How To Tear Down A Junker & Build New Construction

[Dylan Tanaka]

In July, the  REIA of Macomb's Live Event will focus on how to tear down old and build new.  In today's seller's market successful investors have to look outside the box for opportunities.  One way to accomplish this is to completely change the property allowing you as the investor to pay more than your competition.

If you're interested in learning how to put your investing business head and shoulder above your competition; get to a REIA of Macomb event soon. At the REIA you won't hear and get rich quick pitchmen, you'll get meat and potatoes advice from real investors who are doing business in out backyard today.

As we always say...Make It Happen!

[Sarah Lorenz]

Funny that this should come up today--I closed on this house in Ann Arbor this morning that fits this description. @Jay Hinrichs and @Bill Gulley are both right, this is a tricky business. My husband/partner and I bought a tiny, run-down 850sf house in Ann Arbor last year, took it down to nearly the foundation, then added a 1000sf addition. The house turned out beautifully, but it was a brutal project--took about 18 months and we probably would have made the same amount of money if we'd just done a quick cosmetic re-do and flipped it. Or kept it as a cruddy rental. We also took a lot of risk in terms of it appraising for the final sales price, because the only reason we were able to buy it for cheap was because it was in a tiny neighborhood that is just barely starting to gentrify, but surrounded by higher priced neighborhoods. We live in the area and know the micro-markets very well, but it still kept us up at night waiting for that appraisal--the construction loan appraisal came back at 350K initially (which we appealed) and we sold for 585K, which is what the finished product appraised for at the end. You can't really buy at a discount here very often, so you end up pushing the comps with a high-end product.

Jay is right about competing with builders in this type of market, as well as buyers who are trying to land a house in a hot area. Few houses in markets like these are in significant disrepair. And EVERYBODY is doing their post-recession renovations, so every good builder with the capacity to do a large project like this has an 18 month waiting list and is charging retail rates, so there is rarely room for an investor to hire a builder and also make a profit. Subcontractors are also booked solid and charge higher rates in upscale areas like this. And beware the cut-rate builders and subs--you'll pay one way or another. It took us about six months, four builders, and countless subs to get the estimates we needed to choose a direction. Then we had to have plans drawn by an architect. We also had about 20K of cost overruns due to a bad gas line and sewer pipe. And then the obligatory timeline overruns, which ended up at almost 90 days. We may or may not do this again, but if we do, we'll work as the general contractors ourselves--that's the way to double or triple the profits. And forget hard money if you've got an 18 month timeline,  400-700K budgets, and longer DOM/super-picky buyers with the higher end properties. Ann Arbor lures a lot of investors but I call it the flipping graveyard--there are about 10 "half-flipped" flips sitting on the market right now because of various miscalculations on locations, finishes, etc. I was worried we might join their ranks, but I'm breathing easier today.