All Forum Posts by: Jimmy Nguyen

Thanks @Suzanne Griffiths and @Don Harris.  I am interested in knowing more about your holding costs, especially in situations where the house does not sell quickly upon completion.  In regards to the construction loan, if the terms were 6.5% for 12 months, interest only, and interest was paid only for the money used, how would this play out if the house stayed on the market for some months?  Let's say I used $300,000 and the house did not sell upon completion.  Would I pay 6.5% of the $300,000 spread out over the 12 months until the loan came due?  Or does the 6.5% interest compound monthly?  At what point would I consider refinancing to a conventional mortgage?

As for the 20% ROI rule, are we talking about the personal investment put up for the project (COC ROI) or do we include the loan and interest in that calculation?

Thanks for all your help.  I am excited to find a good deal.   

Hello spec home builders,

I was wondering if you could review my breakdown of a potential deal I was looking at.  It involves purchasing a piece of land to build a spec house.  Let me know if I'm missing something in my analysis or if I made an error in my math.  I'm particularly wanting to know if I'm missing some additional expense that would cut into my profits.  I understand the comparable data that I listed is a little old and the cost/sqft construction estimates are not as accurate as a thorough breakdown, but I needed something to start with.  

Here goes:

Example deal: We find a .35 acre lot in Virginia in a good neighborhood with good schools. The lot is selling on MLS (retail) at $234,900. If we purchase at this price we would include $7,047 (3% buyer closing costs), which gives us a purchase total of $241,947. We would buy the land cash and take out a construction loan @ 6.5% interest.

Comparables of homes sold in the area (based on Zillow data):

1. Sold 5/29/15 for $790,000 - Built 1988, 4br/3ba - 3,180 sqft on 1.12 acres with 552 sqft garage and partial basement
2. Sold 9/9/15 for $625,000 - Built 1977, 5br/3.5ba - 3,130 sqft on .3 acres with 440 sqft garage and 350 sqft basement
3. Sold 5/09/16 for $600,000 - Built 1981, 4br/2.5ba - 2,397 sqft on .32 acres with 462 sqft garage and partial basement
4. Sold 6/18/15 for $515,000 - Built 1982, 3br/3ba - 2,116 sqft on .17 acres with 399 sqft garage

If we are to build a new 4br/3.5ba home at 2800 sqft with average-sized garage and partial basement for a maximum cost of $110/sqft that would equal $308,000. The cost of construction ($308,000) + 6.5% interest on construction loan ($20,020) + land price ($241,947) = $569,967. If we can sell the home for $650,000 - 48750 (7.5% for real estate commission + closing costs) we would get $601,250.

The profit from the sale of the home would be ($601,250 - $569,967) = $31,283
Percent profit on sale price = 4.8%
Cash on cash ROI if paying only for land ($31,283/$241,947) = 12.9%
$Profit/sqft = $11.17/sqft

The numbers do not look overly attractive. If we are to be successful and reach our minimum goal of 15% profit on sale price, we will have to do one or more of the following:

1. Buy the land for $65,000-$70,000 discount
2. Bring down the cost of construction to $85-$90/sqft, which would be challenging if we are doing a high quality, energy-efficient construction
3. Sell the home at the high end of the comparables at around $725,000, which seems doable in the right market environment since it is a new construction and will be a high quality, energy-efficient home

Of course, the profit does not take into account my salary as a general contractor for the job, which is factored into the $308,000 figure.  That would be around $15,000 - $20,000.  

I realize now that direct marketing for land or working with wholesalers to find affordable lots would help increase the chances of making greater profits on spec homes.  

Any suggestions or thoughts?

Thanks in advance.  

Update - a work friend's husband actually installs solar panels for a living.  He told me they are relatively easy to install.  He can get them delivered to me for $1.50/watt, which is good compared to the $2.50/watt installed price I have gotten recently.  I am planning on getting a 4,680 watt array so this would save me $4,680.  If I went the DIY route, my payback period would be less than 5 years. Have you thought about installing them yourself since you already know how to build houses it shouldn't be that hard?  

Hello,

I have been working with one real estate agent for the past 8 years now. She helped me buy and sell my first house and helped me to purchase my first land deal, where I have built two houses (well, one of them is still a few months away from getting the Certificate of Occupancy). However, I do not believe she is the right fit for my next venture, which is building spec homes and finding rental properties. These two ventures are related, but will be managed by two different entities/businesses that I will form. I want to look for both land deals to build a spec house and rental properties that can cash flow. Whichever deal makes sense at the time I want to act upon.

