1st Deal - New Construction of Duplex

[Gabriel Graumann]

Investment Info:

Small multi-family (2-4 units) other investment.

Purchase price: $98,400
Cash invested: $400,000
Sale price: $560,000

My first new construction project. Purchased unimproved land with intent to build a duplex. Took more time, more money and learned numerous lessons the hard way regarding developing land.

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

I was struggling to find a multi-family property that I liked so opted to try building one instead.

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

The deal was a referral from a broker who lived in the subject community.

How did you finance this deal?

Partnered with an investor for the acquisition funds needed. Paid the pre-development expenses out of pocket. Used a construction loan to fund the build-out that rolled into long-term financing that was activated upon construction completion.

How did you add value to the deal?

Took the property from raw, unimproved land to construction of a brand new duplex.

What was the outcome?

Unfortunately my timing and management of the first project was not great. Completed construction and lease up in the fall of 2008, right as the local market started to get hit hard by the recession. As a fringe market of the Seattle metro, we saw rental rates drop and we had one of the two renters lose their income source which triggered a string of negative financial events.

Lessons learned? Challenges?

Numerous. Learned the true cost of improving raw land, the time required to do so, witnessed the challenges of managing new construction from a distance, and the effects of a receding market on fringe communities. In summary, I didn't do enough homework on the front end and I relied too heavily on brokers and sources that weren't educated enough themselves on the process I undertook. Ultimately, I should never have purchased this deal and yet learned so many lessons that I may otherwise not have

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

Unfortunately not on this one. As mentioned, the realtor who brought me the deal was a personal friend who claimed to be an expert in the market and also lived in the subject community. In hindsight, he was a newer broker who had early success due more to a hot local market but had zero history in unimproved land, development, or the construction process. I was new to the residential development business & didn't interview other brokers, talk to experts in construction, or perform due diligence.

[Gabriel Graumann]

@Jared Boundy The lessons did provide an avenue to pursue other development types and have a better understanding of what it would take to make a deal work. I'll be posting a few additional projects before and after this one that may be helpful for others to learn from soon.