Multiple Lot Collateral for Construction Loans or Subordination?

Question

Smart people - if I own 24 buildable lots appraised ~$1.6-1.8 million in total (assessed by town at $1.4M), what do you think is the best way to build out the homes (notionally $300-400K builds/$450-550K sells) and make money: a) putting the least money out of pocket into project, and b) NOT signing on construction loan(s) if possible?  One of my friends said to subordinate the land to a GC willing to build/sign completion guaranties and bond and we split profits along the way.  Will any lenders hold multiple lots for collateral and release them for building maybe 3-4 at a time?  Please let me know if you have any experience with this situation.  Also, selling off any lots up front is not part of equation because I've agreed to fix the subdivision road these are in.  Thanks!

Lesley Resnick · Answer

Funding for small builders is really tough right now.  The terms are high and the level of effort to get the loan is onerous.  Fix and flip loans are cheaper and considerably easier to close.

Smaller building projects are often funded in cash on a phase approach.  As each house is closed, the profit is rolled in as working capital.  The snow ball effect.  It is a slow way to manage a project, but it works.

You could sell off some of the lots, before or after horizontal construction is competed.

ED - I agree with you about this site and residential construction.  I am not sure if there are members and they are silent or it is just not a focus.

Jim Froehlich · Answer

@Ed O. ...sorry for the delay, but yes regarding the reservation process (if you haven't already solved) - this might not apply in your case or state, but in our case because we were putting in infrastructure (new road) and had over 14 lots, our state law forces us to act like a new subdivision in terms of State Attorney General office registration, which is a real pain, but supposedly is for consumer protection. In addition, we had to Quiet Title (via courts) because TWO of the existing residents in this unfinished subdivision would not sign lien waivers they had against the former developer who left the road a mess - I tried to take the quick route, but they were stubborn and didn't trust me (I guess?)  Anyway, due to this quiet title action, we could only take NON-BINDING reservations during this time.  So my attorney did a simple reservation agreement and we collected $1,000 deposits and reservations (set up a website and small billboards advertising with Non-binding caveats).  In the end it was worth it I think because about 65% of the reservations converted to signed PSAs once we had the green light from the state.  I think they had 5 days to sign PSA or get money back and we had 10 days to return the deposits, which were held in escrow.  If you need a sample of forms we used, please send me direct message and I'll send to you.  Good luck!

Ed O. · Answer

@Jim Froehlich

Boom! Great stuff! Congrats on getting it across the finish line!

Thanks for the update on this.

I'm on the front side of a good size development - can you describe how you handled the reservation part of the lots from start to finish? The group I'm working with has discussed this, but we haven't come up with a full idea of how we'll be managing this piece.

Thanks!

Jim Froehlich · Answer

@Ed O. and @Lesley Resnick - since you were the only ones who ever chimed in on this one and I happened to logon, which is too infrequent these days, I figured I would update you...

This is how it went down...

1. It was a pain to get good quotes and available people to build out spec homes and I needed a reliable/credible GC to qualify for the loans I considered anyway.

2. This was a half-finished subdivision from the late 80s with middle to upper-middle class homes - the residents had a lien against the former developer who went bankrupt and left the road in state of disrepair (never done the correct way)...so 10 years bankrupt...I bought it from the town for backtaxes and agreement to build new road.

3. Spent ONE YEAR having to quiet title with attorneys because TWO people wouldn't sign their lien waivers against the property.  Won that.

4. Allowed people to reserve lots.

5. Figured out via simple math that building/selling spec homes was not a better proposition than selling lots outright.

6. SOLD 22 of 24 lots in past six months for 10-15% more than we conservatively projected. NOTE: the largest builder in our state put them under contract for $100K per, then backed out saying there would be too much sitework and tried to get them for $75K each - they sold for average of $122K.

7. 150% ROI in 18 months - no sweat...hah

Unicorn, but certainly worth the work/trouble.

It's just too expensive to build in most cases these days...this is one of my strong conclusions.

Thanks for your earlier feedback!

Jim

Ed O. · Answer

Most here would say I'm not smart, so tread carefully....

Best way to build them out might be how you've suggested. As a Builder, I wouldn't be interested in the deal right now (profit sharing/splitting), because there's simply too much work out there and everyone is turning down jobs. A modified approach to this could be for you to subsidize the builder by carrying the lots during the build and collecting your agreed to price after an agreed to timeframe. Lots of builders do this.

I haven't worked with a lender who would not release some, but not all of the lots out of a loan in the scenario you're describing. This is quite common.

Can you elaborate on your last sentence? How certain you are about not being able to sell lots outright (up front) if I am understanding you correctly. Why can't you simply escrow the costs of the road repairs with the local government or provide them a letter of credit to accomplish this? This happens all the time around me and in many ways it makes sense for the developer and the governmental parties involved.

On this site, it seems like there's a lot of crickets when the subject of residential development and larger scale residential building comes up....which is disappointing as there's a lot of wise people here... maybe the niche is smaller than I thought or we're looking in the wrong place for answers.... IDK on that one.....

Lesley Resnick · Answer

Sounds like a great project and you have a path.  Good luck.

I'm available to chat further.

Jim Froehlich · Answer

@Ed O. and @Lesley Resnick - thanks for the feedback!  maybe I will sell some of the lots up front and put that money in escrow for the road - I'll talk to the town about it - great idea.  I'm closer to solving this now as a couple local GCs seem interested in coming to terms.

Jim Froehlich · Answer

No "smart people" have ideas on how to do this?  you mean I have to think for myself?  (I'm in trouble)

Multiple Lot Collateral for Construction Loans or Subordination?

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