Building Investment Property
I havea an opportunity to buy 2 acres of land in an area of 2 mil $ homes. I spoke with the bank and they said that if I make my case, they'll give me an investors loan for as much as I want. I have a builder, who's great, but expensive. Obviously, if this thing works out, I would like to maximize my earnings as much as possible. (1/2 will go on taxes, 6% realtors fees).
I have a few questions that I'd like to ask the experts on this forum.
First, some numbers.
a) To build a house from scratch could cost up to 1 million bucks and take 9 mos
b) Modular house could be built for 400K in 4 mos
c) Land costs 450K
1. Modular vs. stick.
Do modular homes resale for less then stick-built? It's a nice area, and I'm afraid a modular home could stand out as a sore thumb and bring the value down.
2. Is it worth investing in an awesome looking house (stone work, etc) - will it bring the value of the house up significantly? Building a 5600 sq ft house vs a 4200 sq ft - which one is prefferable? I see houses on the market that are 8000sq ft, and that makes me sick. Who needs that? Wouldn't a person rather buy a smaller, but prettier house?
3. Realtors fees
When the house is done, we'll have to sell it and pay 6% to the realtor. If I become a real estate salesperson (a 40-hr course, plus exam to get a license), could I just list the house myself? Or is it more important to get the right kind of potential customers through a well known real estate agency?
Thanks for your response!
jenland,
Some thoughts and questions...
Does the zoning permit more than one lot (subdivision) or this one house on one lot?
As for size and type of home (stick built versus modular, size, amenities, etc) I suggest you check out the upper-end homes in your market. In my area homes in this price range are generally in the 4-6,000 sq ft range and are stick built. Try to get a handle on the features and amenities typically provided in your market--ie, the package that "pricey" buyers expect--as well as the house size. I would caution about "over improving".
I would have your RE attorney review the builder's construction contract and make sure the builder looks at the site and evaluates it for suitability before you buy it.
As for RE agents and their fees, you could negotiate something other than 6%. I would be reluctant to try to sell this type of property myself as either a FSBO or new RE salesperson. You want to select your RE agency carefully -- look through the RE trade publications to see who's marketing in this price range. Interview several people. Do some research on this site since there have been Articles and Forum posts on how to choose an agent and things to look for.
Nancy
Thanks so much for your advice! I agree with putting in granite and top of the line appliances in the kitchen. I'd want to do many things, but I'm afraid I'll be "over-improving", as Nancy pointed out. The thing is, I'd like to build a few houses like that, and then build my own.
The lot cannot be sub-divided - it's in a 2-ac zone.
I went to see the property today - it looks fine. It's next to a state park. But! Across the front of the property there's a brook. Also, the property right next door to the property I'm looking at has a house in bad shape. The owner said he was selling the house also, but I don't know if it's going to be torn down or fixed up and when. Could that hurt my resale potential? If they fix up the house, it will still be a crappy house. (unless my vision is totally off on this).
I have a few thoughts on this, since I have been looking at the high-end spec house market, too.
- are you going to pay the builder or partner with them? Partnering controls your costs but limits your profit.
- are you prepared to pay all the costs for 1-2 years? High-end homes often sit that long in this area. How many days do $2M homes sit on the market where you are?
- Are you willing to do a custom job, if a buyer shows up prior to finishing? It adds to the price and can add lots of time with all the changes they want, and $2M buyers usually want to customize everything.
Other thoughts:
- size matters. 5-8K sq ft is norm here for that price, and in the burbs it can be 10K+.
- the standard around here includes whole house sound/video, home theater, game room, and a wine cellar. That is ~$100-150K worth of extra costs just to justify the price tag. It's like the granite and steel kitchen.
- the new thing in McMansions here is stone/brick/cedar shingle exteriors with a distintive style (Craftsman, Tudor, or even a semi-castle). Not just a big house with lots of rooms. No stucco, no siding, just the expensive stuff.
- this is what I see here, so it may be completely different where you are.
I also agree with others that finding a realtor that specializes in expensive homes is the best way to go. They have the techniques and contacts. And don't wait until it is finished to market it. At that price, you never know when a buyer is looking.
If you don't sell it before it is finished, you may need to rent furnishings to help it sell. More costs.
Good luck
Peter
I'm definitely bringing the builder and the realtor to the property before commiting to it. I'm talking to the bank, RE lawyer, you guys. I can't afford to make a mistake - this would be my first deal, and I'm hoping to make good $.
The land is definitely underpriced. But, there's this house next to it...
Good point about possibly getting stuck with the house for 1-2 years until it sells. Altough, people moving to the area are moving from NY City and most are RICH. I don't think houses sit long, but I have to put that into my little formula also. Great advice about renting furniture. Thank you. I don't know how expensive that would be, but I think it'll raise the value of the house if it looks inviting and tasteful. I just have to be careful with not overdoing it.
Cellar and movie theater? Wow. I didn't even think about it. I'll have to ask the realtor if that's common in the area for the price.
Thanks again, everybody!!!
If the brook/flood plain is fairly near the building area, it can be a nice feature. With all the home improvement shows on today, people are seeing lots of water features and gardens that look perfect on tv. You can play it up, clean up around the stream (according to the regs), add a path to it, maybe a bridge... That's if people in your area are looking for outdoor living spaces. They definitely want them here.
You need to find out what the plans are for the house next door. Hopefully it is another large house. Or, maybe you can grab it and build 2 houses. There are some economies of scale in doing 2 houses at once. More risk, more potential profit.
Good luck. Keep us updated.
Peter
Jen,
You wrote: "I can't afford to make a mistake -"
And this compells me to warn you a little bit about your project. High end spec houses are really risky. The people that succeed in them do very well but they have pretty much reduced the product to a formula. Its very likely that you will make a mistake of some sort in your first deal in this market. If you really cannot afford to make a mistake here then I'd find someplace else to invest.
This segment of the market is very picky. They know what they want and they will walk from a deal because the paint is off by half a shade and not even tell you why. They tend to be tough negotiators, and have lawyers who make the deals even tougher. They are impressed by the right brand names and the right "trendy" design touches. But if you don't move in those circles you might not even know what this years cool design touch is.
Every real estate development project is a thousand choices. Some of those you will do wrong. Mistakes are inevitable. Have some manevering room.
Well let me take a shot at this but I think I need some clarification,
What you have is a lot with a 3,000 sq.ft. building on it currently residential. One story or two or more?
The lot also contains some vacant land large enough to build another building. How large? One story or two or more?
The seller is asking $250,000 and is willing to carry a 10% second. But at that price it won't cash flow. I.e. NOI is less than $400/unit/month?
You think it will cash flow as comercial. With what use? How much gross rent? How much net.? Why do you believe there is a market for the space?
Do you intend to build on the other available space?
The existing 4-plex is 2 story with new carpets and in really good condition. I could get away with paint and new doors. They now rent for only $400. and full with people who have been there for 10-15 yrs. The area is growing like wildfire and in great need of commercial. The second prop is one story and has 1500sq ft up and same down with walkout. It is in process of renovation and owner has blueprints. The 2 spaces have comm tenants interesed now. The rentals will be from $1000-1250 a mo. The lot will be a commercial building as people are clamoring for same in the area. Attorneys, ins.,dentists, and realestate cos now looking for space
Well on the assumption that the original question here remains in effect which is what to offer.
I'd offer the value of the building as it is currently operated. That is I'd take the current net operating income and figure a 10% cap rate.