Joint Venture Partnership Structure With A Builder: Thoughts?

[Asad Shaikh]

Good day Biggerpockets,

I apologize if this post is lengthy. I think full context is helpful to receive thorough feedback. 

I live in  Florida and am a licensed real estate agent.  A year ago I had the observation that the modern/contemporary style is not common on new single-family home construction in our market, and ESPECIALLY at an affordable middle price point. I wondered the reason for this lack of market supply in the $300-500k ("affordable") range? I thought of a few possible causes: lack of demand, pricing of modern-specific building materials, lack of builder expertise in this type of construction, or lack of builder desire to create this product when cookie cutter sells so well in this price range.

I have no construction or development background, so I reached out COLD to a bunch of modern home builders in Tampa via email and phone call. Most of these builders built homes in the $700k- $2 million price range. I asked if they had any desire to do similar contemporary homes in the $300-500k price point, a "stripped down" version if you will. A few told me to eff off or kick rocks, but one builder was interested. He said he always desired to build modern homes at an affordable price point, but his clients had dragged his price range UP with custom home jobs.

He said the bottleneck or restriction in moving forward with these plans was A) lack of land opportunities in gentrifying communities, especially off-market (MLS deals typically were overpriced and left little room for profits and B) lack of capital to do multiple projects concurrently and make it worthwhile.

He proposed the following structure:

-I find off-market land opportunities in gentrifying neighborhoods.

-We split land acquisition cost 50/50.

-We use land as collateral to secure the construction loan.

-A 20% developer fee is factored into construction loan.

-I list and sell property with traditional real estate commissions. We split profits 50/50.

For example, a single family project we are currently working on has numbers that look like this:

-Land cost: $110k. (I put in $55k, builder puts in $55k)

-Construction loan : $240k ( $200k cost plus $40k developer fee)

-Projected sales price: $475k (low end.) After 8% closing costs, including commissions and taxes, this nets $437k. 

This means projected profit is = Net sales price - ( land cost + construction cost)

= $437,000 - ($110,000 + $240,000)= $87,000 profit. $43,500 to each party.

From land acquisition to the final closing of completed product averages 8 months. So ROI would be $43,500 on an initial investment of $55,000. A 79% cash on cash return. Is this a scalable business model? What am I missing here, what factors should I take into consideration?

PS. This ROI is not taking into account two key factors. In the stated example, the builder also earns a $40k developers fee. So his ROI is $83,500 on a $55k investment.

I am also not including my real estate commission. At 3% this is $14,250, bringing my total return to $57,750 on a $55k investment.