My New Construction Journal From Start To Finish

[Douglas Gratz]

Hello fellow investors!  I began a post a few months ago in regards to a new construction project I will be starting soon and after all the great input I thought it would be nice to start a journal in order to help new investors who plan to start new construction projects for their first time.  Here's the down low in a nut shell.

I am building two SFH in Northern Liberties, this is a very sought out neighborhood in the city of Philadelphia. Minutes away from downtown and all major highways. Each home will be as follows: I bought the lots for 720k in total

1. On 2400sqft lots

2. 5800 sqft houses

3, 4 stories , garage parking, roof deck, elevator, and skyline views

Attached are the 3d Renderings of what I plan to build

Last week a home 4500 sqft just sold for 2.1 million dollars in one day. So thats the market as of now and I am told that pre-selling these within a month of breaking ground is very realistic and that I could get as much as 2.3 million per house. We shall see!

Here's how I started. As I am new to the new construction game I hired a consultant to guide me on my journey .  I interviewed 3 builders and 5 luxury real estate agents and their team.  I was told to not use my usually agent as when doing luxury at this level, you want someone who specialized in selling high priced homes.  Someone who has the clientele , know how, and team to get it done.

So I interviewed builders and got budgets from all three. One builder said he could do it for 180 sqft another quoted me at 225 a sqft.  When I compared their budgets I began to feel a bit worried since thats a large discrepancy between the two.  During my interviewing process, I visited projects these builders have done and are doing to get a feel and look at the quality of work they produce.  Both builders have experience in luxury home and the one I am going with just finished a 16 unit project in the heart of covid, which is one of the main reasons I chose him. He will know supply issues and how to circumvent them (ordering wolf appliances the day I break ground because he knows they are a year out, Anderson windows, same deal, etc etc). But back to the budget discrepancy .  The builder I chose has it at 1 million per house and the other is closer to 1.2....That said I am going to build in a contingency and put money aside just incase.

I am using hard money which makes this very risky, but I sold 3 of my 9 duplex's so that I could have a cash reserve of 400k to make sure I do not run into money issues.  I also have a buyer lines up, who is willing to buy the land with permitted plans for 1.2 million which would give me a profit of 500k without doing anything. I lined up buyers as another contingency/ exit plan, incase the lending doesn't work out, or some unforeseen issue , where I need to unload the lots.  So as backup I have some built in exit strategies.

Onto the steps I have had to take :

1. I had to first subdivide the lot from 4 1200 sqft lots into 2 2400 sqft lots

2. I hired an architect to build out the plans, submit zoning permits, do a structural survey of the land, and ultimate after getting zoning approved we just submitted the building plans.  This is a process in itself.  You want to make sure your architect knows the zoning laws in the area you are building, this is very important because, if my architects did not have the knowledge, I could have run into problems where zoning would not approve and I would need to wait months just to get variances IF I could even get them. So make sure your architect knows their zoning!  As a matter of fact, my guys knew their zoning but they assumed I knew it too...The original plan was to build 4 homes on 4 1200 sqft lots, and the architect went along with this (assuming I knew I would need a variance since it did not meet the 1400sqft per lot requirement) BUT I DID NOT KNOW....this set me back another month because I had to pivot.  It turns out it worked out for the better because with my original plan, I would not be able to get garages (which is a huge selling point in the city) After finding all this out, I had it subdivided for a second time into two 2400 sqft lots and looked up zoning laws where I saw that if I put a 5ft side yard on each side, it will be considered a detached home and not a row, which would allow for built in garage by right.  This pivot ended up working out because instead of having to wait another 6-8 months for a variance to sell 4 homes at 800k each, I am now able to build two larger homes for just about the same price but am able to sell each for 2.2 to 2.5 million , so I went from a gross profit of 3.2 million to a gross profit of around 4.4 million with a lower building cost. 4 homes would have been approx 650k each to build for a total of 2.6 million where as two larger homes cost 1 million each to build, maybe 1.2 million, either way it ends up being less to build but almost close to the same amount of profit.

a. the architect gave me schematics of the build

b. we went over them in stages and made tweaks here and there until I was satisfied with the final schematic

