Making Profit While Paying a General Contractor?

Question

Hello Everyone!

I am currently planning on purchasing a piece of land and building a spec house on it to sell. I have already vetted the land with the city to make sure it was possible. I was originally going to manage the project myself and sub out all of the work. The reason being a General Contractor will of course charge anywhere from 15-20% of the building costs.

I found out though that only a general contractor can pull permits in the city I plan on building in which is completely understandable! However, I feel like this 15-20% would eat into my profits too much but it would definitely make the whole process much smoother.

I was wondering how many of you are using a general contractor to manage the project and still making a decent profit building spec houses? Or are you handling all of the contracting?

Thanks for your time!

Greg Dickerson · Answer

Yes you can still be very profitable.

Yes turnkey means the GC handles everything from permit to CO and gives you a turn key guaranteed price that does not change unless you make changes.

Also some GC have stock plans or do design in house which will save you on design fees. If you go with an Architect you can save a lot by using the same plan in different locations and pay a reuse fee instead of a full design fee.

Greg Dickerson · Answer

I started out as a GC so there is a definite advantage there but I still hired my own company to build for me as the developer so the company made a profit and I made a profit as the developer/investor. Now I hire GCs turn key. It’s way more efficient and profitable in the long run of you are not a builder. Keep in mind 10-15% of the GC fee is to cover WC/GL other overhead and admin costs, punch list, warranty and mistakes and overruns. When you hire a GC turnkey you don’t pay for any of that separately so you actual cost of using a GC is only 8-10% at the end of the day so your overall net profit is only  10-12% when you self perform.

The key is getting land at the right price. You need to buy right and with the market the way it is you should have no trouble using a GC and still getting your margin.

Wayne Brooks · Answer

Yes, as you’re beginning to realize, there is not enough profit for you And the GC....all aspects home builders are also the GC. Even if you could do it yourself, it would take longer and likely cost the same. The real value with a GC is not only do they know the process and how to properly schedule/manage subs.....they know which subs/suppliers to use and which ones not too. It’s not as simple as just hiring a bunch of random subs and expect it to get done.

Jaret Walker · Answer

@Johnny L. Yes Johnny it is going to be hard to make a profit in this situation unless the market is rising fast. I don’t do any single family but I develop multi family and use a GC. I hold my properties so I’m not needing to make the fast profit and can offfset the GC cost over time. I have had good luck with my GC because they have the time to do what I don’t want to do ( dealing with subs ). They SHOULD also know a lot more than me about the building process so this helps in the timely manner for project completion. If you wanted another option and do not need the quick cash you can always build the unit rent it for a year and then sell the property. This will help offset your cost for the GC and will put you into long term gains instead of short term gains. I hope this helps!

Emmanuel Garcia · Answer

I understand the temptation to handle 100% of the project management yourself to save the cost. Perhaps consider bidding the work to multiple contractors to get a fair price. Many reputable general contractors have experience with city/township inspections and final inspections before you can sell your home; they can provide value based on experience with trades inspectors and providing more accurate estimates for project costs based on current market value of work per trade. Not sure how much experience you have with development but if this is among your first, the cost of hiring a general contractor may save you cash in the long run. In the process you will also learn the steps to complete your next home. Based on my experience even with hiring contractors you may also need to do some minor project management to keep the project on track.

Michael Olawale · Answer

Hello Johnny,

How did the process go? Did it end up being a profitable model? I’m currently in the same boat and would appreciate your advice/feedback.

Johnny L. · Answer

Hey Greg!

I enjoy reading your responses on here and your YouTube channel so thank you for the reply! I definitely see what youre saying when you say its much more efficient when im not acting as the builder. Taking into consideration the WC,GL and him most likely getting the subs and materials cheaper than me definitely make it worth it.

When you speak of turnkey GC's are you speaking of GC's that handle everything basically from start to finish and charge you their 10-15% fee at the end? Pretty hands off other than supplying the financing and making sure the land is a good buy?

I appreciate the advice so far as I needed to hear this! I wanted to make sure it was possible to turn a profit using a GC or if I was missing something before I met with my architect.

Jaret Walker · Answer

@Johnny L. Good deal Johnny hope everything works out. Let us know how it goes!

Johnny L. · Answer

Hey Jaret! Thats what I was worried about. It seems like in order to make any profit as a developer selling spec homes you have to be a GC so you don't have to pay the fee and can organize the work yourself. That strategy actually does make sense to rent it out for at least a year and then sell it to recoup that fee of the GC. Definitely something to think about moving forward! I appreciate the information!

Johnny L. · Answer

I definitely see what youre saying about the General Contractor saving me money in the long run due to him knowing local regulations better and getting better price on materials! I just feel like in order to make money developing you have to be a general contractor. I feel like the contractor is eating into your profits a lot. Maybe im wrong because I lack experience in this arena but I want to at least turn a %15 gross profit off of the final sales price and its hard when youre paying the contractor %15 of the construction costs. I see what youre saying about going and getting estimates from multiple GC's to make sure im getting a good price! Something I will have to do.

Have you developed single family homes? This will be my first and I have my land vetted and my plans all drawn up just meeting with GC's now. I would love to hear your experiences!

Thanks!

Making Profit While Paying a General Contractor?

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