The first few deals (land and rental properties) I intend to do all cash in order to get a better price. At least for the rental properties, I hope to refinance later in order to free up cash to make more investments. I am not ready to make any deals until middle to late 2017. In the meantime, I am finishing construction on my second home and will get a Class A Builders License in Virginia so I can become a General Contractor for my spec home builds. I also have to setup my construction business. For my first couple of spec builds, I want to focus on the Northern Virginia area (Fauquier, Prince William, Loudoun, Fairfax). For rental properties, I am open to extending the geographic area to most of Northern Virginia and Southern Maryland.

I am looking for an Investor Friendly Real Estate Agent that I can work with on my first couple of deals. Being able to facilitate in finding and analyzing deals would be of great benefit to me as I am just beginning. Of course, being a Bigger Pockets member is a big plus so that is why I am starting here first for my search for a good real estate agent. I would like to see separate MLS listings of land/lots and good potential rentals for my desired geographic areas. Again, I won't be making any deals for at least another year. As long as you are patient with me in this respect, know that I intend to build some beautiful, energy-efficient, and profitable houses as well as purchase enough rental properties so that I can have more financial freedom.

@John Hanson I just had a 20 minute conversation with my county's zoning department about this very issue and they were very helpful. As Chris Eaker says, they should be your next call or visit.  Unless there is already an approved subdivision approval letter on file that was submitted by a previous owner, I would not assume the lot is subdividable.  In my county, there are 3 different ways to determine if a lot can be subdivided and only when you submit an application will you know whether or not any of those options are available.  I believe my application costs $160.  If you want to avoid paying that fee and go in blind, do some research.  In my rural county, if the lot is over 10 acres and was created before 1980, there is a good chance that it can be subdivided.  However, if the lot was created more recently, there is a good chance it was already subdivided and therefore, not allowed to be subdivided again.  In order to find out when lots were created, I can go to my county's records room and research property deeds for free.  If this is inconvenient, they offer me online access for a $300 annual fee.  

Hello,

I have been working with one real estate agent for the past 8 years now.  She helped me buy and sell my first house and helped me to purchase my first land deal, where I have built two houses (well, one of them is still a few months away from getting the Certificate of Occupancy).  However, I do not believe she is the right fit for my next venture, which is building spec homes and finding rental properties.  These two ventures are related, but will be managed by two different entities/businesses that I will form.  I want to look for both land deals to build a spec house and rental properties that can cash flow.  Whichever deal makes sense at the time I want to act upon. 

The first few deals (land and rental properties) I intend to do all cash in order to get a better price.  At least for the rental properties, I hope to refinance later in order to free up cash to make more investments.  I am not ready to make any deals until middle to late 2017.  In the meantime, I am finishing construction on my second home and will get a Class A Builders License in Virginia so I can become a General Contractor for my spec home builds.  I also have to setup my construction business.  For my first couple of spec builds, I want to focus on the Northern Virginia area (Fauquier, Prince William, Loudoun, Fairfax).  For rental properties, I am open to extending the geographic area to most of Northern Virginia and Southern Maryland.  

I am looking for an Investor Friendly Real Estate Agent that I can work with on my first couple of deals. Being able to facilitate in finding and analyzing deals would be of great benefit to me as I am just beginning. Of course, being a Bigger Pockets member is a big plus so that is why I am starting here first for my search for a good real estate agent. I would like to see separate MLS listings of land/lots and good potential rentals for my desired geographic areas. Again, I won't be making any deals for at least another year. As long as you are patient with me in this respect, know that I intend to build some beautiful, energy-efficient, and profitable houses as well as purchase enough rental properties so that I can have more financial freedom.

We have finally finished interior framing.  Framing stairs with landings took some extra calculation as you have to adjust for the different floor thicknesses at every level.  I saved around $1400 cutting the stair stringers myself over getting them fabricated.  Of course, this doesn't take into account my 8 hours of labor.  We also decided to go ahead and frame out our basement so that the insulators and electrician could do the basement while they were taking care of the rest of the house.         

