First Time builder on a potential spec home

[Randy Pratt]

Hello! This is my first post on Bigger Pockets hope it goes well! 

I have been a low voltage contractor for 14 years, non-licensed. So I am not a newbie when it comes to construction. I have not been a GC however I have can do an know people that do, plumbing, electrical, low voltage, most of the Air conditioning system, hang drywall, irrigation. 

I recently found an old run down part of town that is starting to be bought up and there are several lots for sale around 50k, one receltly sold for 38k and there are some comps for 200+ with near 2000 sq ft houses. The lots are 6500+ sq ft, some are larger. There were 2 similar sized lots that one had the original home and the other was a flipped home, the original sold for under 100k and the flipped for 230k. 

This is very intriguing me and honestly I am becoming obsessing with building a house on one of these lots. 

My kind of plan is to get licensed contractors for the foundation, framing and roofing, the rest I can get done on the side or do it myself. During the housing boom I did a side job for a friend of a friend and he built houses with side labor work and made 50% margins on the whole thing. This is the first time that I can see me potentially being able to do this. 

About getting the financials done, my current house has about $80k value in it and I can sell this and then either rent a cheap apt or live with my GF parents for a few months. Construction loan the rest as my primary residence and I can either live in it for 2 years or sell it right after and hopefully make $50k plus and  have $130 to buy into a new house for my family. 

So thoughts? Good? Bad? 

[Mike Wood]

@Randy PrattNot sure your going to get the profit you are hoping, lets look at some quick numbers.

Totally rebuilt houses are selling for $230k, for a 2000ft2 house.  Thats about $115/ft2.

Lets assume you build a 2000ft2, with alot of your own labor, no GC costs.  My guess (based on my local costs) is that will run you a min. about $55/ft2 (assuming you use subs for electrical, plumbing, hvac).  That estimated price is for very basic construction (8ft ceilings, cheaper cabinets, cheaper flooring, vinyl siding, cheap windows and doors, etc.).  It would cost you about $110k to build the house (which I personally think is opportunistic).  You will have holding costs during construction, lets say on the low end thats $10k (interest, loan points, builders risk insurance, etc).  Assume your land costs is $38k. That puts construction total costs in the $158k range.

Now you list the house for $230k, and say you sell it at full ask, no seller prepaid money.  Your still going to have to pay 6% realtor commissions ($13.8k), so your max potential profit is $58.2k.  What happens if your build costs go up to $60, 65 or 70/ft2, your potential profit goes down to $48k, $38k and $28k.

You would really need to get a handle on your construction costs before jumping in.  Its a good sign that comps are in the +$100/ft2 range, which would be the absolute bottom that really could justify new construction.

Good luck.