How do you find a deal in a market without deals?

Question

So in the market I live in (which is a relatively small town) it would literally be cheaper to buy land and build a 2 bedroom 1 bath house than buy.. it’s a crazy rental market and by crazy I mean everyone is renting and there aren’t enough rentals to go around. I have two home but had to put hefty down payments and even though I am making 250 cash flow I had to put down thousands to get them. All of the homes for sale are 10s of thousands in some cases over what they appraise for and I’m just at the end of my rope. Everyone I’ve listen to have said never build to rent always buy. But is building a bad thing given my circumstances?

Dennis M. · Answer

Stop searching the MLS and using realtors . You need to go off market and find motivated sellers ! Market for distressed homes . Rest assured there’s guys killing it in your area behind the curtain . Good deals aren’t “ found” they are created

Tim Johnson · Answer

@Jared Hawsey

You better read the fine print on those prices.  To give you idea the national average for Habitat for Humanity for building a home is $65 per sqft and they get all the labor donated for free.

You can't build a house cheaper than Habitat, not possible.  The largest mass builder in my area that builds 5000 plus house a year builds bi-levels boxes with nothing fancy in them.  And they build them for 85sqft, and they move serious volume and they even own a lumber yard.

Your 55sqft number is missing something.

I would dig deep into your city water and sewer hookup and get a quote on install on that.  If they have to cut the road and patch I just did one about a year ago and its was 14k.  The house was 30ft from the road and you had to use licensed and bonded city contractors and they charge up the nose.

Steve K. · Answer

Well if you're getting serious about building, you'll definitely want to take a harder look at the actual cost to build. Sounds like you're in a low cost-of-living region but even if you're on the very bottom of the scale in terms of building costs, it'll likely be closer to $150k bare minimum with even the most basic finishes. Regarding the companies advertising $49-59/ft2, that seems ridiculously low so not sure what that includes. Also doubt that's their price on an 850ft2 build because they'll have to cover all of their same fixed costs as they would if building a bigger house. If you're going to spend the money to build a house ground-up, certain base costs are built-in whether it's 850 or 3000 square feet so it makes more sense to just build a proper 3/2 with a modern layout that will have much better value.

Take a look at each of the line items I specified earlier and price them out plus remember if you're going to set it up as a rental you'll also need to have it move-in ready with all fixtures and appliances, landscaping and everything. I don't think there's anywhere in the country where you can achieve that for any less than $150k (straight construction cost only, not including land purchase, closing costs, financing costs, etc. so you'd likely be all-in for over $200k said and done).

If the problem you're trying to solve is having too much cash tied up in your properties, building will probably just tie up a lot more cash as most construction loans require a higher down payment (typically 20-50%) and it will probably take a year or more before you can get it designed, permitted, built, and rented.

Running rentals is one thing but development is a whole other ballgame. First-timers should plan on significant cost and time over-runs because there are a lot of moving pieces that need to come together and it's a steep and expensive learning curve.

Owen Dashner · Answer

Another option is to look outside of that immediate area.  There should be more affordable property within an hour or 2 of where you live - it could be well worth it to drive a little further.  Even most crazy expensive coastal cities have affordable housing stock 2 hours outside the city.

Account Closed · Answer

You can find a house to buy a lot faster than building a house. You need to drive for dollars, door knock, and send mailers to buy a house "off market", one where they are considering selling but haven't listed. You can buy it by taking over their financing and save a ton of money.

James Wise · Answer

A massive direct mail campaign will allow you to reach the sellers before they put their properties on the open market and drive up the prices.

Brent Paul · Answer

This question seems to pop up every once in a while and stifle people from investing.  You should be able to find a house somewhere within an hour to 2 hours of your location that fits your budget.  Everything in my area leaves very little cash flow and they all cost 230k+ with lots of repairs needed.  However if I drive an hour north I can find all kinds of houses for 150-175k that cash flow much better.   If you are looking on the MLS search by county instead of city, and input 2 other counties near your.  I bet you will find something.   Also there are a ton of Wholesalers in Alabama I have seen here on BP.  Start networking with your local real estate groups.  They are always looking for buyers to scoop up these deals.  Those that wait unfortunately miss out on that opportunity.  I went to a networking event over the weekend and the guy next to me was a wholesaler.  Through normal conversation he gave me his card and offered me a house he just got under contract.  Never say never.

Or as others have said you can start knocking on doors etc to get your name out there for potential sellers.  The BP podcasts have covered this quite a bit. You could easily listen to some of these driving in your car.

Building will tie up a lot of your cash and not only that inspectors can be a real pain as well as dealing with the city that approves everything.  Near me it took 6 months just to get a garage built because the city kept sending the plans back for revisions, and having to send it to the next meeting.  Huge pain.  I probably will never build for that very reason.  And if it's a bigger city they may not even get to the vote for a few months.  Do you want your money tied up for 6 months?  Think of how many properties you could have purchased in that time.

Jared Hawsey · Answer

@Steve K. No I am not factoring in every single one of those you listed. There are quite a few companies around me advertising $49-$59 a square foot for a new home. Obviously I’m not going to live there myself so I’m not particularly picky on what type of countertops and how energy-efficient the windows are. My plan was to find some blueprints online I was happy with and purchased those. I can also get anywhere from a 1/4 to 1 acre of land downtown ranging from 4K to 8k. keep in mind where I live has a population of around 8,800 people but is within 1 hr or less of major cities.  You are talking to a 25-year-old who has only purchased two homes in his life. So at this point everything I do is a learning experience LOL I just can’t afford to put 10k every time I go to purchase a home. The rent just is not high enough

Jared Hawsey · Answer

@Parker Eberhard no just a rough estimate. I’m adding about 5 grand to it and the land that I have found is clear and flat with city hook ups.

Steve K. · Answer

@Jared Hawsey I’d be curious to hear more about how you could build a new home including land purchase for $50k. Average price for a new home nationwide is currently ~$290k, not including land purchase. In my area you’d easily burn through $50k before even breaking ground. Are you including everything (design/ engineering and permitting costs, utility tap fees and connection, site work, foundation, framing, plumbing, electrical, HVAC, interior and exterior finishes, landscaping, construction insurance, etc)? If you can build for that cheap you should do that, but I don’t see how that would be possible as materials alone will likely exceed $50k even for a very small home.

How do you find a deal in a market without deals?

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