How to partner with Developers for new construction

Question

I have been eyeing this corner intersection property for a new construction. The property across the street has been rezoned for a multi family. So I inquired about this corner abandoned house, and I just got word that it has been rezoned for a duplex.

Now I’m in the process of buying this property for the land value. But what are some creative ways to partner with developers to finance the construction? We currently do not have funds for construction but willing to give up fair % equity of the sale of properties

Thanks,

Joel

Mike Smith · Answer

I have people pitch this idea to me multiple times a year, so let me start with what not to do:

Landowner : I own a piece of property worth 100k, and I owe 95k on it.  Let's build a house on it and we can split the profits 50/50.

Me : So you put in 5k, I put in the 300k to build a home and 95k to payoff the lot, along with all my experience/knowledge and you feel 50/50 is a fair split?

Reality : Each party is paid a split on profits based on capital invested.  Each party is paid fairly for their work before profits are calculated.

Reality example :

Land cost : 100k

Build hard cost: 300k

Value at completion : 500k

Reasonable fee to build 300k home : 13% or 39k

Profit : 500k less 400k less 39k builder fee = 61k

Profit split (landowner paid in 5k): 5k/400k = 1.25% for landowner

395k/400k = 98.75% builder

Profit split (landowner paid 100k for lot, free and clear) = 100k/400k = 25%

Builder 300k/400k = 75%

For this reason, simply finding a piece of land without putting up significant capital or knowledge isn't worth much.

Sonu W. · Answer

I’m a builder.

The devil is in the details.  What are the margins?  How much is the true expense of construction and what’s my ROI?

If it’s a 95k lot, chances are the numbers will be too low for me to get excited about doing a deal like this.  If the hypothetical numbers are right (and I know they’re hypothetical), I’m taking on a ton of risk for like 10% ROI at 50% partner.

You’re better off finding a hard money or private lender that will fund the purchase and give you a construction budget.  Then hire the contractor to just build the property for you.  A lot cleaner/simpler.

Chris Seveney · Answer

@Joel Matthews

Create a pitch deck and market it to then with thre opportunity and who would do what

Rylan Lacey · Answer

I too get people all day long trying to get me to partner on projects and it’s just not simply worth it.1. Why would I partner with someone when I can just put down the money on the land and do the project myself? I know land can be hard to come by sometimes but not hard enough for me to rely on a partner. If my capital is too tied up odds are I have enough work lined out for me for the next 12-24 months.2. The margins are too low, especially on a deal this small. For splitting profits with a partner, I’d have to be doing a deal larger than ones I normally do to help mitigate the risk or cost.

Feels like with partnerships I’m educating my partner on a very niche market, and in doing so I’m cutting 50% of my profit compared to me just doing it without a partner.I recommend doing it without a partner, hiring a good architect and find a decent builder to build it. Odds are there’s a hard money lender willing to do the deal out there, especially if you’re willing to put more money into the deal.or if you really want to build this by partnering with a builder, If you owe $95k on a $100k land, when you get a construction loan, the land loan gets absorbed into the construction loan. If you’re both on the loan, you’re both on the hook for that land balance. So pay off the land free and clear with your own money, find a builder willing to partner 50/50 and have him build it for cost. You find the financing together (builder usually has some connections here) and split the money 50/50. His skin in the game is building it for cost and giving you the knowledge and experience to build it, your skin is your land owned free and clear.

Joel Matthews · Answer

Hi Mike,

thank you for taking the time to write out this thoughtful explanation.

I had a few quick questions, hoping you can clarify. Why did you include the $95k note over to the builder expense column? Isn’t 100k note that the land owner owes enough for his stake in the deal regardless how much he put down to secure the purchase of the land?

Also confused with the below, at first it says the profit split is 1.25 and 98.75 and then the second line item says 75/25. How would you split the remaining $61k in your scenario? 75/25 split?