What is the new construction process? Dig lot, pour concrete, etc

Land & New Construction
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What is the new construction process? Dig lot, pour concrete, etc

Douglas Gratz
Rental Property Investor · Philadelphia, PA · Member since 2018 · 260 posts · 145 votes

Hello, 

I am doing my first new construction and at first I was very confident, but no, not so much.  A lot of my flips took longer than anticipated which resulted in me having to find money for the closing.

I did! but now I am just not as confident.  Its 1.5 2 single family build in the hottest neighborhood in philadelphia. Northern Liberties.  My lot sizes are 40x60. Comps in the area range from 1.3 million to 1.9 and those homes have 10 feet less frontage.  Ir willl cost 1.5 to build it all.  So the profit looks nice however I am using hard money and thats always hard....(need to be strict with time)....Anyway, I want to make sure I of all the knowledge I need to make as few mistakes if none, possible ...

My first questions after all appovals and permits.  What is the first 3 steps to from breaking ground to the next 3 steps? does the developer handle this all?

I really need guidance here, this is a once in a life time opportunity and due to a flip taking to long, I had to pivot and I feel less safe in the investment.  All will be well as I should have 690K as soon as on house closes next month and and refi comes through, is my less safe may just be my fear....So I'm trying to reduce the risk and know all I can possibly know. 

Starting with the first 3 steps and costs right now. its 5000 sqft home with elevator. Basement, 4 levels and roof deck.



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Paul Sofia
Lender · Charlotte, NC · Member since 2016 · 372 posts · 172 votes
4y

I do flips and new builds and have over 20 years experience.  No way, I would attempt this with my experience.  No offense but you are asking rookie questions ready to enter the championship game.  I would never do a spec home of this magnitude.  

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  • Douglas Gratz
    OP
    Rental Property Investor · Philadelphia, PA · Member since 2018 · 260 posts · 145 votes
    4y

    @Jay Hinrichs yeah it sucks prices are so high.  My initial plan was to purchase the land cash, that way I could wait a little and see if prices went down (which they have a little) but a flip I was into, the contractor screwed me and the project took longer than expected and just sold (closing next month) which I might use to repay the hard money loan (so I can wait, or use tot pay the interest) Home prices have also risen as a result in higher supply costs. 

    0Reply
  • Douglas Gratz
    OP
    Rental Property Investor · Philadelphia, PA · Member since 2018 · 260 posts · 145 votes
    4y

    @David Butler is it high risk though (aside from a depression) in 2008 crash and years following homes here half the size of mine were still selling for 600-700k.....When I look at my worst case ( I would have to sell alot of my rentals to pay the hard money back in full) But other than that, I dont see much risk other than my profits beginning to dwindle to a 100-200k loss....(big loss yes but compared to the upside, I dont know) but lets say it takes 9 months to build (leaving me 3 months left on my loan, which my lender due to covid has an extension clause) if I drew all the money at once my yearly interest would be approx. 180k)...Lets say there a supply issue and it hold me back 5 months over the year which costs me 15k a month.  If my net profit will be around 900k give or take, then my profits get lower....It would take more than a year before I am in the red....does this reasoning make any sense in that fact that losing money here seems lower risk then I am hearing from people?  In the housing crash of 2008 homes half the size were still selling for 600-700k, if I were have to sell the property for 1.3 or less ill be taking a loss, but crashes come and they go I cant base it off that if or when it will happen, It will happen given the crazyness right now, but there is always a time where it will happen.  So expand on your thoughts on where you see the risk or biggest risk given what I have said above..Maybe I am doing my math wrong ?

    0Reply
  • Douglas Gratz
    OP
    Rental Property Investor · Philadelphia, PA · Member since 2018 · 260 posts · 145 votes
    4y

    @Bruce Woodruff waiting on the blue prints to get my exact numbers and budget....

    0Reply
  • Douglas Gratz
    OP
    Rental Property Investor · Philadelphia, PA · Member since 2018 · 260 posts · 145 votes
    4y

    @Bruce Woodruff waiting on the blue prints to get my exact numbers and budget....prices of material are changing everyday so until I have the prints I cant come up with my breakdown

    0Reply
  • Michael Gessner
    Pomona, NY · Member since 2016 · 375 posts · 217 votes
    4y

