Investments With Pre-Built Homes
I am new to this type of REI but am trying to learn the basics regarding new home construction. So I'd appreciate any advice or help any of you here can give me.
Let me first explain my situation to see if this is even feasible for me at this time. I and my father (architect/autocad) have been thinking about getting into buying small lots to build new home construction on. Mainly Pre-Built Homes. (Side question: What are "Spec" homes?) When referring to small lots, we are thinking, 2-4 lots each 7000sq ft and each to build a home on for resale.
I just bought a brand new SFR for rent in the area. The seller bought the land for $15K a few years back and built 4 brand new single story homes on it. I bought one of the homes to rent. I believe the seller mentioned that 1 home cost her about $110K to build which factors to around $84/sq ft based on 1300sqft of my house. She sold it to me for $188K. So she made roughly $70K from the sale. Seems very lucrative to me. Even more so if I find a lower per sq ft cost to build a pre-built home.
If my father and I were to get into this, we would most likely hire a contractor to supervise and handle the build. My question is, besides getting financing for a project like the one above, what other main/major obstacles will be have to tackle? What other major costs are incurred during a build?
We both have FICO scores in the 700s and stable jobs. My father has at least $150K in equity in his home. We both have $40K liquid cash to work with. Do small brand new single family home constructions sound feasible for our situation?
In the area I'm looking at, it's an older area but quickly and steadily appreciating. There are tons of small lots from anywhere in between 8,000 to 40,000 sq ft and pockets of small investor construction in the area.
Any opinions or advice is greatly appreciated. Thanks in advance for your replies.
Leo, This is a great idea and yes it will work for you. I'am currently doing the same thing.
First I will try to answer a few of your questions. Spec homes are speculative building or building with no end buyer in place. You need to know your market hold costs can take a serious bite out of your profit.
#2 If you want to turn a profit you cannot afford to hire a contractor to build it for
you. You must act as the contractor or hire a consultant to over see your management of the home.
#3 What major obstacles are there. WoW, books have been written on this question.
Some of them are
Lot selection
market condition
house design
state/ govermental requirements, Impact fees etc.
loan, lenders fees
material / labor projection staying within your budget.
holding costs
selling costs
Tax costs / gains
As I said earlier I have put together a program to build custom homes. The advantages to what I'am doing are
I know who the buyer will be
60,000 to 100,000 instant equity at the completion of each home
The title is held in a trust. (asset protection)
The property is sold and by the means of a1031 exchange rolled into a bigger home at a 30% equity gain each time.
And the biggest plus is It's all done TAX FREE!
Please feel free to e-mail me, see my profile
Good Luck!
Quote:
On 2003-08-30 20:43, Leo_Investor wrote:
I am new to this type of REI but am trying to learn the basics regarding new home construction. So I'd appreciate any advice or help any of you here can give me.
Let me first explain my situation to see if this is even feasible for me at this time. I and my father (architect/autocad) have been thinking about getting into buying small lots to build new home construction on. Mainly Pre-Built Homes. (Side question: What are "Spec" homes?) When referring to small lots, we are thinking, 2-4 lots each 7000sq ft and each to build a home on for resale.
I just bought a brand new SFR for rent in the area. The seller bought the land for $15K a few years back and built 4 brand new single story homes on it. I bought one of the homes to rent. I believe the seller mentioned that 1 home cost her about $110K to build which factors to around $84/sq ft based on 1300sqft of my house. She sold it to me for $188K. So she made roughly $70K from the sale. Seems very lucrative to me. Even more so if I find a lower per sq ft cost to build a pre-built home.
If my father and I were to get into this, we would most likely hire a contractor to supervise and handle the build. My question is, besides getting financing for a project like the one above, what other main/major obstacles will be have to tackle? What other major costs are incurred during a build?
We both have FICO scores in the 700s and stable jobs. My father has at least $150K in equity in his home. We both have $40K liquid cash to work with. Do small brand new single family home constructions sound feasible for our situation?
In the area I'm looking at, it's an older area but quickly and steadily appreciating. There are tons of small lots from anywhere in between 8,000 to 40,000 sq ft and pockets of small investor construction in the area.
Any opinions or advice is greatly appreciated. Thanks in advance for your replies.
Not sure what your market looks like in your area but 60k to 100k is doubtful unless you got a smokin deal on land.
Spec means speculation building on the idea it will sale fairly quickly.
There is nothing wrong with hireing a contractor for the first couple until you get the hang of it.
