All Forum Posts by: John Blackman

Anything other than 50/50 is likely to cause some tension.  It's very much like a marriage.  You'll need to both bring equal sweat and equity to the table.  More cash from one side is easy to justify more returns for a specific deal.  It can be great fun to do deals with your friends because you are going to know you already work well together. 

You also need to ask yourself how you will handle a situation where there is a financial loss.  That may test your friendship, so predetermining it early will help mitigate any bad feelings because you agreed and put it on paper.

I would also recommend adjusting your splits on a deal by deal basis.  There might be a case where one of you is bringing more money to a deal or where one person isn't as available and one side is doing more work (time) on the deal.  The more you clearly define up front in terms of how you will compensate each other prevents blow-ups later.  Negotiate wile your friends and get it on paper and backed up in the cloud.

So when disagreements come up you can fall back on your agreements.  I've done this plenty of times with Bryan.  We get enough deals going on that we forgot how much money we put in or who was doing what.  So we go back to the agreement, and go oh yeah that's what we wrote down 8 months ago, ok.

If you have all of your arguments up front, it will practically eliminate them when the tensions are higher.

@Karen Margrave 

 The city is currently averaging 4-5 weeks from permit drop off to permit in hand.  That assumes one round of comments that can be successfully addressed.  If there are any hiccups at all (Historic, multiple rounds of comments, City changes their requirements) this can go up to 6, 8 weeks.  Our worst has been 1 year of permitting before we could start.

Where we build we may have a lot empty for about 3 months before we start to build.  It generally looks like this:

Day 1 - Under contract

Day 30 - Due diligence complete, money raise under way possibly complete, start designs

Day 60 - Close lot purchase with equity. Designs complete, submit to City of Austin, start loan review process

Day 90 - Permit ready - this can swing anywhere from 30 to 180 days depending on how crazy the city is.  When everything is operating normally, 4 weeks is average.  Historic reviews, reviewers on holiday, and politics can increase this amount by 2-10 fold.

Day 100 - Close the construction loan

Day 101 - Grade the lot, start construction.

So on an average deal from contract to start is usually 90-100 days.  This only applies to our projects in Travis county, Texas and our experience level.  I'm sure other folks can move faster if they have faster designers or are willing to purchase sooner with less due diligence.  So your mileage may vary.

You can deflect timelines like 6 months with critical events like say getting your permit.  A lot depends on your market but instead of putting it under contract for n days, put it under contract until the permit is approved or some event reduces your risk.  This can usually be coupled with some non refundable earnest money every 30 days to show you are serious.

We try to get close with permits, but often cannot.  The next stop is 90 days, then 60 if we think we can confidently rush it.  30 is just too few to get all of the due diligence done and raise the money.  If you had cash, 30 days might work but you would need to be super confident in the lot.

It's also the middle of December, the worst possible time to sell a house.  Dropping the price may not even work.  The higher commissions will get you on top of broker lists for sure.  Sales will start to pick up in January.  It's easy to panic and start cutting prices, when sometimes it just takes a while to sell a $900k property.  This is why I like to build stuff at $400k and under.

You will eventually sell the property and I am sorry if you have to take a loss on it. 

However, don't throw in the towel because you got burnt on your first deal. You now know a lot more than you did before.  You know what to spend and what doesn't work.  The experience you've gained will make the next one better.  I've paid my share of dumb tax, so keep your chin up and go into the next one with a better plan.

Good luck.

Here's how I see it.

GC - Someone who rides herd over the sub contractors, tradesmen, etc.  This is also effectively a project manager for a given house.  We hire these to do all of our jobs.  They are independent.  We write contracts for them.  They are 1099-ed.

Project Manager - Can be another name for a GC in real estate lexicon, but I see this person as a manager of the general contractors.

Our company hires GCs to do all of our jobs.  Each GC gets a contract and acts as their own company.  This does two critical things.

1) Puts all of the employee risk on the GC.  The GC becomes liable for the job.  We act as financiers.  This is critical for a risk mitigation standpoint.

2) Allows our organization to scale.  A good GC can probably handle at most 10 projects before they will start to drop some balls.  You can only do as many deals as you have managers.

This way if we want to do more, we hire more builders.  Now there is a significant portion of margin in a deal in the GC fee.  Many more deals work if you are the GC because you're effectively paying yourself.  So in order for a deal to work for us it has to be thicker than most, so we are very selective.  If you make the wrong buy, then you're going to come up thin.

However, even if you come up thinner you can still scale by hiring more GCs.  If you ask yourself, how do I do 100 projects a year, you're clearly not going to be able to do that if you are the GC on all of them.  Any large organization has a chain of command in the shape of a pyramid.  If you want that GC fee for yourself, fine, but you are short selling your company by not allowing it to grow.

Now finding competent builders is going to take a while.  We have been through 8 and have kept 3.  Those 5 cost us some money.  Fortunately we still made money on all of our deals but some came up less than we targets and over schedule.  You will find out pretty quick which ones work and which ones don't.  This is why when we hire a builder we only give them one project and wait to see how it goes before giving them 2, then 4, then 10.  At 10 we stop unless they are very good at scaling themselves.

Right now our company is at a point where our manager of the GC's is at full badwidth, namely me.  So we're going to be adding more project managers that will help manage the GCs as our company grows.

www.basecamp.com

Enjoy!

Karen,

I'm sorry to hear about your predicament.  I certainly hope we don't have to go the legal route.  That is almost always more expensive.  Your insights are helpful as always.  I'll let you know what we 'dig up.'

I take you are still under litigation with the neighbor.  Do you know what his pain point is?  Does he just feel entitled to it?  Does he know that will prevent your home from having utilities?  It boggles my mind that a neighbor wouldn't want you to be able to have utilities to your house.  I think most folks just think developers are somehow out to damage you because of a few bad apples or the ones that get in the news.

Good luck with your neighbor.

Many banks in my experience work like this.

Day 1: Yes

Day 15: Yes

Day 30: Yes

Closing Date: No

This is typically a result of the guy you talk to at the bank is generally in the position of selling loans, so he's more likely to say yes.  Once it gets to loan committee, that is where the real rubber hits the road.  Be prepared to be turned down after having been told yes for about 30 days.  We have interviewed literally over 100 banks to find the few that work well for us.

Once you establish that relationship and start doing a few deals, even years into the relationship, be prepared for the bank leadership to shift gears and all of the sudden not do loans like you are doing and your financing goes away overnight.

As such, always have multiple lenders because they may walk away at any minute.  This is usually not the fault of the rep you are working with.  It's the leadership of the bank that decides.

Now in preparation for that first meeting, banks will often want you to fill out a lot of information.  Start using those to create a packet of information for banks you talk to.  They all ask for the same stuff.  If you walk into a bank with a packet in hand, it's less work that the banker has to do and reflects competency.  It may help you get across the committee line.

Greg,

Thank you for the feedback.  We did check with the city and they show a sewer line that goes to the southern half of the lot.  We think the way the previous owner got waste water was with a non-recorded agreement to connect through the southern lot owner.  That agreement is no longer enforceable and the City wants to upgrade their records so that everything is fully recorded.

I have hired the line detection service and am hopeful.  If it's an iron pipe it's probably still in tact.  I'll let you know what we find.  I am optimistic.