    @Douglas Gratz i didn't read up on the whole post so please excuse me. I've flipped a few properties and have decided its tike to dive into new construction providing the market stays strong. New construction is a whole other animal in its self and is in no way comparable to flipping. Grant it I have an extensive background in construction so my only hurdle will be learning the business side of being a builder. Your best bet is if you continue with the new build partner up with a reputable builder and learn. This is and I say this with extreme emphasis NOT the time to be learning, the market is wayyyy to unpredictable, I mean the material market, weather my suppliers can't commit to a price for more then a few days or the item is 3 weeks out. Lumber started to come back down and sure enough in a matter of 2 days went up a solid buck, that's alot of money considering the amount of lumber going into a new build. I know builders and they're lumber packages were 25k now they're 70k, ++ that's just for the framming. If you partner with a builder he will have the resources to source out best pricing and if you in a jamb and short on something he should have a source somewhere. Yes the winnings on the end do seem well worth the risk, but seriously consider the major and daily fluctuations in the material market. A good freind of my just came out of the hospital and needed a walk in shower, something we do all the time has been delayed 2 weeks now because we couldn't find a shower pan and now decided to do custom, that's great and all but it double the price of the reno. So tread lightly on your decisions, I do belive new builds are they way to go if you can build a solid list of subs and vendors. Especially in this market where everyone is paying a sky hi premium for run down properties, but again you can also loose your shirt.

    1Reply
  • Rob Pollock
    Accountant · MI · Member since 2018 · 18 posts · 13 votes
    4y

    There is material risk in not finishing the project and cost overruns. Your looking at the end and saying there is little risk but the risk is throughout the process. 

    if you get a contractor or two who don't finish their work and you are doubling up on an expense to hire a new contractor plus time delays, etc you may not get to the finish line with enough money to completion. 

    4Reply
  • Jim Spatzenfeld
    Investor · NorCal · Member since 2015 · 281 posts · 240 votes
    4y

    Why do you think this is a “once in a lifetime opportunity”?

    1Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    4y

    I don't know the location or price to build in your market, but I've worked with similar numbers on recent projects and would need the finished product to sell for $3M+ to be worth the risk and effort. Granted your costs are probably lower than mine, but luxury builds are minimum $250/ft2 here currently, and can easily go over $400 without even getting that fancy. It's going to be a steep learning curve: there are always budget and timeline overruns, unexpected costs, etc. and that hard money loan will kill you every time. 

    I would sell the lot, take the $200k and diversify into dividend-bearing stocks. That way you'll have some dividend income and financial assets to help you qualify for loans. Or put it into crypto or something if you want to play the high-risk/high-reward game.

    1Reply
  • Mike B.
    Rental Property Investor · Madison, WI · Member since 2020 · 91 posts · 71 votes
    4y

    Agree with Steve K and others.  Sell the lots, take the profits.  This is only "once in a lifetime" if you choose to view it that way.  If new construction is what you'd like to learn, partner with someone who has extensive experience doing it.  It's possible that you're the 1 fellow out of 100 that succeeds on a project like this, but it's 99% more likely that you're not (no offense intended).  

    3Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    4y
    Originally posted by @Douglas Gratz:

    Hello, 

    I am doing my first new construction and at first I was very confident, but no, not so much.  A lot of my flips took longer than anticipated which resulted in me having to find money for the closing.

    I did! but now I am just not as confident.  Its 1.5 2 single family build in the hottest neighborhood in philadelphia. Northern Liberties.  My lot sizes are 40x60. Comps in the area range from 1.3 million to 1.9 and those homes have 10 feet less frontage.  Ir willl cost 1.5 to build it all.  So the profit looks nice however I am using hard money and thats always hard....(need to be strict with time)....Anyway, I want to make sure I of all the knowledge I need to make as few mistakes if none, possible ...

    My first questions after all appovals and permits.  What is the first 3 steps to from breaking ground to the next 3 steps? does the developer handle this all?

    I really need guidance here, this is a once in a life time opportunity and due to a flip taking to long, I had to pivot and I feel less safe in the investment.  All will be well as I should have 690K as soon as on house closes next month and and refi comes through, is my less safe may just be my fear....So I'm trying to reduce the risk and know all I can possibly know. 

    Starting with the first 3 steps and costs right now. its 5000 sqft home with elevator. Basement, 4 levels and roof deck.



    Sounds like your first step should be to get some education. You're biting off an awful lot and it sounds like you're not ready to "chew" that much.

    My $0.02 ...

    2Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Originally posted by @Jay Hinrichs:

    right now in Oregon our semi custom product homes are costing about 150 a foot.. to 180 a foot.. to build

    and in florida were we are building dingers those are running 100 to 120 a foot and used to be 80 2 years ago.

    and you know how cheap they build in Texas and OKC.. starter houses. 

    Jay - I'm sure you can get a house built in some areas of the country for less than $200k SF, but the OP stated that he is building a stick-built, 4 story w/basement, elevator, custom built, high-end finish house in downtown Philly 

    My point is that I don't think he can do it for $180sf. Unless you're 100% sure that he can, I wouldn't encourage him, which you're doing. So are you sure he can build what he's describing for $180sf?