A consultant is going to charge a fair amount anyway. Most of the time they are contractors anyway! And going it alone with no experience is a huge mistake. Good luck to you!
Being a home builder is not as easy as everyone makes it out to be. And the profits are not as high as you may think. This is why you see a ton of bankrupt small builders. Keep in mind costs like sewer,water, etc.... They are very expensive to run to your site. Most newbie home builders look for lots in small subdivisions where the developers have developed the land and it is ready to be built. Another factor is weather. Here, we have so much rain that it holds up projects causing carrying costs to go up. Best of Luck though!!!
Quote:
On 2003-08-30 20:43, Leo_Investor wrote:
I am new to this type of REI but am trying to learn the basics regarding new home construction. So I'd appreciate any advice or help any of you here can give me.
Let me first explain my situation to see if this is even feasible for me at this time. I and my father (architect/autocad) have been thinking about getting into buying small lots to build new home construction on. Mainly Pre-Built Homes. (Side question: What are "Spec" homes?) When referring to small lots, we are thinking, 2-4 lots each 7000sq ft and each to build a home on for resale.
I just bought a brand new SFR for rent in the area. The seller bought the land for $15K a few years back and built 4 brand new single story homes on it. I bought one of the homes to rent. I believe the seller mentioned that 1 home cost her about $110K to build which factors to around $84/sq ft based on 1300sqft of my house. She sold it to me for $188K. So she made roughly $70K from the sale. Seems very lucrative to me. Even more so if I find a lower per sq ft cost to build a pre-built home.
If my father and I were to get into this, we would most likely hire a contractor to supervise and handle the build. My question is, besides getting financing for a project like the one above, what other main/major obstacles will be have to tackle? What other major costs are incurred during a build?
We both have FICO scores in the 700s and stable jobs. My father has at least $150K in equity in his home. We both have $40K liquid cash to work with. Do small brand new single family home constructions sound feasible for our situation?
In the area I'm looking at, it's an older area but quickly and steadily appreciating. There are tons of small lots from anywhere in between 8,000 to 40,000 sq ft and pockets of small investor construction in the area.
Any opinions or advice is greatly appreciated. Thanks in advance for your replies.
Quote:
On 2003-08-31 12:14, RWC wrote:
Quote:
On 2003-08-30 20:43, Leo_Investor wrote:
I am new to this type of REI but am trying to learn the basics regarding new home construction. So I'd appreciate any advice or help any of you here can give me.
Let me first explain my situation to see if this is even feasible for me at this time. I and my father (architect/autocad) have been thinking about getting into buying small lots to build new home construction on. Mainly Pre-Built Homes. (Side question: What are "Spec" homes?) When referring to small lots, we are thinking, 2-4 lots each 7000sq ft and each to build a home on for resale.
I just bought a brand new SFR for rent in the area. The seller bought the land for $15K a few years back and built 4 brand new single story homes on it. I bought one of the homes to rent. I believe the seller mentioned that 1 home cost her about $110K to build which factors to around $84/sq ft based on 1300sqft of my house. She sold it to me for $188K. So she made roughly $70K from the sale. Seems very lucrative to me. Even more so if I find a lower per sq ft cost to build a pre-built home.
If my father and I were to get into this, we would most likely hire a contractor to supervise and handle the build. My question is, besides getting financing for a project like the one above, what other main/major obstacles will be have to tackle? What other major costs are incurred during a build?
We both have FICO scores in the 700s and stable jobs. My father has at least $150K in equity in his home. We both have $40K liquid cash to work with. Do small brand new single family home constructions sound feasible for our situation?
In the area I'm looking at, it's an older area but quickly and steadily appreciating. There are tons of small lots from anywhere in between 8,000 to 40,000 sq ft and pockets of small investor construction in the area.
Any opinions or advice is greatly appreciated. Thanks in advance for your replies.
Not sure what your market looks like in your area but 60k to 100k is doubtful unless you got a smokin deal on land.
Nope, I pay full retail for land, the land cost is only a reflection or a percentage of the overall worth of the project so it really does not matter I would'nt buy a 70,000 dollar lot and put a 100,000 house on it these are custom homes. You need to get away from the builder mentality (dealer) average 10% profit margin as opposed to our way (investors) 30-35% profit have you ever wondered where the spread of 25% goes. for a contractor it is mostly business operating costs. All of our profit is held as equity totally different deal. Do not doubt what you do not understand.
Spec means speculation building on the idea it will sale fairly quickly.
Which still means building with no end buyer.
