Hi. I am currently in the process of my first spec home project. I am a Realtor and have partnered with a contractor who will have an interest in the property, meaning he will do the work assuming he will make money after we sell. We have plans drawn up and possible lots we are interested in. The plan is to buy a lot, start building and marketing right away. Hopefully then we will sell before construction is complete. Sounds easy right? Right!

I am still shopping for financing as I know many banks in this market will not want to finance a spec house. Although I beleive we have a nice proposal with all the figures for building and marketing info clearly laid out. Does anybody have any experience in this type of deal? If so what is the best approach to financing such a project. Obviously we want to go in with as little out of pocket as possible. If there is some creative wat to wrap as much of the loan including the lot into a builders loan I guess that would be the best.

Any info would be much appreciated!

Thanks,

Mike

Hi Mike:

You can finance your project through a bank (possibly) or with hard money - and you can write the construction loan at the time you purchase the lot. Be cautious, however, of the interest rates and how interest is paid, as several hard money lenders in my area (NH) charge interest on the full loan, regardless of draws, from the beginning. Hard money will also cost you at the closing - closing costs and inspection fees can be considerable. Bank financing can be tough on a spec home, however you could try SBA or other community program backing if you are structured as a business or targeting low income housing. There are a few real estate investing groups on YAHOO, and many offers of hard money.

In my area, seven builders have recently lost their projects back to the bank. Two builders also drew equity lines on their homes, losing the spec house to the hard money lender and still owing on the equity line. As a REALTOR, you have the ability to research the market to determine where, when, and what type of home to build. Please consider your own research, as many builders do not. Build for your market, not for yourself, and carefully watch your bottom line, as your costs will be fixed but the market can change. Also take some time to research the law regarding warrantys. Most states have an implied warranty of habitability, however some also will consider that warranty extended for a period of two years if the warranty is not in writing, and not presented to and acknowledged by the buyer prior to entering into a purchase and sale agreement.

Feel free to PM me if you have any questions - I have specialized in new construction and REO for the last four years, and I'd be happy to help if I can.

Sincerely,

Karen

You could borrow the money from private money sources and not pay the high fess associated with a hard money loan.Example you use someones self-directed ira and at the end of completion and sale pay a higher interest rate to themthan they would get from a cd,stock,or savings and loan company.You would just have to check you local sec laws in your state.

Mass is a drastically declining market right now,some as much as 10 to 12 percent.Make sure you have worked out an exit strategy.

How would you go about finding an investor for that type of deal though?

Yes the market is not great here...or pretty much anywhere from what I hear. My company has 4 offices locally and our inventory did fall quite a bit in the last couple months so maybe that is a good sign. Maybe it's just the time of year but it was a pretty good percentage that dropped off. There has just been way too much inventory here and way too many properties not priced right. I figure I get in now when times are tough and we overcome then we should glide through the good times!

Thanks!

This is what I'd do to keep things in check so to speak.

Typically a builder in my area will make 8%-20% on a new home depending on size, location, etc. The norm is around 10%.

Make a spread sheet detailing every expense on this home from framing labor, to lumber, doors, windows, even the crapper you rented, make sure you also include the builder/construction profit, I like to call this site supervision. If
you'd like a sample of one of mine, e-mail me for it at rpaulick@earthlink.net.
Let’s say this home is $200,000, you made 10% so now the profit/ contractor fee is $20,000. Take that $20,000 and put it into a savings account. Now neither you or the builder made a dime on this thing, but your construction profit is put away for monthly interest fees. If the interest is $1,800 per month, you now have nearly a year of payments put away. As a contractor, I typically make 10% on my new homes. My last spec house just turned 1 year old and it still isn't sold, luckily I have three custom homes and an 8,000 square ft. commercial job going to help with the bleeding. Some builders add the realtor commission, maybe a small cushion for interest, but you have to be careful not to overprice the home or shake your bank up with additional fees being paid to you.

It's your best interest to sell as soon as possible due to interest payments. Train your staff on the construction process, why are you better, what do we offer, etc. Even if you hold the house for 6 months and only make $8,000 when it's all said and done, if you can sell 4 builds off of it, your golden! Now you have $80,000 out there in profit with the buyer taking care of the holding costs! Make sure since it's a joint project, your builder is fair, that profit on the build and future builds is as much yours as it is his for being there to roll the dice with!

As far as financing, shop banks hard, find the best program. Keep in mind that even banks are a little negotiable and that you are their customer! I’ve worked with several banks, and found a local bank a few years ago that’s golden. Stay away from Indy Mac Bank and the like, though they have good programs on paper, they will fee you like you won’t believe.

I hope you have a very good understanding of your market area. In most locations in the US at this time, building a Spec home would be the very LAST thing most investors or wannabee investors would consider. In many areas unsold inventories are driving up DOM's and driving down prices.

Your debt service could kill both you and your builder before you have the property completed and sold. Ask yourself is their a NEED for a home such as you plan to build in the specific location. What is the economy for the area now and where will it be in a year or two? What is going to change positive and negative.

Do you have a business plan and formal agreement as to how this partnership will be organized and what type entity will it be?

Do not expect people to come to buy just because you built it.... a real need has to exist.

Of course we have a plan and a formal agreement. I also research everything to death before I make a move. Obviously markets are slow in most places now. However the broker I work for has many new constructions and even in this market there is a good amount of activity and sales. You would be surprised how many new constructions there are here still. Of course some of them are sitting empty but there are lots that are selling. As far as a NEED, there are buyers out there right? Hopefully all the friends and family of renters out there will start talking up how now is a "buyers market" and get them to get motivated to invest! I know I have been doing my part! I guess we just need to make our deal a little more attractive than the other guy. We have researched our target market and will advertise accordingly.

Massrealestateguy,

My husband is a g/c so we're also builders in MA. We have 2 going up in Webster - one spec and one pre sold. I feel the market is stabilizing here as I've had more calls on my listings in the last month than in the previous 3 months (along with 2 closings coming up as buyer's agent)

Anyway, if you're interested in so called hard money, PM me and I'll get you some info. Interest rate is higher and there are points but the process is simple and they charge interest on draws only.

I agree with Concept. The market is picking up a bit here. We've put 6 of our listings under agreemet in the last week. Great open house turn out as well. Houses that were getting 0-3 people at the open houses the last few month are now getting 7-10 people or more.