My journey building a cabin in the Smoky Mountains

[Jason Potts]

Hi, I wanted to share my experience of building a cabin up in the smoky mountains remotely from Florida.

Back in October 2020 I went up to TN to view a recently completed cabin by a builder that was beautiful then walked a new build that was already 50% complete with an expected completion date of March 1, 2021. We signed the contract and put down the earnest money in November. I was in the process of selling an LTR in FL that was going on a 1031.

We got an amazing deal on a 5/5.5 with an indoor pool. However, here we are 6 months late and still another 30 days from close (Sept-30). We are furnishing the place ourselves, and live in Florida so our home is filled to the ceiling with furniture that we had to redirect from TN to FL. We have been on a waiting game as the builder typically waits to be about 10 days from the next closing date to tell us “I need another 30+ days to complete”. My local agent/representative always seems to be surprised when this happens. We have gone through this cycle 6 times now. I have become a ninja at rescheduling movers, moving trucks, freight shipments, closing dates, Insurance effective date, etc. What took me an entire day to complete at first now I can do in 2 hours. 

I have talked to 30+ lenders from Credit Unions, Local Banks, Sophisticated Online Brokers, Private Lenders, you name it I have likely talked to someone. We have gone through the full underwriting process with 4 different lenders as underwriting criteria kept changing as the year went on, and we needed to get creative. I'll note of the 30+ less than half were able to wrap their policies around an STR Jumbo 30yr loan.

I would have walked away long ago, but knew I had at least $100K in equity on day 1 (confirmed with appraisal last month), so losing the 1031 wasn't too painful. We honestly feel that the builder was hopeful we would walk away as he is selling 4/4 with indoor pool next door for $100K more than ours right now. The 4/4 hadn’t even broken ground when we signed the contract in October and is expected to CO in September as well. I’m sure lumber prices and a tough winter had some impact.

I can’t complain on the fit and finish as everything is looking beautiful. I’m going up this weekend to confirm we are on track to complete end of September, and do a punch list.

So as I sit in my primary residence filled with: 37 pillows, 8 TVs, 10 night stands, 5 dressers, 2 sofas, 10 rocking chairs, 8-mattresses of various sizes ready for TN; I see a positive. We have gone through a ton of challenges and have learned so much. I have learned the value of a lender that really understand the market and the STR business model. I also understand the value of a good agent who is on my side, and acts as my local eyes and ears. I have been forced to learn RE tax strategies, that has helped me know what questions to ask when I hired a new CPA (my new one is Rockstar). I know now that we can take down the next deal without thinking twice about it from all these learnings. As I say to my family and friends who have watched us go through this cycle over and over again. If it was easy everyone would do it, and to be honest none of it was all that hard just took time to sit back look at the big picture, determine options, and execute.

Good luck to you all out there looking to take the plunge, sometimes you just have to jump in and figure it out.

[Ken Boone]

Jason - This is not atypical.  It has been like that for the last 18 months.  Workers are in short supply in that market.  The builders are over booked due to the buying frenzy that has been going on. I too went through several lenders and took about 5 months to close due to underwriting changing the rules multiple times.  They made the final change the week of closing and wanted me to go from 25% down to 35% down and at that point I told them to pound salt.  So yea it took forever, then we closed and waited like 2 months for the county to turn over the building permit.  Then it has been slow going on the build due to labor shortages, supply shortages etc..  That is unfortunately how it is up there right now.

As far as a 1031 exchange.  I am assuming you are closing when they cabin is complete.  I think the only way to do a 1031 up there right now and be successful with it on a new build is to do it with a construction loan instead of builder covering construction.  I have been looking into this for quite some time and my limited understanding from what my 1031 broker told me is that on a construction loan, you only have to have enough equity in the property to match the funds from the sold property.  So for instance if you walk out with 150k from the sale of the first place on day 1, then on day 2 are ready to put in contract on lot and build, and it takes several months to close, in a lot fo cases, the lot alone will cover the 150 at this point in time, if not, lot and foundation will get you there.  At that point they can complete the execution of the 1031 even though the cabin is not finished.  That is my understanding.  I think that would be the only way to make it work there.  By the time my build is complete, it will be over a year since I put the offer on it.