Where do you want to be on the food chain?

Question

In reading @Manuel Acunas blog post about the tight market where he lives, and inability to get offers accepted at the price point he needs them to be, I got to thinking. Many investors are 'wholesalers' buying houses that have been built, sold, financed, lived in etc., and are for some reason back on the market. Many are back on the market as REOs, Short sales, probate sales, etc. However; the 'true' property that is actually 'wholesale' is new construction. The closer you get in on a property to its original construction, the more potential for profit, as it hasn't gone through the various mark ups. (I am speaking about areas that have stabilized and beginning to appreciate, not in areas where properties can still be purchased for less than building).

Therefore; why aren't more of you working with builders, or developing projects yourselves in those areas? Also, another opportunity may be in looking at builders hit hard by the real estate collapse, that can use a financial infusion. It seems like a great opportunity for partnerships, etc. , and could be a win/win for both parties.

Karen Margrave · Answer

Brandon Turner We have built spec for over 25 years. Our first was a 10,000 sq. ft. medical office building. At the time we made the offer we had no money to speak of, but we were licensed in real estate and construction and used that experience along with our commission for 'skin in the game".  We knew our local market, and the hospital had just done a huge expansion. Most the doctors in the area worked out of older homes that had been converted to office space, and we knew they'd prefer new space closer to the hospital. There happened to be a parcel of land across from the hospital and made an offer on it.  We  had a basic rendering of a building, along with the income and expense projections. We then found a HML that could see the potential.

While the building was under construction we started advertising for tenants and filled the building, while at the same time advertising for an investor/buyer. By the time the building was finished, we had it sold, and another piece of property down the street tied up, and in escrow. We then built a 15,360 sq. ft. bldg. and leased it to the State of California, and sold to investors. Next up was a medical/dental clinic sold to an Indian Tribe, a few small office parks, and office/retail condos, etc.

However; we ended up getting into a subdivision that was finishing up final approvals and the developer needed someone to come in. The residential market was HOT. We agreed. Unfortunately, the City and Army Corp of Engineers had a disagreement over whether or not a gate should be put in a fence, it ended up pushing the project out another full year. That year was the difference between having a marketable project and the market crashing.

After the market crashed we sold all our stuff, paid off our investors, leased out our house and relocated to Orange County where employment and the real estate market are much more stable. We spent a few years doing small jobs, and getting to know the various towns here, getting to know all the different building and planning depts and which were good to work with and which to stay away from. Now we're getting established here, and excited about the prospects. Sorry for the long... answer!

Karen Margrave · Answer

Glenn Espinosa Remember, when we did that first job, it was several years ago and things have changed considerably in the banking industry (which affects the pool of buyers)

The most important thing to know in both real estate and construction is to KNOW your local market. We had grown up in the area, and KNEW every neighborhood, and every piece of dirt in the town. When you live in an area like that, you get a good idea of what the needs of business are, etc., and we were able to capitalize on it. The same with residential. When you know an area, you know what direction the new growth is moving, what schools are most popular, etc., and that allows you to minimize risk. If you haven't lived in an area for a long period of time, you need to get up to speed on it, understand the market, various neighborhoods, and most important the agencies that control construction, permit times, etc. they can make the difference in being successful or failing.

But.. spec building is NOT for the faint of heart. You can do well, but you are constantly taking risks, and not everyone can handle that. In construction we have a saying, 'measure twice, cut once' in other words, be prepared ahead of time!

Jon Klaus · Answer

I'm working on several new construction projects in Austin.  A couple of them with Bryan Hancock   We are seeing deals get sold pre-construction and mid-construction.  And lots are very hard to come by.  There are a lot of moving parts, but the profit potential is substantial.

Shaun Reilly · Answer

I think this is a bigger "every market is different" thing than pretty much anything else.
I honestly believe that every market will have big fat deals if you look long and hard enough.
With new construction there is going to be a rule of thumb for the costs (around me it is $100-150/sqft) so you have a rough idea of what it will cost to build and you should have a feeling for what houses will sell for of that size and whatever room makeup you decide on.  So houses either sell enough above that cost to make it worth it or they don't.
Around me most places that have a lot of lots do not support the cost to build and the places that do have few lots.

Xing Zhu · Answer

Yes! At the peak of the BUBBLE, many major developments took place. Some of the greatest condo buildings and resort hotels in many cities were planed and built. Many developers and banks have lost so much money thereafter and they are unlikely to build the same for many years to come. Hedge funds have been busy collecting cheaper assets for higher return, but I believe sooner or later, dearth of liquidity will push them to the aforesaid newer building market.

On the other hand, smaller  cash investors have begun to take this unprecedented opportunity since a year or two ago.

Karen Margrave · Answer

Brian Hoyt that's why I was posing the question/idea asking if any investors had considered partnering with a builder in their local area, if the market is one that is starting to rebound, with no available distressed properties, but lots available. I know there are many reputable builders that are strapped for cash, but have the experience and know how to do deals, and might want a financial partner, and it could be a win/win if done right. Though of course to get into such a deal you need to do your due diligence, etc.

James H. · Answer

I think for most people looking into wholesaling, the margins in new construction are too thin, the entry captial requirements too large, and the necessary knowledge base is too broad AND in depth. You have to be pretty sophisticated to successfully execute new construction. Think of how many competent people can barely build their own personal residence.

The successful builder is a true talent. Thus this joke:

How do you make a small fortune in construction? Start with a large one.

Karen Margrave · Answer

Brandon Turner The School of Hard Knocks majoring in Masochism. Just kidding, I love this business!

Brandon Turner · Answer

Hey Karen M. - thanks for sharing! I love hearing stories about where investors have come from!

Glenn Espinosa · Answer

Karen M. WOW. That is a great portfolio. Sorry to hear about the subdivision deal..

As for me, I definitely want to be closer to the top of the food chain. I'm getting to the point where I have enough capital to start spec building. I'm pretty tied up right now but I see opportunities everywhere. Its frustrating letting things slip by as you wrap up your current projects. I guess I gotta get more creative with the financing part.

Anyway, your first example was just awesome especially the fact that you did it with literally no financial skin in the game. Truly an inspiration. Maybe I'll jump into spec building sooner than later thanks to you Karen!

Where do you want to be on the food chain?

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