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!

[Bill Gulley]

Seems to me you're stuck with a lot, tried for 2 years to sell it and had nibbles. You wanted 35, you'd take 30.

Then you have 145 to build the spec, you build it and make 35 getting your land sale price, you end up with say 143.5 with sale costs selling yourself, with a realtor listing that's 10,500 for the Realtors, say 12,000 on costs of sale.

So, after you build the house, your labor, time, etc. you net 163. less 30 as a lot sale, just assuming you have a pressing obligation, you have 133, you lost 12,000 but dumped the lot.

What if you used your 145, paid off any pressing issue with the lot at 30 and you still have 115 cash and keep the lot for sale. 18k difference. 30k in land, 115k in cash = 145.

It's going to take 4 months to build that house, if it doesn't sell you have all your money in a rental and you'd be down 145 and still be stuck with the lot. A whopping 3% coc basically. Assuming you net that 5k.

I think I'd pay off my lot with any issues, use 115 to do 2 or 3 properties in those 4 months, contact the nibbles from the interest in the lot and cut my price to 25 subject to you building a contract home instead of a spec house and you'd be making about 25 on the house and getting rid of the lot, net difference to you 15K plus, you'd not have Realtor fees with the custom build.

115 from that cash should about 155 k in other properties, from your estimate on rents, that's 4,650 instead of 5k. plus your 15k profit, no lot.

I think I'd rather go with the last option, take less risk of all my money being in a spec-rental, get rid of any lot issue immediately, have other deals going on for 4 months to make money and possibly get a contract job with the perception of a much better lot price. :)