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    4y
    Originally posted by @Bruce Woodruff:
    Originally posted by @Jay Hinrichs:

    right now in Oregon our semi custom product homes are costing about 150 a foot.. to 180 a foot.. to build

    and in florida were we are building dingers those are running 100 to 120 a foot and used to be 80 2 years ago.

    and you know how cheap they build in Texas and OKC.. starter houses. 

    Jay - I'm sure you can get a house built in some areas of the country for less than $200k SF, but the OP stated that he is building a stick-built, 4 story w/basement, elevator, custom built, high-end finish house in downtown Philly 

    My point is that I don't think he can do it for $180sf. Unless you're 100% sure that he can, I wouldn't encourage him, which you're doing. So are you sure he can build what he's describing for $180sf?

    No you miss understand my point my point is its all regional what i can do in one market and what can be done in another is apples and oranges .. IE the home I built at 7 new st in Charleston SC that cost about 500 a foot and had no elevator much of this dictated by the materials required by the city to build it.   And I simply cant fathom how cheap they build in areas like Texas and OKC that i have seen

    I know why our FLA dingers are so cheap its all minimum ubc code stuff ..  So I agree with you in that pricing is local and until you bid it all out and use current prices for components you wont know what it will cost.  one simple item is framing labor.  IN texas its like 3 bucks a foot in charleston we pay 15 to 20  in Oregon I paid 5.75 last year but that will go up to 7. and this includes window install and nails LOL.. Smae work different labor markets.

    Just like builders today ( myself included) even with pre sales we have a component price addendum.. IE we based this price on lumber package being 50k  if by the time we order it its 75k you the buyer are going to pay the difference and if you cant afford it or dont wish to then we have the right to cancel contract and return your deposit.

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    1Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Originally posted by @Douglas Gratz:

    @Bruce Woodruff waiting on the blue prints to get my exact numbers and budget....prices of material are changing everyday so until I have the prints I cant come up with my breakdown

    You should be able to put some pretty accurate numbers together without a set of plans. That's how you decide if the project is worth doing before you start spending money on architects, engineers, city fees, etc....

    Or you could spend $30k to get your plans stamped and then run the numbers and find out you can't afford to do it....

    Just curious....how much are your architect and engineering fees? What is the permit cost and school fees?

    1Reply
  • Don Gouge
    Specialist · Johnson City, TN · Member since 2021 · 139 posts · 146 votes
    4y

    This post reminds me of a situation like you see a baby laying on the train tracks. The train is barreling down the tracks at 50 mph. Bells ringing and whistles blasting. You are 200 yards away. Train is 100 yards away. All you can do is stare in slack jawed horror since you cannot help and disaster is certain. 

    7Reply
  • Chris SvendsenPro Member
    Front Royal, VA · Member since 2016 · 306 posts · 240 votes
    4y

    OMG this post is giving me anxiety.  Starting your first ever home build of this magnitude, with hard money loan, and no knowledge of house to build a house is quite a risky venture. This isn't a $100 lego kit you are building this is a 1.5 to 2 million dollar home and have no idea how to build one.  This price point, location is not all that matters.  Finishes and design are huge for this level of buyer.  I have no business giving advice on this as I never built a home.  I know all the steps to do it, time frames it takes, and various contractors needed due to working in the building industry for 20 years but would never jump this far in my first time building an investment home.  That said hard to say what happens with market but if things begin to shift that is when people who have no idea what they are doing usually suffer the most because they are taking the biggest risks. I suggest you find someone who actually knows what they are doing, reach a deal where you provide the lots, they build on them and you split the cost. Setup a contract that protects you.  Way to many areas you could end upside down and loose everything.  I hope it works out for you but this whole thing scare the crap out of me for you.  People make plenty of money building house that have no idea how to build a house.  I work with many of them.  However, they are smart enough to surround themselves with the right people who do know what they are doing and everyone benefits. 

    Good luck sir. You got a lot ahead of you. Sincerely hope it all works out for you.  

    7Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Originally posted by @Don Gouge:

    This post reminds me of a situation like you see a baby laying on the train tracks. The train is barreling down the tracks at 50 mph. Bells ringing and whistles blasting. You are 200 yards away. Train is 100 yards away. All you can do is stare in slack jawed horror since you cannot help and disaster is certain. 

    Don, you're killin' me man......

    I woke up this morning thinkin' - I gotta stop this from happening...every warning sign I've ever seen is there....OMG somebody stop this.... :-) :-) :-)

    7Reply
  • Lance Hernandez
    Investor · Hollywood, FL · Member since 2015 · 8 posts · 5 votes
    4y

    Hello all, while have been a member for several years, this is my first official post, so go easy on me... Based on what I have read in this thread, I believe the general consensus is "why". @Douglas Gratz I appreciate your tenacity, but look at all of the variables, most of which have been mentioned. Unpredictable material costs, unpredictable labor market, unpredictable housing market. If this was an opportunity, and you were just weighing out the risk, I wouldn't be concerned. But it sounds like you have already started moving forward. Why don't you consider selling one lot, which gives you some capital, and start looking for a construction loan on the other? I still think this plan is too risky, but at least it minimizes the risk some.

