All Forum Posts by: Andrew W.

If the structure on the property is determined to have no value, be careful when you consider paying the “value of the land”.The value of raw land is different than the value of land with an existing structure, even if the structure has no value.  To develop the property, you would need to demolish the existing structure.  In other words, you will incur the cost of demolition just to get the raw land.  So in my view, the value of the land is what comparable raw land is going for, less the costs that will be incurred to get to the raw land. 

Quote from @V.G Jason:

Quote from @Charles Carillo:

@Lorenzo L.

The investors buying these properties could pay cash and make that 5.3% return. They could also be losing money in the short term while value-adding the property (before they can increase rents and NOI).

 This is how. And before someone says just keep it in a HYSA. A HYSA pays 4.5-5%(before rates went down) pre-tax, 3% net tax if you're a high earner. 

When I keep money in my HYSA, I make cash. When I buy property, I am long assets. 

I would rather buy the house at 5.3% cap rate than keep it in the HYSA. Obviously, I want higher so value add or re-finance as things happen I can always own the option. If it's a good asset(meaning primarily good location), you eat the 5.3% cap no problem you own the physical asset. When rates re-trace and other folks start trying to deploy the capital, I want to know I secured the (right) asset.

Right now real estate is a different ball game. For 95-99% of folks, right now nothing is happening. It's a stalemate due to affordability and either wages or prices give, I would bet the latter. 

I agree it’s a stalemate right now but in addition to the affordability, the issue is that it’s easy to make 5% (after tax) in the stock market, and has been for several years.  When you can get a similar if not better return on municipal bonds, after tax, it’s a problem.  The issue is the use of capital to buy a multi family for all cash only to receive a cap rate of 5.3%.  Yes you also get appreciation, but when a total stock market index like  (IVV) returns 30% over the last year and 90% over the last 5, I have a hard time advising someone to buy a property for all cash to receive 5.3% along with the risk, property mgmt etc.  that’s why leverage in real estate is a beautiful thing.  If you leverage, the analysis is much different.  And since the numbers don’t pencil out leveraging certain multi family at this time, back to the stalemate.  
.  

I know one but I don’t know how to share the info with you.  The rules of this forum prevent providing any contact information.

I know one but I don’t know how to share the info with you.  The rules of this forum prevent providing any contact information.

What are you referring to when you say more affordable housing?  Your first comment regarding attending city commission meetings seems to indicate that you are referring to affordable housing under state statues (i.e income and other federal/state restrictions).  Your comment about building more houses/increasing supply to make housing more affordable seems to indicate that you are referring to simply increasing supply to lower prices.  These are obviously very different things.  Creating more true affordable housing isn’t really something that you can tell your local planning and zoning.  Affordable housing is not something that they have any say in, as it is regulated by the particular state.  Local planning and zoning can generally not change that.  A planning and zoning commission can generally not turn down a development with affordable housing that meets all of the state and local requirements.  In fact I think it is more common that developers will increase the % of affordable housing allowing them to circumvent the local planning and zoning commission in their approval process.  Also, I think people generally want less affordable housing in their towns, not more.  I could be wrong, but it certainly true in my experience in the cities/towns that I have lived in.

@Alan Walker - Sorry for the delayed response.  Long story short, I ended up hiring a general contractor under a cost-plus arrangement.  It is somewhat of a unique situation.  The spec home that I am building was based off of a home that was built not far from my property.  I used the same basic plan and architect, and the GC is the same one that build that house.  So he knows the cost etc.  I am also very involved in reviewing proposals, selecting subs, design, etc.  That is part of what I am paying the GC for, however it has allowed me to understand the process in depth, as well as keep an eye on costs.  This was also significantly easier to get a construction loan.  Given the factors that I noted in my initial question, the construction loan was very easy.  My plan is to complete this build and proceed with the next.  On the next, I may build the home myself, not using the GC.  I anticipate that the construction loan would be easier with the same bank that I used for the first spec home, since we will have history, etc.  I am using a local bank - Savings Bank of Danbury.  They did say that it is possible to get a construction loan without a GC, but it takes a good story, etc.  Assuming I do go that route with them on the next build, I'll post how that goes.  

If you are funding the entire project, I am curious why you would want to share profits.  I have recently begun my first project as the investor/developer.  I considered similar types of arrangements but in the end went with a cost-plus contract.  One of the potential issues with a cost plus is that the interests of the investor and builder are not aligned.  There is no incentive by the builder to keep costs down.  In my case, I have relatives who are builders (in a different state) but have good connections with subs, etc. and I am spending the time to personally review all proposals (obtaining some on my own as a check), etc. so that I am confident that the cost incurred is appropriate.  Just looking at my situation, I am paying the contractor cost plus 10%.  The 10% of total cost is significantly less than what 50% of the estimated profit would be.  To give you some perspective, 50% of the profit would be around 25% of total cost, significantly higher that what I am paying.  So, while there isn't incentive by the contractor to keep costs down, even if I am paying a few more % in costs, I am still significantly better off than splitting the profit. Personally, I would start by getting a proposal from a builder to build the home and compare that to your estimated selling price to see what your profit would be.  My guess is that you will be better off just paying a builder their normal profit on the construction than with a 50/50 profit split arrangement.  Also, this could change based on the cost of the home, etc.  I am building a high-end home, so the dollars are bigger, etc.  Additionally, I own the land so theoretically the builder would be getting the benefit of the land location, etc. since this increases the sales value and related profit on sale.  Good luck.  I'd be curious to see what you decide.