There is nothing wrong with hireing a contractor for the first couple until you get the hang of it.
Read closely that's not what I said. Hiring a contractor as a consultant is one thing hiring them to build you a home is another 5% verses 25% where is your profit at. Many people each year hire a contractor to build them a home usually with little or no equity at completion.
A consultant is going to charge a fair amount anyway. Most of the time they are contractors anyway! And going it alone with no experience is a huge mistake. Good luck to you!
That's exactly why I said you should have a consultant ,the mistakes could far out wieght the profits if your not careful. A fair amount is exactly what you should be looking at. Even U-buildit ( franchise contractors) only charge 5-7% better than 20-25% compared to a contractor.
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On 2003-09-01 01:38, jlwirk wrote:
Quote:
On 2003-08-31 12:14, RWC wrote:
Quote:
On 2003-08-30 20:43, Leo_Investor wrote:
I am new to this type of REI but am trying to learn the basics regarding new home construction. So I'd appreciate any advice or help any of you here can give me.
Let me first explain my situation to see if this is even feasible for me at this time. I and my father (architect/autocad) have been thinking about getting into buying small lots to build new home construction on. Mainly Pre-Built Homes. (Side question: What are "Spec" homes?) When referring to small lots, we are thinking, 2-4 lots each 7000sq ft and each to build a home on for resale.
I just bought a brand new SFR for rent in the area. The seller bought the land for $15K a few years back and built 4 brand new single story homes on it. I bought one of the homes to rent. I believe the seller mentioned that 1 home cost her about $110K to build which factors to around $84/sq ft based on 1300sqft of my house. She sold it to me for $188K. So she made roughly $70K from the sale. Seems very lucrative to me. Even more so if I find a lower per sq ft cost to build a pre-built home.
If my father and I were to get into this, we would most likely hire a contractor to supervise and handle the build. My question is, besides getting financing for a project like the one above, what other main/major obstacles will be have to tackle? What other major costs are incurred during a build?
We both have FICO scores in the 700s and stable jobs. My father has at least $150K in equity in his home. We both have $40K liquid cash to work with. Do small brand new single family home constructions sound feasible for our situation?
In the area I'm looking at, it's an older area but quickly and steadily appreciating. There are tons of small lots from anywhere in between 8,000 to 40,000 sq ft and pockets of small investor construction in the area.
Any opinions or advice is greatly appreciated. Thanks in advance for your replies.
Not sure what your market looks like in your area but 60k to 100k is doubtful unless you got a smokin deal on land.
Nope, I pay full retail for land, the land cost is only a reflection or a percentage of the overall worth of the project so it really does not matter I would'nt buy a 70,000 dollar lot and put a 100,000 house on it these are custom homes. You need to get away from the builder mentality (dealer) average 10% profit margin as opposed to our way (investors) 30-35% profit have you ever wondered where the spread of 25% goes. for a contractor it is mostly business operating costs. All of our profit is held as equity totally different deal. Do not doubt what you do not understand.
I have no doubt, specially because I live in reality and not lala land! If you can find a contractor that charges 10%, watch out because he hasn't built much and you wind up with construction defects up the arse!
Also, you seem to forget about impact fees, water fees, permit fees, sewer fees, I could go on and on.
Spec means speculation building on the idea it will sale fairly quickly.
Which still means building with no end buyer.
No kidding, really?
There is nothing wrong with hireing a contractor for the first couple until you get the hang of it.
Read closely that's not what I said. Hiring a contractor as a consultant is one thing hiring them to build you a home is another 5% verses 25% where is your profit at. Many people each year hire a contractor to build them a home usually with little or no equity at completion.
Well then, they got screwed hard because they have no real world experience when it comes to building and real estate do they? 5% hun? never actually seen someone charge that little.
A consultant is going to charge a fair amount anyway. Most of the time they are contractors anyway! And going it alone with no experience is a huge mistake. Good luck to you!
That's exactly why I said you should have a consultant ,the mistakes could far out wieght the profits if your not careful. A fair amount is exactly what you should be looking at. Even U-buildit ( franchise contractors) only charge 5-7% better than 20-25% compared to a contractor.
If your looking to build low quality track homes thats a good Idea! I wonder if you want a handfull of warranty issues to deal with down the road? And, a fair price is subjective to what someone with years of experience knows should be fair.
Some of what you have said is accurate, and most is simply not the case!
[ Edited by RWC on Date 09/01/2003 ]
Appreciate the replies.