    1Reply
  • Douglas Gratz
    OP
    Rental Property Investor · Philadelphia, PA · Member since 2018 · 260 posts · 145 votes
    4y

    @Bruce Woodruff

    I have the loan for the job, just not the type of lender id like.  If things we're that bad as everyone saying, 1. I would not see newconstruciton going all all around the neighborhood  2. I get 10 calls away for people wanting these lots .....

    Either way, if I were to hire my own subs what do you think my savings per sqft could be?

    And I ran all the numbers I could, I just dont know the blue prints so I can only get close....Using the schematics I can suppose do the cost of lumber figuring in one 2x4 each 16 inches....I have the dimensions of all the rooms and the house. So I Could get close...whats a piece of 2x4 going for these days  $8.00..So I could get close to what the cost of lumber will be....

    But why is everyone so discouraging on here.  Yes there are alot of variables due to covid, but that hasn't stopped the housing market from growing exponentially......I have a consultant who's holding my hand throughout etc etc whats everyone so discouraging for?

    And I already ran the numbers at builing at 200sqft and im still profitable so I have done my due diligence

    0Reply
  • Douglas Gratz
    OP
    Rental Property Investor · Philadelphia, PA · Member since 2018 · 260 posts · 145 votes
    4y

    @Lance Hernandez I have not pulled any triggers yet, closing is in 2. weeks on the lots and its conditional in my favor so I could back out or assign them, but the 200k I can make from selling them is alot of money, but its doesn't help me reach my goal.  It would give me chance to buy one more rental or pay off some of my rentals and thus increasing my income....and that is my exit plan but before I go there I am confident I can pull this off so I am doing as much research as I can

    0Reply
  • Douglas Gratz
    OP
    Rental Property Investor · Philadelphia, PA · Member since 2018 · 260 posts · 145 votes
    4y

    @Lance Hernandez  @Bruce Woodruff I mean every house in a .1 mile radius sold before it was even finished being built. Justabout evreyhouse if not the day it was listed.  You dont know what neighborhood I'm taking about but run some comes....844 n 3rd st, philadelphia pa 19123 then get back to me

    0Reply
  • Douglas Gratz
    OP
    Rental Property Investor · Philadelphia, PA · Member since 2018 · 260 posts · 145 votes
    4y

    @Bruce Woodruff andI mean nothing bad about being discouraging I mean you are speaking truths but still, everything carries risk and things that have large returns carry more risk.  Covid era, housing crash era, there will always be something going on

    0Reply
  • Mike B.
    Rental Property Investor · Madison, WI · Member since 2020 · 91 posts · 71 votes
    4y

    Douglas you seem to be equating the fact that it's easy to sell a newly built high end home in a hot market with how easy/hard it is to build such a home.  Needless to say they are not the same thing, which is why everyone is urging such caution!

    4Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y

    @Douglas Gratz We're not trying to be discouraging...just realistic. You are getting very similar advice from people with combined hundreds of years of experience....this just sounds wrong to anyone who's done it a few hundred times.

    if I were to hire my own subs what do you think my savings per sqft could be? 
    Well, you would save approx 20%, but that means YOU have to run them and the whole job, the inspectors, everything. You are clearly not ready for that.

    I already ran the numbers at builing at 200sqft and im still profitable so I have done my due diligence      Running the numbers at $200sf is not doing your due diligence. $200 sf is not your worst case scenario. Run them at $300, and $350..do you still make money?

    every house in a .1 mile radius sold before it was even                                                                                    Just because every house nearby sold quickly means nothing. Did the investor have cash? What did they pay for the lot? What did they pay for construction? Did they owner build? Was their GC a relative?

    Covid era, housing crash era, there will always be something going on                                                           Yes there will, but that has no bearing on this possibly/probably not working for you. You need to know your true construction numbers before you go any further. Counting 2x4s is not how you do it. Maybe pay a veteran GC to give you a budget...you don't need plans to do a rough budget within $25k. Take that number and add 20% just for Mr Murphy. He will be working with you too. He showed up on every job I ran :-) 

    Then you're close to seeing if can make any money......

     










    6Reply
  • Lance Hernandez
    Investor · Hollywood, FL · Member since 2015 · 8 posts · 5 votes
    4y

    @Douglas Gratz if that's the correct address, to top things off, it looks like a logistical nightmare to build. Especially it being your first. Anyway, you mentioned there are several new builds going up. Once you lock these lots down, why don't you JV with the another experienced developers?

    0Reply
  • Douglas Gratz
    OP
    Rental Property Investor · Philadelphia, PA · Member since 2018 · 260 posts · 145 votes
    4y
    0Reply
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