My most recent New Construction spec home and what I learned

[Jacob Hamilton]

Investment Info:

Single-family residence fix & flip investment.

Purchase price: $480,000
Sale price: $1,080,000

This was a new construction project that I took on in 2021 and finished in mid 2022, the whole project took roughly 10 months from start to finish. I bought the property in a suburb of Washington DC, specifically Falls Church Virginia; this area has been growing a lot in the past 10 years with a considerable amount of new construction homes being built. The existing home on the property was slab on grade so this new home was built on the existing foundation.

What made you interested in investing in this type of deal?

I've been a real estate agent for the past 5 years and most of my business has been helping other investors and developers, in my market the traditional fix and flip margins are so low typically that this was the best happy medium between a fix and flip and a full blown development. Typically when you build a new home on an existing foundation you do not need a site plan so that saves a lot of time permitting and simplified the construction as well.

How did you find this deal and how did you negotiate it?

The lot for this property was actually on the MLS, it had been on the market for 45 days or so and was over priced by 6% or 7%, since it was overpriced there was simply not a lot of competition for this deal. I submitted an offer for $470,000 and it was listed for $500,000 originally and then we met in the middle at $480,000 with the terms I wanted. I ended up with a 10 day study period to check the footings on the foundation, verify setbacks, etc and then a 45 day close.

How did you finance this deal?

The financing for this deal was fairly creative, I used a combination of a private money lender and a mid sized local bank to fund the deal. I obtained a construction and acquisition loan from the bank and then I used private money to cover the down payment required from the bank; the private money was placed as a 2nd position deed of trust and the bank was in 1st position. The private money was a $200,000 loan and the bank loan was $630,000; the private money was paid at 12% and bank at 4.25%.

How did you add value to the deal?

As a real estate agent my value to this deal was finding the deal but also lining up the funding and bringing the team together to complete the deal. I have a small staff for my sales business that assisted in purchasing material, running permits, managing the GC and more. The GC we hired had very little support staff so my teams role in the backend of things was intricate in getting this deal done in a relatively timely manner.

What was the outcome?

This deal was profitable but not as profitable as we had initially anticipated and also took considerably longer than we initially anticipated as well. I've done a breakdown of the deal below, it was profitable but the education and experience from doing this was worth more than what I made.
Sale Price $1,084,650
Commissions and Closing Cost -$35,000
Interest Carry Cost -$37,000
Build Cost -$455,000
Acquisition Cost Including Points -$11,687
Acquisition Price -$480,000
Net Profit $65,953

Lessons learned? Challenges?

First lesson, be as involved in these deals as you possibly can. This is my third spec home and the first one I basically handed each draw I got the the GC without question, I made money but was not completely and fully aware of everything going on at the project everyday. This project I did hire a GC but was involved in selecting subcontractors, selecting finishes, county approval, every little detail I was involved in and now I feel more confident about the building process as a whole.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I did work with a GC who provided the proper licensure for the project, as well as daily project oversight. I would recommend that anyone getting into a larger project like this use a GC but make sure that GC will allow your input into the project. Take advice when advise is given but question everything you feel the need to question so you can learn about all facets of the business.