Guidance Needed - Working with builder on a tear down and build up

[Lucky Oldham]

While doing search for investment property, I guess I went too far and decided to convert my own (current) home into rental and bought an old property which needs to be torn down and built from scratch. It may not be best investment decision but something I always wanted to do. I have done my due diligence around property, city codes, cost of built up and finances and think that if all goes well I can be in a good new home at price point I can never imagine in this area. However, since this is the first time I am using a builder to build a whole house (I have done renovations using builders) , I surely need input from this forum on what should be on my watchlist. I am worried about cost, schedule but what would you suggest I should negotiate with builder to keep the costs in check. What line items in the builder’s cost I should closely watch? Since we are in very early stage, I want to play cautiously from here itself. To give you an idea, when I asked about “allowances” he said that those are quite generous and I pointed to him that it is very subjective term viz. Generous allowance from him may seem frugal to me.

What should be my focus area now that I don’t get surprises on cost and schedule? Also, what kind of activities would be too much of interference with his work as well as not worth my attention?

Since I am going to be deeply invested in this work financially and emotionally, I want to play safe and avoid big surprises.

Thanks in advance for your feedback and guidance!

[John Blackman]

@Lucky Oldham

 You are in for a ride.  I remember my first build.  I was such a pain in the #@%& to my builder, but that's ok.  The key is to make a good budget.  Get *everything* on there and get pricing established early.  Most builders are cost plus meaning they tack on a percentage based on the cost of materials.  I don't like this because it means I am paying more just because I chose nicer paint or fancier equipment that takes the same effort to manage.  So I prefer to do a fixed price contract that details out finishes or a fixed management fee attached to a budget.

Invite me as a colleague and I will share my building budgets with you that you can use as a template.  Construction costs in MA are going to be different than they are here in TX but you should get an idea for the categories you will need to consider.  You can also check out my new home build thread where I cataloged the process from beginning to end here on BP:

http://www.biggerpockets.com/forums/44/topics/1362...

Some things to consider:

1) Make sure you get builder's risk insurance to cover the cost of the building during construction in case of fire/loss etc.

2) Make sure your GC is insured and his subs are insured.  Your contract with him should place all of the liability on him. 

3) Get very crisp on the budget.  Add 10% contingency and try not to spend it.  Things come up though, so you are likely going to have some unexpected surprises.

4) Plan out your carry costs as part of your budget.

5) Make a schedule.  This is probably going to be the most challenging to hit.  One off builders don't usually have a pipeline process and will tend to move slower than a production builder, but you kind of have to live with it until you can scale.

6) Don't build the fanciest house in the neighborhood.  You will be tempted to put extra nice features into the house.  Don't.  Build for your market.  Spend what you need to sell in your market, maybe a few extras but don't get carried away.