Besides all the city, water, and permit fees, one of the largest costs I should factor in is the contractor's cost? Some say it can be as low as 5% all the way up to 25% that will cut into profit. Is this percentage the cost of the home build itself? Say the 25% is the case. I'll use the same example as in my first post:
This is a very rough estimate.
$84/sq ft to build a 1300sqft home
$21/sq ft to hire a contractor (25% basis)
Land $30K for typical 7000sq ft lot
Total Cost $136K. Now I'm sure I'm missing a bunch of costs and fees incurred during the build. The comparatives for brand new 1300sqft SFR in this area are around $210K-$260K. From the more seasoned builders' experiences and the other costs I'm missing, does it look like I will come away with a pretty good profit from a deal typical to this one? And factoring in a smaller per sq ft cost with a Pre-Built Home it will be even more? What do you guys think?
Many people each year hire a contractor to build them a home usually with little or no equity at completion.
jlwirk, if you pay a contactor a total of 20-25% profit to build, and your making 30 to 35%, I'm no math wiz but clearly, one would still have equitly. So this statement makes no sense! Looks like your the one that doesn't understand!
for a contractor it is mostly business operating costs. All of our profit is held as equity totally different deal. Do not doubt what you do not understand.
Thanks for pointing out the obvious.
Quote:
On 2003-09-01 12:33, Leo_Investor wrote:
Appreciate the replies.
Besides all the city, water, and permit fees, one of the largest costs I should factor in is the contractor's cost? Some say it can be as low as 5% all the way up to 25% that will cut into profit. Is this percentage the cost of the home build itself? Say the 25% is the case. I'll use the same example as in my first post:
This is a very rough estimate.
$84/sq ft to build a 1300sqft home
$21/sq ft to hire a contractor (25% basis)
Land $30K for typical 7000sq ft lot
Total Cost $136K. Now I'm sure I'm missing a bunch of costs and fees incurred during the build. The comparatives for brand new 1300sqft SFR in this area are around $210K-$260K. From the more seasoned builders' experiences and the other costs I'm missing, does it look like I will come away with a pretty good profit from a deal typical to this one? And factoring in a smaller per sq ft cost with a Pre-Built Home it will be even more? What do you guys think?
I'd have to look at your prints in order to have a good idea of what square foot cost would be but those numbers don't sound too far off.
Also, other than reality fees and so on. Talk to a local contractor and see what they charge. If those are your comparitives you should come out on top. Again, consider a consultant, one that comes highly recommended. This is the way you should pick a contractor as well. Ask around.
Interesting post here guys.
Im a builder and I question anyone that
says they have 60 - 100k in equity in a home......its rare, very rare....and definitely not easy.
My personal home, I have over 150k in equity in it.....BUT that is called SWEAT / BLOOD equity.
I did my own footers, framing, roofing, drywall, flooring, trim, painting etc......that is how I did it......plus calling in alot of favor from my suppliers and subs.
I have people come to me all the time wanting to do sweat equity....thinking they will save tens of thousands of dollars.......I hate to burst peoples bubble but most people are lucky to be able to walk and talk at the same time......yet alone be able to invest the time into building their own home...........and knowledge....well thats another topic in itself.
With that said...check the following...
1. Reported high equities can be based upon false appraisals......anyone in the building business knows what Im talking about.........I have seen appraisals of the same house with a variance of over $50,000.00.........I put little faith in an appraisal other than using them to get a construction loan.
2. If a lending institution is involved then
they are likely to require a contractor involved.......because........so many people have heard that building a home is easy and they end up screwing up, going over budget or not finishing the job etc.....
3. Check with local building code department, in most state you are allowed to build your own home without a contractor...although some require that you show knowledge in the field that you plan on doing your own work
4. Builders come and go......usually because in most states you can get your license without any working knowledge.
This often leads to shody houses and builders that dont last that long.
5. Construction Managers.....check local and state laws as well....in NC anyone that acts as a construction manager has to be licensed as a contractor......why, so that their is accountability.
If you do go with a manager then make sure you have a contract defining what their job is.......
6. Also make sure that all of your subcontractors are insured in both workers comp and general liability and you can even get Lien Release forms so that no one can come back and put a lien on your home......
PS. Hey guys...when quoting post...quote only the part that you want to reference.....their is no need to quote the whole thing only to reference one line.
Good Luck.
