How Would You Structure This Deal: You Own The Lot

Question

Curious as to the best way to structure a deal. You own the lot. You want a builder to come in and do the build. Then you sell the product and both get paid off. Houses in the neighborhood are up to 1M or slighly more.. The lot is worth about 400K. This lot is oversize allowing a bigger footprint, etc. Anyone have any thoughts or suggestions? I am advertising the lot on the BP market place currently.

Jon Klaus · Answer

I agree with Jay, you should get some professional advice on the 1031 exchange plan.   The safe thing to do would be to rent it after you build it to prove that your intent was to hold   Then sell in the future.  Maybe not ideal for your goals, but you don't want the 1031X disallowed after the fact.

I'd check with @Bill Exeter

John Weidner · Answer

I think it's possible to find a GC to run with your original plan if you add them to title.

However I like the suggestions better of a construction loan with hired GC as your profitability should be much higher in the transaction.  Why give up 50% of the profits?

GC aside you still need to be very involved.  The floor plan, finishes, selling price will determine if you sell the property in days with multiple offers or it sits for months with multiple price drops.   If your not good at the finishes I would hire a design consultant to pick the finishes given the end sales price

Jay Hinrichs · Answer

@Jon Klaus  I just made a clarifying post.

however its regional in my mind.. in the PDX market we are flat fee based.. from as low as 7k if your doing volume 20 to 30 homes a year in production housing.. to 25k or more if you building customs.

I average on my 350 to 450k builds 12 to 15k flat fee.. all other subs at cost ... and for insurance purposes we can't pay the subs direct we want that insurance on the GC.. but we are a signer on the GC account that is opened just for that build job.. our draws come into our account then we transfer the funds to the GC account.. and the GC pays subs.. but we get to see each and every invoice and check that goes out... Plus we require lien release from the past period before next draw goes out. We get release's from virtually every sub.  that's how we do it.. Giving 100% of the money to the GC and trusting they will pay has some major risk to it... I got burned in the melt down 08  so I know the pain first hand.. its tough to pay to build a house twice  :(  while the GC has walked off with the draw money...

Jay Hinrichs · Answer

HIre a GC on a fee basis.. make them show you all the sub bids.. Pay all subs direct..

give them a good enough fee to make it worth their while.. make sure you get an experienced GC

John Thedford · Answer

@Chris Seveney

Yes sir the lot is free and clear. I don't know the construction business. I assume I would have to pay a retail price whereas if I found a builder to partner on it we could both make some money. Maybe I am wrong because this is not anything I have experience with.

@Jay Hinrichs may have some advice?

Bill Exeter · Answer

@John Thedford,

Unfortunately, your intent is to build and then sell, which does not qualify for 1031 Exchange treatment.  You must have the intent to hold for rental, investment or business use.  You are actually intending to hold the property for sale (i.e., inventory in your real estate business) so it does not qualify for 1031 Exchange treatment.

Now, if you held the property as rental property instead you would qualify, but you would need to be able to demonstrate your intent to hold should you ever get audited.  The best way to demonstrate your intent would be to rent it long enough to clearly prove intent.  I would rent for at least 24 months (personal opinion) so that you straddle 3 tax years to demonstrate your intent to hold for rental since you originally helped develop the property.

John Thedford · Answer

@Dave Foster thanks. I was going to inquire if this would knock out a 1031 idea.@Jon Klaus thanks for your advice.\@Jay Hinrichs thanks as well.@John Weidner thanks.|@Chris Seveney thanks.This is why I come to BP. Smart people helping others learn! To anyone reading this post considering getting a Pro account...do it! Well worth the money in more ways than one.

Dave Foster · Answer

@John Thedford, As you know lot's are like pimples on a 14 year old in our neck of the woods.  Which is why you correctly identify that you're probably going to pay retail as there's not much benefit/incentive to a builder.  But I don't think you need or want to go all the way to a custom one off builder GC.    Those guys are one extreme or the other - experienced and pricey or inexperienced and dangerous.

You may want to do a sweep of all the builders in the area who are building spec on their own lots and have model homes.  Find a couple that you like and talk to them about building that model on your lot.  This way you get a product you've been able to see completed and you can vet the builder.  And you also get some economy of scale from a builder with a "been there done that" model.  They may even be willing to throw in their financing model to you.

Better think of it as a rental for a while.  A new build intended for sale does not qualify for 1031.

Jay Hinrichs · Answer

@John Thedford  I would check with a 1031  consultant and make sure this can be done in this configuration.. when you build homes to sell to the public its usually inventory.  but I don't know your situation of course.

and I did want to clarify.  that my advice was based on you getting a construction loan.. lender will want to know GC is Solid.

I would NOT put a builder on title at all.. to many things can go wrong... keep control.. even if you have to pay a little more.. if builder is bringing nothing more than experience.. just keep him or her as a paid consultant.  GC fee's vary by region.

Jon Klaus · Answer

"give them a good enough fee to make it worth their while.. make sure you get an experienced GC"

@Jay Hinrichs What would you pay the GC? A percentage of build cost?

How Would You Structure This Deal: You Own The Lot

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