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It Might Be Time to Switch Your Niche to New Construction – Here’s Why.

by Karen Margrave on December 25, 2013 · 10 comments

  

Every day on BiggerPockets we read of the strategies of those that fix/flip properties, or buy/hold. These investors are usually looking for older houses that for one reason or another are being offered at below market prices to buyers. However; as the market improves, there are fewer and fewer of those opportunities. You can get out of the market, or change your niche.

Why not get in on a new niche?

Rather than buying a “used” property that may be outdated and old, and may have issues you cannot see, BUY NEW!

Reasons to buy new construction

  • You will be the first owner (you’re paying for the house, not all the previous profits of prior owners, brokers, remodelers, etc. over a period of years.)
  • Everything in the house is new, and under warranty
  • Lower costs of owning (less maintenance, lower insurance costs, energy efficient, etc.)
  • Higher rents and demand
  • Longer building lifespan
  • Pride of ownership

Ways you can get in on new construction:

  • Purchase a new home as a buy/hold investment, or as an owner/user
  • Purchase land and Develop/build homes or commercial project yourself
  • Partner with a Developer to develop land ( You can provide development loan or act as a Joint Venture Partner)
  • Partner with a Developer/Builder on the construction of a new home or commercial project (Participate as a Construction lender or Joint Venture Partner)

If you aren’t familiar with new construction and the process, you will need to do your homework, and make sure you consult with an attorney, and/or your accountant to discuss the details. Be sure all financing is done according to the laws of your state, and through a mortgage broker that is experienced in dealing with construction lending. Make sure there are protections that limit the amount of money given out at any given time, and require regular construction updates. (with all the new technology, it’s easy for you to literally watch the progress of a building as it’s being built). Make sure the contractor is experienced, licensed, bonded and insured.

Related: Start Here! Real Estate Investors, Buyers, Developers or ….

Photo: compujeramey

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{ 10 comments… read them below or add one }

Roy N. December 25, 2013 at 8:58 am

Karen,

The biggest issues for us w/r to new construction are:

1) Ourselves: Development/construction is a whole other realm of knowledge and skills that we do not have … or only possess enough to get ourselves in trouble.

2) Location: We like to be in the City core and there are few affordable opportunities for new development. That said we are talking to both a vendor and the City about two lots with fire damaged properties with the idea of replacing an existing structure and a bit of infill.

3) Zoning: The zoning / rezoning dance is a new one for us. One full of politics and all but devoid of logic – I’ve learned this year that I am not naturally oriented towards civic politics.

We do want to build a mixed-use, multi-family building that is healthy, energy efficient, and cost effective. A forth factor we encountered was that local contractors developers are a little behind the curve on energy efficient construction techniques … a major factor behind this is the building code is hopelessly outdated and weak.

Realistically, we are a minimum of 3-years from being ready to engage in this type of construction.

Reply

Jon Klaus December 25, 2013 at 10:10 am

Three years ago if you told me I’d be a builder/developer, I might have thought you were crazy. Now, it’s my strongest business. The profit per deal is just so strong. I know it (high margins) won’t last as the cycle matures, but now is the time to build in many cities.

Roy, to address some of the barriers, the learning curve isn’t as big as I thought it might be. Yeah, there’s a lot to it, but it’s easier than ever to get the knowledge you need. Partner with those who have done it successfully, and after a few projects, you’ll be teaching them tricks.

Thanks for the article, Karen!

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gerald harris December 25, 2013 at 11:23 am

I remember in the California area there was an investor who only dealt with new build flips. I remember him building homes that were sold even before they broke ground in construction. Buying vacant lots in high end areas just be be a nice niche to get into . Great Article

Reply

Randy Phillips December 25, 2013 at 11:46 am

In my area of Central California, it costs more to build a new house than it will be worth once completed.

Reply

Jason Merchey December 25, 2013 at 3:34 pm

I find the biggest issues to be the cracker-box issue, the “construction defect/s in the entire subdivision” issue, dealing with contractors (if a spec house), and the cost of labor and materials relative to scoring a used house. However, even with all those issues, I’m still 50% in favor of new builds.

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thomas Williamson December 26, 2013 at 3:00 am

Good info Karen, I’m going through this process myself in GA. I met with a builder this past Monday to explore building spec homes. The MLS has really dried up here in ATL, but the demand is still very much there. Cheap land and lots are all over the place, so it might make more sense to build new now.

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karen margrave December 26, 2013 at 1:14 pm

Thanks for the comments everyone. @Roy N. I understand there’s a barrier to getting into the new construction niche. That’s why I suggested a few ways you can profit from new construction, without having to get out and go through the learning process yourself. It’s definitely not for the faint of heart, and every region has their own obstacles that need to be addressed.

Jon Klaus has done a great job getting in, and building some great projects!

Randy, obviously if there’s no market, and the prices are still down in your area, it’s not the time to jump in with new construction. But, in areas where there’s just scraps left, and a healthy demand, new construction makes sense.

We moved to southern California from northern California where we were one of the largest developers of small commercial, with some residential. The market crash hit us hard. We knew to survive, we had to find a new market, and came to Orange County. It took a lot of homework to get up to speed on the cities, markets, land, etc. to work, but I think we’re settling in, and moving forward nicely. New construction has always been our niche, and we’ve done very well at it over the years.

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Julie December 26, 2013 at 7:11 pm

What about just finding land or a tear down house in an area that it makes sense for a developer to tear the house down to rebuild….. Then just tie the property up and assign the contract like a regular wholesale deal?

Get a map of a City, highlight the areas where builders are looking for new projects…. put a marketing plan together and dig up deals and assign them to these guys without having to partner on the entire project. Is this a viable way to go?

Example:

If I know a builder can pay at MOST $75,000 for a lot all in… Say there’s an existing house on the lot. That might cost $10,000 to tear down. I add in my profit of $15,000…. Get the house under contract for $50,000 and assign the contract to the builder/developers.

At the same time you are beating out your wholesaler competitors too because you are able to pay the seller more money for the same property in most cases. In other words a new construction house is likely going to sell for more money than a fully rehabbed house. Therefore you are able to pay more for it going into the deal, thus beating out your traditional wholesalers that us the 70% MAo formula when running their numbers.

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Douglas Dowell December 27, 2013 at 8:10 am

Thanks for the great read Karen,

I think the joint venture model works great for those of us with a missing resource. I think real estate development is best as a team sport anyway. Can not thank you enough for lighting the path.

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karen margrave December 27, 2013 at 10:15 am

Julie, if you’re in an area where you can pick up houses and market them at a price that would be in a price range that makes sense for builders, it’s a great idea.

For us, in the coastal areas and more popular areas of Orange County, CA, even a small 500 s.f. house on a SFR lot can be $500,000+., meaning the asking price on the new house will be upwards of $1 million dollars. (Because there’s been a house on it, it will save you some on the development costs and some fees).

The tricky part, is when you’re in an area like that, and there are NO comps in the neighborhood yet for what the asking price of the new home being built will be, you have to be able to justify the pricing to potential buyers, lenders, appraisers, etc. We’re doing one like that right now, though we were able to get a good buy on the lot.

Reply

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