Quote:
On 2003-09-01 12:39, RWC wrote:
Many people each year hire a contractor to build them a home usually with little or no equity at completion.
jlwirk, if you pay a contactor a total of 20-25% profit to build, and your making 30 to 35%, I'm no math wiz but clearly, one would still have equitly. So this statement makes no sense! Looks like your the one that doesn't understand!
for a contractor it is mostly business operating costs. All of our profit is held as equity totally different deal. Do not doubt what you do not understand.
Thanks for pointing out the obvious.
You need to read into the post a little more. First off If I hired a contractor to do the work, and his fee amounted to 25% of the deal there would be no additional 15% so I would end up with a new home and no equity. The 35% stems from our ability to run the job more efficiently reduced costs for material and labor and maybe pick up a trade or two like painting or something. Example, I got 2 bids for our framing package then took them to another supplier in town and told them if they could beat it they could have the business they came in 4,000 less. Who's going to do a better job building your home you or some guy you hire. he's probable running 4 other job's at the same time.
In response to nc yanks previous post: It seems that your telling us that you could build in 150,000 equity in your house but nobody else could do it.
This is for anyone reading these postings.
If you would like to get a more objective view you can go to amazon and get "the owner builder book" probable the best layman type book I have read on the subject ( and no I don't have anything to do with the book ) But it does list case study after case study on people through out the country that have owner built some of them with little or no experience with an average of 35% equity gain and or average 70,000 gain. It's estimated that some 200-250,000 homes are owner built each year. Do let me say this make sure you hire a consultant, educate yourself and get ready for aa-lot of hard work.
[quote]
On 2003-09-03 04:34, jlwirk wrote:
[quote]
<<In response to nc yanks previous post: It seems that your telling us that you could build in 150,000 equity in your house but nobody else could do it. >>
No, Im just being realistic.
I have over 20 years of hands on experience in the trades that it takes to build a house. I used that experience to acheive my 150k equity.
Since I make a living as a contractor / home inspector I have the time to do my own work while still checking on other jobs. Most people do not have the experience or time frame.
My framing took 5 - 6 months (6000 sq. feet under roof, Victorian home)
Drywall 3 weeks, trim 6 weeks, flooring 2 weeks........I can go on and on...plus the weather delays that will hold you up....which all means money. There are somethings that I would not have done...because it took to long for me to do them.
My home took 18 months to build.
How many of you have 18 months to work on a project, full time.
Thats what I thought.....
On my custom (larger) homes it is common for my clientel to have 30k - 50k plus of equity in there home.......but its not all sweat equity, some of it also includes the low price they paid for the lot.....as well as the location..........obviously some locations will appraise higher than others.
My building fees are set (which is not the norm in most places).....any savings that I can achieve go directly into my clients pocket. The majority of my customers will have more equity in their home than I charge.
I find it laughable when people come to me wanting to build that $500,000.00 home for $200,000.00. They heard or read some book how that you can save large amounts of money by doing it yourself. They want to do the framing, although they have no experience, they want to cut corners by using laminate flooring versus wood (although this is no savings).....I have heard it all.
Yes people can save money by doing some it themselves....but not the money that most think.
In regards to getting subs and suppliers to outbid one another.....well if you have good subs and suppliers....you dont have to waste your time playing this game....a good contractor has reputable people that he can rely on that will also service their work when requested....plus the contractor will at times get contractor prices that Harriet HomeOwner does not get........(which by the way...I pass onto my customers). And yes...what happens when material like OSB goes up 4 times the price (which is happening now...there goes $4000.00 out the window. Yeah, you can use another material such as celetex or styrofoam but then you will hate yourself down the road when have problems with the siding)
And then their is also the savings that the builder can achieve by knowing how much material to use. I never rely on a suppliers material list. I know the best way to use my lumber with very little waste.......that comes with experience....again another savings to my customers.
Lastly, there is a reason why the majority of lenders require a contractor.......and its not because we are in bed with the lenders, its because many people have an unrealistic view what what it takes to build a home.......as someone stated previously......even the majority of new builders will fail........unrealistic views, along with getting a bad reputation with subcontractors / suppliers....like bidding wars.
Yes there are a very few individuals that can and will build their own home, these are often simple smaller homes.
This also account why most people want to rehab or flip an existing home versus trying to get rich off of a new house.
I am for anyone trying to have that dream home, whether they do it theirselves or hire someone, they just need to have realistic expectations.
One of the reason these forums exist is to impart free knowledge in our fields of expertise. I applaud Joel and company for making this site possible.
If there are any other builders that disagree with me then I am all ears....
Good Luck