Help evaluating this wholesale deal for a builder/developer

[Spencer Bowen]

Howdy! I'm just getting started, and this is the first builder/development contract I've hit upon through my marketing. Is this a good deal? Here are the details: Contract is $280k for a view property (lake and territorial), with Lake Washington beach access on the title. It's on Goat Hill in Kirkland. The job requires replacing the entire existing structure. Building a 4/4 3200 sf house at $125/sf (plus permits, plans, holding and laying foundation) and selling at $345/sf would yield $134k profit with a hard money loan at 4 points and 12% (assuming holding 8 months for permits and 8 months construction). Known issues: 1. The existing structure sits near the property line and cannot utilize the existing foundation with current side/back distances. 2. The lot is on a hill, with about a 50 ft grade from one end to the other. This is what gets the property it's view. 3. There is a stream on the adjacent property, about 25 ft from the property line, that could potentially require obtaining a reasonable use exception with the city of Kirkland (it depends on the type of stream, which is determined through testing). Kirkland permit office estimates 8 months to receive a reasonable use exception, if it's needed. They would need a stream biology report, soil report, foundation and rainwater plans, and full design drawings. To address this, I have factored in 8 months to obtain permits and $100k for plans, permits, holding costs and laying foundation. Even with these costs, assuming $345/sf, a hard money loan would yield around $134k with 66% cash-on-cash in the worse-case scenario of carrying the acquisition loan for 8 months before starting construction. What do you think? Is the juice worth the squeeze? It's a lot of leverage and a decent amount of risk for $134k, but profits could be a lot more as well if the exception isn't needed (saving $20k in holding costs). I think the market is strong, with some houses topping $400/sf, and over the course of 8 months the value is going up. Thanks for your thoughts and feedback, I really appreciate it! Spencer

[Rich D'Agostino]

Hi Spencer,

It sounds like your bumping into some good to decent deals and I would be happy to share with you the types of deals that I'm seeing on a monthly basis that make sense and others that don't.  Without knowing all the details the goat hill project sounds really tight given the potential of a difficult build being on a slope.  You can't go wrong with QA projects, so between the two the townhome project makes way more sense.  You can call me to discuss further, but in my opinion the Goat Hill project would need to be north of $300k projected profit to make it fell more comfortable and give you more room for margin for error.