Why Building/Developing is Better Than Flipping These Days

[Juan Diaz]

Just thought I’d share some of my experiences with you all in the San Francisco market. The big, HUGE take-away that I’m getting from my experience over the last year and a half is that there is absolutely no money in flipping around here. Zip, zero, zilch. The market is so competitive that practically all the inventory is going at prices where we’d likely lose money. Now, before you say to yourself: “This doesn’t matter to me, I don’t operate near San Francisco!”, I have strong reasons to think that if you’re ever facing a similar market, that it will be very, very useful.

This was not something that I discovered solely because I was doing a deep dig on market inefficiencies, it’s something that happened because of the crazy situation we’re in here in the Bay Area. I’ve been a full-time flipper since about 2009-2010, so I missed the bubble when it happened. That meant that when the prices were rising like crazy in west Oakland, I was doing everything that I could to try and find ways to make money.

I was looking at tiny houses in west Oakland on a decent-sized lot, and wondering if there was room to expand. I crunched the numbers, and at the time 350-360 per square foot was about the top of the market. I did some quick math for new construction, and realized that I could build a brand new addition for about $200/square foot. Boom! Easy money.

Since that revelation what I’ve done is looked for small houses, on lots with room to build. If I can add on at $200/square foot in areas where the price per square foot is much more than that, it’s money in the bank. This has been incredibly helpful in helping me buy properties—the numbers don’t pencil for anyone else, but they do for me because I’m adding on.

With this success adding on, I’ve started developing, and have had some pretty fantastic results. The cost per square foot is a bit higher now with brand new development, usually around $250/square foot, but if you’re building 2000 square feet from scratch at a sale price of $400,000, you’ve got a potentially great deal.

The other part of this equation that I’ve left out so far is this: land prices haven’t caught up with the crazy housing prices. Commercial lots, yes. Large lots for housing developments, yes. But these smaller lots that can only host one to four houses/townhouses/units are much less in demand. I bought a lot in North Oakland for under $150K, and I’ll sell for $900K, with rehab costs of around $350K. That’s an insane return! It’ll take six or seven months, sure, but that’s a pretty great investment. It’s pretty crazy to me that these lot prices haven’t caught up with everything else yet.

I know that there are some downsides to the approach, including the time it takes to develop and the steep learning curve for those who don’t have a lot of experience with construction. But if you’ve got the gumption to take it, it’s a great opportunity in a super-hot market.

[Jan H.]

@Juan Diaz, great insight, thank you for your ideas.

One thing is not clear though: You are saying that  if you're building 2000 sqf at $250/sqf, you have a great deal at the sale price of $400k? Would it not cost $500k just to build it? Am I missing something?

Question for you developers: does the $250/sqf figure include all plans, permitting, infrastructure-related cost (water, sewer, utilities etc.), building? Or is this figure just a construction cost?

I know a few smaller developers who buy old homes on the peninsula, demo them and build a new custom home. They make a killing on them, but could never figure out how to raise $1.5M-$2M to play in that game. Emphasis on 'couldn't ' as now I am figuring it out...;)