Spec deal structure

[Account Closed]

How do these numbers look on a spec deal?  Enough return to justify the risk in your opinion?

Lot: $325,000

Construction costs: $450,000

Financing costs: $35,000 (est.)

Closing & commissions: $40,000 (est.)

BREAKEVEN: $850,000

SALES PRICE = $1,000,000 very realistic in this location

I'm lined up with a local portfolio lender who will loan me 80% of the acq + construction costs (includes hard & soft).  In this example, I'll get a loan for $620,000 and need to bring $155,000 in equity to the deal.  My plan is to put $20,000 of the equity in myself and bring the other $135,000 in with partners.  We are looking at them being invested in the deal versus me just borrowing the money from them at 9% for 12 months (or duration of the project.)

I'll be partnering with an experienced spec home developer and an experienced spec home builder, who also does his own spec deals.

If the numbers above hold true, the gross profit would be $150,000.  The builder would take 50% and I'd take 50%.

[Will Barnard]

Originally posted by @J Scott:

Originally posted by @Will Barnard:

I don't know your market, but regardless, the numbers presented are way too tight for my tastes and likely too tight to find a developer willing to put that much money into the deal and only get half of $150k profit. That is a lot of work and a lot of effort for a very small return. The dirt plus build total of $775k is 77.5% of the $1M exit. 

Will and I are typically in pretty close agreement on things like this, but in this case, I'm going to disagree. This is a 15% return on ARV and a 100% cash on cash return opportunity. While there are plenty of those around, it's not typical to find them in the million dollar price-range; personally, I'd love an opportunity to put $150K to work and double it in a single deal!

Perhaps it has to do with our areas -- there may be plenty of opportunities like this in SoCal...but not nearly as many in the areas where I invest...

 J, you may want to re-do your numbers on this one. Note that this is a 50%/50% split so the developer bringing %135k cash to the table only gets half of the $150k expected profit which is $75k. That is a 55.5% return, not 100%. While that is not bad, I think it is tight and in the  $1M plus range, you must expect the time frame to build and the time frame to sell to take longer than the average home. Typically, this will be a one year project and could stretch out longer depending on how easy teh city is to work with amd how quickly a buyer can be found. If the developer had nobody to share profits with and brought the $155k to teh table and made $150k, then you are much closer to that 100% return.

With the share of profits, that really makes what is a tight deal, too tight, again, in my opinion.