2A) Got general liability insurance and preparing to get builders risk, but not paying for it until the building permit is approved

3. While all the was happening, once I got the preliminary plans I gave them to my builder so he could price it all out. I learned that builders or yourself have to give the plans to a supply house and they run whats called "take offs" on all the line items and give you estimated prices of what everything will cost (Wood for framing, windows, siding, and the list goes on)

4. After this was done my builder had a budget which my hard money lender wanted and I needed so I know how much I will need to get a loan for in order to build these homes.  After careful consideration, since hard money is expensive and risky, I decided to build one house fully and one "under roof" which means exactly how it sounds, build just until the roof is on so outside elements cant get in.  The plan is to pre-sell one then have the lender release the rest of the money needed to finsih the 2nd house

5. Now we are at today. I am waiting for the building permit and in the mean time I am working with my builder to make sure we get the budget as close as we can to the actual cost.

I purchased the land in February, but began the process in November, so its taken 6 months to get to where I am now (submitting for building permits) To be continued.....The permits should be approved in about a month from now and we will break ground.

[Douglas Gratz]

@Mike Dymski Thank you for your post, it means alot.. and @Bruce Woodruff it wont inflate my head, i know where things stand, but it does help to hear encouraging words that acknowledge the difficulty of the project I am taking on. It helps in that, it means something positive about my character and that makes someone feel good about themselves which in turn drives motivation. So again Mike, what you posted, meant more than you know so again thank you. I have heard a lot of negativity on this post and maybe rightfully so, but negative none the less.

[Douglas Gratz]

@Bruce Woodruff I actually plan to write a book at some point. To early as of yet though. I would not change what happened in my past because it has made me into who I am today and I am proud of who I am.  On the side I facilitate mindfulness meditation groups at halfway houses all around my city and at NA I tell my story in hopes that it can show others who have gone through what I have, that, life is not over and positive things can happen if you stay on the right path and keep on trucking. It has made me into a great section 8 landlord because I have lived in ****** conditions at these halfway houses, and since I can relate to my tenants in a large way, I can help them. When I have extra cash around the holidays, I love to send out large gift baskets or send a portion of rent back so they can buy presents for their kids. Little things that really mean a lot to people in tough situations. For those of us who make a good monthly income from our cashflow, don't understand what an extra $200 dollars can do. The smiles I see, well I can't explain the feeling, but you can tell just how much better their life got, no matter how brief, just from having money to get their kids gifts for Christmas. I find that they become good tenants as a result and try harder to keep the place nice and pay their portions on time. As for me, when I receive a thank you card in the mail, it makes my entire week that much better. The secret to happiness is making others happy which is why most people are not, because we are selfish by design. I am talking about sustainable happiness, not the kind that comes from getting a good deal or buying something you really want.

[Bill MacFarland]

Thats a hell of a story man. Keep plugging forward, set your goals and crush them!

[Douglas Gratz]

@Bill MacFarland Thanks you, I most definitely will!

[Douglas Gratz]

October 7, 2022

The loan officer and partner met with the bank last Thursday 9/29/22. I am awaiting a commitment letter. My other partner won't put his contribution in as per our LLC agreement until we have it. After the meeting, my loan officer said it is in construction underwriting and he would have an answer early this week.

BOY am I frustrated. First off I hate salesmen/women, they are selfish and out for themselves, at least the one I am dealing with who has a habit of telling me what I want to hear, so I take what he says with a grain of salt. My only comfort is my partner is on the board of the bank, to me, this means we will get a commitment and term sheet soon, I could be very wrong, but fingers crossed. This loan officer is POS, since day 1, never facts, just what I want to hear, even after reaming him out and telling him straight up "just tell me the facts, the truth, what's really happening, real timelines, stop ********ting! I have had enough of that from you considering one of your ******** lies is the reason I did not close on my hard money loan (which at this point, my rate is going to be close to that), make something happen, and if you cannot back off and start giving it to me straight  so I can  make a  decision based on facts on whether to  hold it and wait or sell it" 