On the exterior, we added a rain screen made of 1x3 furring strips over top of our water resistive barrier (#30 felt paper).  Houses that have vinyl siding do not require an extra rain screen because vinyl siding has an air gap and weep holes already built in.  In our case, we are using LP Smartside, which is a composite wood material, that lays flat against the house with no gap.  If there were no rain screen behind this siding, water that gets past the siding has nowhere to go and will not easily dry out.  Moreover, we have 10 1/4" thick walls.  The walls will be dense-packed with cellulose, which is a great buffer for moisture, but thicker walls can be slower to dry out than normal walls.  The inability of a wall to dry out can lead to problems such as paint peeling, warping, and eventual sheathing rot.  We have 2 foot overhangs on our house so most of the time when it rains, our walls barely get wet.  However, when strong winds mix with rain, water is definitely going to be driven through and behind the siding.  

Notice that most of our rain screen is oriented horizontally.  That is because we are going to be installing vertical board and batten siding.  For our bumpout, the rain screen is oriented vertically to receive horizontal tongue and groove cedar siding.  One advantage of doing the rain screen is that it will be easier to install the siding as I do not have to search for every stud to nail the siding into.  I apply the siding directly to the rain screen.  

In this picture, my dad is routing out the back of the 1x3 furring strips to create weep holes in the rain screen much like vinyl siding has.  This will allow water to drain out of the horizontal rain screen and allow ventilation for faster drying.  A lot of builders use Cor-A-Vent strips for their rain screens, but the product is a little expensive.  To keep insects from getting behind our rain screen, we wrapped hardware cloth over our first and last row of furring strips and it saved us some money over purchasing the Cor-A-Vent strips.  Total added cost of doing the rain screen is $3,000.  This is not an insignificant amount of money, but good protection against future moisture damage on a house that should stay in our family for decades.  Another choice we made was to go with 1/2" plywood over 1/2" OSB for our wall sheathing.  OSB is a little bit cheaper, but takes longer to dry out than plywood and when it begins to rot it does so really fast.   

Next up, we are preparing for windows and doors.  Great care is taken to make sure window and door openings are watertight and waterproof.  We are using vapor permeable tapes, liquid applied flashings, and corner guards for these openings before setting the windows and doors.  A sloped sill allows for water to drain out in the case that it does get behind the windows.  The turquoise color in this picture is the liquid applied flashing made by Protecto.  It is waterproofing and vapor permeable, which means it allows things to dry out easier.  At $40/ gallon = 65 square foot coverage, it is cheaper than a lot of flashing tapes out there and easier to apply.   

A lot of these little details add to the cost of construction, but it will prevent costly repairs in the future.  Pay $3,000 now or $40,000 later.  I drive by 5-10 year old subdivisions all the time and I see a lot of mold and algae growth on siding on almost all of the houses.  This may be signs of moisture problems behind the siding.  Wall rot is a definite problem in the building industry:

http://www.greenbuildingadvisor.com/blogs/dept/mus...

Haha thanks @Karen Margrave.  I see what you mean.  Some of my family members are left brain dominant and have a hard time looking at my 2D plans.  I have to take them on a 3D tour on Sketchup for them to understand.  

Do you ever get any land through direct marketing? Or do you find most of your land as REOs through MLS?

Thanks @Devon Garbus and @Account Closed.  I think I will most likely do a spec house first.  Although, I've always liked the idea of working with a client to build a home.  

Land prices are very high right now in the Northern Virginia/Piedmont area.  I know some people like to only purchase land at around $20/square foot of finished house, but that number will likely be tripled or quadrupled in this area.  Even at those prices, I think if I keep construction costs at under $125/square foot, I can get 20% profit.  

After purchasing land to build a home on, it usually takes a few months to do surveying, site and soil evaluation for foundation/septic/well (if necessary), and other paperwork.  In those few months, is it a good strategy to advertise the land as a site for a custom home to a potential buyer?  I assume this would entail putting up nice designs and floor plans on the big online real estate sites. Possibly putting up flyers on a post on the property for people driving by to take.  

Or if I already have designs in mind for the land, should I just focus on completing those building plans, estimating costs, acquiring a construction loan, and getting the plans through the permitting process? Basically, what are the advantages and disadvantages of building a spec home that is compatible with the desires of the majority of home buyers vs building a custom home for a specific client?  

I understand that a buyer who wants to build a custom home on the land could take out the construction loan themselves and I would become the General Contractor.  Is this the only way to protect myself in case the buyer backs out and I'm left with a custom home that will be harder to sell? Also, in this case, what happens to the land, which I own?  

Finally, which one can offer the best return on investment while also accounting for risk?       

Thanks for any advice you can offer.