Multi-Million Dollar San Diego Rehab/Spec Project

[Mark G.]

Hello,

I have not seen much in terms of case studies of $2M+Rehabs in the Bigger Pockets Forums so I wanted to contribute a little bit:

My partner and I primarily organize joint ventures with developers on ground up construction of small subdivisions and rehabs/specs of multi-million dollar coastal homes.

We recently closed on a $2,500,000 ocean view home in La Jolla, San Diego with a 17,000 square foot lot. We recently went through plan check for a 2,300 square foot expansion of a 3,700 square foot home and plan to have permits in hand over the next 2 weeks. We are gutting the entire property and adding an amazing basement, huge master and outdoor amenities that will rival some of the best homes on the street.

Rehab numbers came in at $1,000,000 including supervision and a $85,000 contingency. 

We anticipate a resale value between $4,800,000 and $5,200,000 for 6,000 square feet.

Lessons:

At the high-end market (when including additions) estimating costs is more difficult because of structural designs and final approvals from the City along with the general pricing of the very high end finishes - it takes time. 

It is critical that the general contractor is highly skilled and experienced. We have one of the best single family contractors in town who has had experience building over 5,000 homes so you get the idea.. (yes, 5,000).

The quality of the team organized must be unsurpassed at this level. Our architect, engineer, contractor, Realtor sales team and investor are all over 55 years of age.

I hope this short case study gave you some idea of what its like in this price range.

Feel free to ask questions!

Mark Gottschlich

[Mark G.]

Hello,

I was actually going to post an update this week so great timing. To start:

Budgeted permit timeline: 2.5 months

Actual permit issuance: 4 months

Budgeted construction timeline: 5 months

Actual expected timeline: 6 months

The reason permits took longer was because:

1. 1. Architect made multiple incorrect drawings and elevations for the underground basement
2. 2. The structural engineer therefor made incorrect calculations
3. 3. Our contractor was not able to use the structural engineer of his choice
4. 4. Rather than going through 2 plan checks we needed 3 to be done. 

The Lesson:

1. 1. The difficulty in building an underground basement cannot be underestimated even with a very qualified team. 
2. 2. When choosing a structural engineer make sure they have the right "attitude"  - this can be very tough because of the "engineer personality". The final choice was a little unresponsive, arrogant and not the contractors choice
3. 3. In hindsight we wouldn't have done a basement, it would have made permits much easier for approval. To give the city fairness they were doing their job from an engineering perspective to ensure a solid building. 
4. 4. Try to get the "as-builts" problem is houses in 1960 usually don't have them on file at the city. 

Construction:

1. 1. The scope of work for the basement is really extensive, slow and time consuming therefore bumping our timeline 1 month
2. 2. January - Surgical demo of the existing house and site work preparation takes 1 month.  The total demo bid is around $50,000 for all the heavy work required. 
3. 3. February - Framing of existing home and problems with basement plans after excavation cause a delay in the basement to be 1 month - slow and frustrating
4. 4. March - Beginning of foundation work and garage addition 
5. 5. April - Heavy duty progress on the basement, Finish first week of May.
6. 6. May - Now we anticipate it will go fast. Framing addition and finishing roof
7. 7. June - Everything Else, may creep 1-2 weeks into July. 

The Lesson:

1. 1. Have a fantastic contractor who really understands scopes of work this big and complicated - we are lucky to have an amazing contractor
2. 2. Keep it simple. In hindsight it would have been easier to demo the pool, build a new one and expand the entire addition above grade but from a cost perspective it could be the same. 
3. 3. Conduct more value engineering during the permit period, unfortunately we didn't do as much up front as we should have
4. 4. Control the architect and structural engineer and push them to do something more cost effective even on the little things. Remember it is the architects job to create the most amazing property at any cost and the structural engineers job to create the strongest building imaginable and up to "code".  There are better solutions to design (such as spray accents versus wood accents and organizing beams and hardware in creative ways rather than creating everything heavy duty) There are always options, ask the subs if you have to becuse they actually DO IT. 
5. 5. Remember the difference between people behind the desk and the people who actually build houses - they are 2 totally different perspectives, get them on the same page
6. 6. Always have a contingency. ALWAYS
7. 7. Best lesson so far: I'm only as good as the information you provide me. This trickles down to everybody involved. Take that one in..

The deal structure: You may be thinking about the cost of debt and how it is impacting the deal right now. 

1. 1. Our going in margin of 20% allows us with some room without impacting the deal veyr much
2. 2. We aren't using hard money, we have a creative structure where the cost of debt isn't a huge expense in the deal and everything else is mostly on budget
3. 3. Also every month of appreciation helps us resale the property. Every month that goes by we feel more confident we will sell for a high price.
4. 4. Case-Shiller said San Diego increased 70 basis months in March. That is an extra $35,000 in our hypothetical pocket. 

Lots of information let me know what you guys think.