First Time Spec Home
Hello everyone! I recently purchased a lot in a section of town that is in a high demand area with plans to build a SFD. This will be considered my final exam as to whether I want to pursue a GC license and jump in with the big boys. I have 20 years experience in the building trade, but this is my first solo flight. The lot price accounts for roughly 22% of the expected appraised value after construction. My plans call for a 2500 Sq. ft. living area Acadian home. I have procurred a 80% LTV, $225K interest only construction loan. The house has yet to be appraised, so I am hoping for a little more funding once the numbers are crunched. The only comp home in the area is almost a year old.
My question is, at the numbers above the allowance to build is roughly $70 a square foot. I know a house can be built for that, but it won't have the bells and whistles I wanted for a quick sale. Should I put the hot items such as higher end kitchen appliances and master bath fixtures in on my own nickel and hope to recoup by selling at the higher side of the appraisal? If the numbers above stay the same, I'm looking at a potential profit of approx. $70K less construction interest and closing costs. I know that is best case scenario but I have some room to manuever if less than best case. I have interested parties already asking for more info on the house. I am thinking about allowing for contractor grade appliance allowances and if the house is sold prior to finish let the customer buy what she wants and pay the difference if any over the allowance. What is the proper way to do this?
What do you intend to retail the total package (ie, house on its lot) for?
Be careful not to overimprove the property for your market. You mention that there's only 1 comp. Where would your retail price fit in the range of values of the properties in the surrounding area?
Nancy, I plan to market the house at between $115 and $120 a sq. ft. I got these figures from the appraisor. hopefully higher once the final appraisal from the plans come through. According to my banker, properties in that area sell on avg. at $137 a sq. ft. My appraisor says he must be on drugs! If I can fall anywhere in between that would be great. If I can get a higher appraisal off my spec sheet then higher end appointments won't be a problem.
So retail price would be in the high $200's.
Going back to your original question--upgrades... What builders in my area do is offer the package at a base price and then buyers can pay for "options" (upgrades) for lighting, carpet, whatever. The house is delivered with the options installed. Also, the buyers could pay for the options separately--in other words, cash upfront--so they wouldn't go into the contract price and perhaps become an appraisal issue.
The technique works well. The builder puts the "hook" out there at a lower base price and by the time the buyer has signed a contract, it's not unusual for the buyer to have spent $50K or more in options. This is where the builders in my area really make their money.
Nancy, that is what I intend to do. Thank you. I remember our first house purchase when we got married. The GC told us what we could spend on fixtures, lighting, etc. Since we had just paid for our wedding, we stuck very close and never over his allowance. Do I need to say that eventually every fixture, lighting, etc. was replaced because they were CHEAP! I think in the area I am planning, I have a gut feeling that it will be sold in the building process, and upgrades from the allowance will definitely happen. I just never thought of the cash basis for upgrades. They just write a check to you for the difference? I guess should change my name to Cash!
It's not unusual for builders to require buyers to pay for options separately from the purchase contract. Done for several reasons--avoid a potential appraisal problem (where people load up the house with upgrades); also, transfer tax winds up getting paid only on the base price and not on the base + upgrades. I don't know if this is area specific. You might want to see what the practice is in your area.
I always recommended to new construction buyers that they minimize the amount of upgrades because builders (in my area at least) charge outrageous prices for upgrade items. As I said, this is where they make much of their money. In the long run, you and your wife were better off making upgrades gradually instead of paying the builder for them when you bought the property.
Nancy