Spec House Financing

[Graham Mink]

I am looking for financing advice for a spec house I am planning on building. Here are the details:

I own 5 rural building lots that I can't sell as vacant land. I bought the raw in 2005 and by the time they were ready to sell the market went south. No land is selling in the town they are located in, about 10 lots in the past 5 years and all for deeply discounted prices. In 2013 alone, 21 sfh have sold, so there is a much stronger demand for them so I am considering building a spec house. I know that it is risky to build Spec but I am getting eaten alive by taxes and interest payments and I have to do something. At this point I will be lucky to break even on the whole deal. I want to get out of the land development business and stick with the buy and hold cash flow properties that I have success with.

Here is my plan:

I have the cash to build a basic starter house on the property this spring. From doing my market research I can build the house for roughly $140k (which doesn't include the land) and sell it for $175-180k. I would break even on the construction and make $35k on the land. I have been trying to sell a lot for $30k for the past 2 years and, although I have had interest, no one has pulled the trigger. I won't sell for less than $30k for financial reasons that I don't want to bore you with the details on. If the house doesn't sell this summer I can rent it out and cash flow roughly $5k a year on it which isn't great but is better than a sharp stick in the eye.

My question is:

If I have to hold the property for more than 3 months what is my best option for financing the house to pull my money out so I can invest in something else?

My options are:

Heloc, which is difficult to find for NOO and has a variable rate.

Conventional financing as a rental, which is expensive and difficult to get.

Commercial long term financing, easier to get than Conventional but more expensive.

Are there any other options I could consider? Does anyone else have experience in deals like this?

I appreciate any comments or advice that you have. Thank you!