I am entering into a cost-plus construction agreement for a new single-family build.  Is it common to withhold retention from the general contractor payments until lean release is obtained from the sub performing the work?  

Quote from @Nicholas A.:

I was hoping that I could post this anonymously, honestly.  Slightly concerned that I might catch a bunch of undesired feedback. The following post is purely to show that I have learned a lot on my first ground-up home build and partnership, or really lack there of. I put this together quickly and hope it will bring value to those looking to embark on their first home build... with a partner possibly. You don't know what you don't know until you learn it.... and sometimes these lessons cost money, stress, and time.

Enjoy -

How To Not Build your First House

Embarking on the journey of building your investment home from the ground up is an exhilarating prospect. However, the path is fraught with challenges, many of which can be avoided with careful planning and consideration. Drawing from the lessons learned in my firsthand experience, here is a fairly comprehensive guide for first-time home builders.

In the early stages, a significant oversight became apparent: the gross underestimation of the total funds needed. The lesson learned here was to meticulously calculate all expenses, including those often overlooked. The builder's fee, for instance, should not be an afterthought but an integral part of the budgeting process. This seemingly minor detail can significantly impact your financial stability throughout the build.

Building a home often involves partnerships, and it's essential to ensure balance. Partners should bring not only financial resources but also relevant experience to the table. Unequal yolks in a partnership, such as a lack of equal funding or varying levels of experience, can lead to friction down the road.

Financial planning goes beyond securing a construction loan. It's imperative to have a plan for covering interest-only payments once the reserves within the loan are exhausted. Additional costs like HOA dues, neighborhood maintenance funds, and property taxes over the duration of the build should be factored into your financial strategy.

The foundation of any successful partnership lies in a robust operating agreement. Ours was weak and unprofessional, lacking essential elements such as an arbitration clause, dispute resolution mechanisms, and clearly defined communication methods. Ensure that your agreement includes specific responsibilities and emphasizes the importance of timeliness.

Choosing the right builder is a pivotal decision. It's not enough to review blueprints and designs on paper; a face-to-face meeting with potential  builders is imperative. This provides a valuable opportunity to gauge their past experience, assess the quality of their work, and even visit current job sites to witness the built quality firsthand.

Understanding the market is essential when designing your home. Investigate what features are most desirable within your target market. In our case, we learned the hard way that a one-car garage is highly undesirable. Additionally, a 3-bedroom home without a private master bathroom suite may struggle to attract buyers.

Communication breakdowns can be a significant source of frustration. Our operating agreement lacked clarity on communication expectations, response times, and methods. Set these expectations early with your builder and partners. Documenting every expense, transaction, and correspondence diligently is a practice that pays off in the long run.

Many aspects of the home-building process are negotiable, including the builder's fee. Don't shy away from discussing and negotiating the terms of the builder's compensation. This can have a significant impact on the overall project cost.

In conclusion, building a home from the ground up is a monumental undertaking that requires careful consideration and planning. By learning from the mistakes and oversights made during our journey, future home builders can embark on their projects with a clearer understanding of the potential challenges and how to navigate them successfully.

Learn from the mistakes of others, it's cheaper and less stressful - Nick 

Thank you for your willingness to share.  Most of us learn the hard way and it’s very helpful to hear honest feedback with experiences such as yours.  It’s very easy to Monday morning quarterback.  I’m sure this was a learning experience for you and that this experience will benefit you in the future.  Thanks again for sharing your insight.  I would guess that most successful real estate investors can relate.   

@Shawn W.It is very common to include these types of clauses in commercial contracts.  I'm not that familiar with residential but I would imagine it's fairly similar.  However, it's not all in favor of the buyer even with these terms.  Generally, the builder will get a benefit (i.e. a bonus) if the project is completed early or by the first completion date.  After that, the builder would pay a penalty which would increase until completion.  As someone in an earlier post said, there are too many factors out of a builder's control to just agree to a firm completion date with penalties for not being completed by then.  So, the builder has to have some additional financial incentive before they would enter into a contract with a firm completion date.  Even with this type of contract, there are still things that are out of the builder's control that would move the completion date out and not result in a penalty.

Also, the contract clause relating to completion is not uncommon on smaller projects.  Sounds like it says the builder will use their best efforts.  So, they are legally required to do that.  I believe you would have some legal recourse if they were delaying the completion unreasonably.  

Regarding the comingling of funds, I assume that they are also buying the lot from this builder?  If not, I don't think it's a real estate transaction.  All states can be different but in the states that I'm familiar with you wouldn't escrow payments for the construction of a building.  If they are truly buying real estate, I don't know the answer, but I'd be interested to hear.  I would be surprised if the funds were not allowed to be comingled.  Someone earlier mentioned they should go into escrow. I don't think that really makes sense for a building contract.  If you put the payments into escrow, who is paying for the construction?  Interesting questions for sure!