable operations are indications that the borrower may have difficulty repaying the loan. Other problems, such as delays in completing construction because of adverse weather conditions, usually increase project costs and could weaken the borrower’s ability to repay the loan.
On an ongoing basis, a Bank must also monitor the borrower’s need for working capital. The analysis must cover all projects that the developer is engaged in, whether financed by the Bank or not. Other unsuccessful projects could seriously weaken the developer despite a successful sales program in the development being reviewed. The Bank also should monitor general economic factors that could affect the marketing and selling of residential properties in the Bank’s lending areas.