All Forum Posts by: Stuart Udis

The insurance coverage you will want to protect against trailing construction defects will not be covered by the policies you stated in your last post. This is the benefit of retaining a GC with the appropriate insurance. My point about your father-in law merely relates to how his insurance carrier would likely respond to a claim- coverage would likely be denied. It appears you are focused solely on the financial components of the project without understanding the insurance and liability factors of self-performing the project in the manner in which you propose.

A few items come to mind. Before you worry about whether or not to hire a GC are all of the land entitlements completed and has your permit been issued? Assuming the permit has been issued, I would imagine in a state such as CT you are located in a municipality that would at minimum require a licensed contractor to associate with the permit for the sole purpose of listing the municipality as a certificate holder under the insurance policy. Generally speaking self-performing construction can be wise if you are an experienced builder. It's a great way to reduce your costs and is a clear competitive advantage in sourcing opportunities. BUT this applies to experienced builders who have a strong track record of successful projects without trailing loss history.  If you don't fall under that category you are really playing with fire.  Hiring a reputable GC is more than just saving money on the build. While there are always risks (even when hiring a reputable GC), they are greatly reduced. You also have an insurance policy and builder warranty that protects you once the home is built. In the event there's a defect, are you going to file suit against yourself? I doubt your father in law's insurance will accept coverage either as you are clearly trying to circumvent the GC relationship to save money.

You will have far more success raising capital if the capital is deployed towards the underlying real estate. Investors will be less enthusiastic about funding your operational capital. Since part of your investment strategy is flips, you may consider a pref equity structure with LP's. 

Elena,

If you own the land with issued permits unencumbered by any debt banks should be able to finance all of the site and vertical improvements herein. Depending on the value of the land and cost of the entitlements, there may even be an opportunity for you to build in some additional soft cost fees or get some cash back at the construction loan origination. You will also want an interest reserve to be capitalized into the loan. Whether the value of the land exceeds the cash requirement will ultimately be dependent on the total project cost relative to what's been spent and the value of the land and as complete product. Lenders are still willing to treat the imputed equity towards your cash if the numbers work, so push for as strong of an as-is appraisal as you can. 

There's two ways to go about ground up construction. You can purchase the land fully entitled or undertake the entitlement process. If you are planning to undertake the entitlement process take inventory of your own financial situation first. Chris is correct. Most don't understand how capital intensive the land entitlement process will be. Be prepared to incur significant upfront costs and in the instances where you can finance the land acquisition be prepared for extremely low leverage debt. The lender who will ultimately provide the construction loan facility will expect to see your equity contribution first.  Besides the financial aspect, I don't understand how someone can teach a course on this topic. The land development process differs from municipality to municipality including but not limited to the land use and zoning, permitting, construction administration etc.). You are far better off assembling a team consisting of a land use and zoning attorney, civil engineer and architect who are experts in the market where you want to build. 

You will typically see the seller elect to retain their own counsel to prepare seller financing loan docs. However it's not unreasonable for the seller to require the legal fees to be reimbursed at closing by the purchaser. Ultimately, who prepares and pays for the loan docs is dependent on the terms of the purchase agreement and can be negotiated. I know this does not pertain to your situation but I would always advise the seller providing seller financing to have their own counsel prepare the docs.

If the motivation is to better position yourself to obtain real estate loans, I don't believe leaving an employer who presumably offers you a W2 salary to become a realtor where you are an independent contractor/ commission based income earner is going to help. There are certainly other benefits that could come from fully immersing yourself in the real estate industry as a realtor, but being more marketable in the eyes of a lender certainly is not one of them.

Don't assume because the building is new construction, there will be less maintenance. There are a lot of poorly constructed buildings and in most cases the builder warranties are as valuable as the paper they are written on. It's important to vet the builder just as much as the building. I've also seen instances where builder warranties only apply to owner occupants meaning they are void if leased. Often times the warranty, if offered is not provided until settlement or shortly beforehand so make sure you understand what you are getting during the diligence period. I frequently see buyers place less emphasis on diligence when they are purchasing new construction.  There's no reason to make assumptions. Go through your process just as you would in any transaction.

It seems you are following what others in your market have done. This is generally not a good strategy because everyone's situations are different (access to different cost of capital & debt, ability to self -perform construction etc.) and for these reasons your assumptions shouldn't match others in your market. Not to mention, just because someone is acting on the strategy doesn't necessarily mean its effective.  Don't be afraid to take a contrarian approach. Focus more on housing needs & take inventory of your skill set and determine how you can use those skills to source opportunities that can be developed to meet the housing need you identified. 

I am always skeptical of these real estate "gurus" and course providers. If you are going to pay for mentorship, find an experienced operator in your market or better yet, offer to invest in the experienced operators projects and get an inside look at their process and systems. This way you learn and make a return on your money. These course providers tend to sell their customer base on  unrealistic expectations or teach the most basic of concepts which are easily picked up through a book or merely browsing through these forums.