So one lesson learned, don't trust loan officers. He isn't even the first one I am frustrated with. The loan officer I used to use for my cash-out refinances from Univest Bank, pulls the same bs. Just recently, a refi fell thru. Luckily at the same time, I was working with Philadelphia Credit Union, who got me the refi on that specific property, closing days after Univest fell through.  So have backup plans when it comes to these things.  Much of the bs could very well be related to the uncertainty of the economy, but not all of it, my old loan officer from Univest Bank, pulled **** all the time. I would get a term sheet for a fixed-rate loan and get the table and it's Adjustable! I signed it because I usually pay all or half of my loans within 5 years in order to keep my debt down and allow me to buy more multifamily rentals using a small down payment, but still why the LIE? So yeah big lesson, don't take your loan officer's word for the full truth,  they just want to get the loan done any way they can so they can make their money. If they tell you something make sure you research it somehow to see how much truth is behind what they are telling you. You could run into problems that you have to pay off some other debt to get it, you may run into problems with them asking for more and more paperwork, you might not be getting the product you wanted, it might take a lot longer than they are telling you, and so on...

I used to only buy from auctions, but since COVID, they are all online, and no more 123 sold. They are 4 hours long! What edge I had from the research I would do, GONE, people have four hours to do research on the day of. Easily enough time for a drive-by and walk around :( I really hope there is a law that foreclosure auctions need to be held in person, however after just writing that I googled "Pennsylvania law requires that all foreclosed properties must go through a public auction before becoming real-estate owned (REOs). Auctions can be held in-person (usually at the county courthouse) or online, though online auctions are becoming increasingly popular"

Well that's horrible, they will never go back in person, they make more money online, a bigger pool of buyers. For example, there was a QuadPlex at the last auction, starting with a bid of 75k. I used to be the only person who would bid on properties in this town, 30 min before it ended someone outbid me. My plan was to wholesale it because ARV would be 425k so I would have been able to get 125-150k for it, it needed 175-200k of work, full gut. Given I could have offloaded before the 10 days needed to pay it off in full, I was willing to go up to 110k, in case 125k was all I could sell it for within 10 days, he got it for 115k UGH! My capital is tied up in this new construction or I would have bid higher and held it to fix up and refi. Who else hates that auctions have gone online?

In conclusion, I am frustrated! Like I said my only solace is because my partner is on the board, if he wasn't, I think I would be selling the lots for as much as I can get over what I paid or at least what I paid. I was actually very close to listening to the advice I got on here, 3 or so months ago, I had an offer to sell them for $1,000,000 until my real estate agent advised against it because of how good a location and house it will be and what it will sell for and also because the loan officer was assuring me we were golden. I ended up firing this real estate agent because I realized he is out for his best interest and not mine. Advice #2 you want an agent who is in it for your best interest, who would say, yeah in this uncertain economy, I think It might be best for you to sell and then let me make the decision. My builder who is the second partner is also frustrated because he has been working on the take-offs, lead times, and material prices for months now. One good thing right now is that he is telling me we are within budget and if we were to do a little value engineering where we can, we should do it not to save money and make more profit (because it won't be substantial savings) but instead take that saved money and put it towards something more important inside the house.

For other people who want to get into new construction, I learned about value engineering during this process. It is done to lower the budget and either make more profit or put the savings into another part of the house. For example, and I'm not sure which is more or less money, but let's say glass barrier on a deck is what the plans call for but, iron bars are cheaper, if it won't impact the ARV, look of the house, and won't matter to buyers than you go with the iron. You can do this with a lot of line items on the budget in case your budget is too high...this is value engineering. I believe it would be easier to do on a lower-end house than a $2mil house since people buying at such a high price either know the difference in materials lowes vs a high-end vanity/tile or because I went cheap somewhere it lowered the ARV...

That's all for today, waiting in the waiting game, yup not fun. As advised new construction is a whole new game and that's in a normal economy, you can't imagine the stress I am feeling with all the uncertainty of rising rate hikes, Ukraine, inflation, the jobs market, etc etc. If am being real there's a 30% chance I end up selling the lots if I don't get a term sheet soon.

P.S Trying to look at the bright side of how long this is taking, maybe it is all happening for a reason as I know things do per the STORY OF MY LIFE POST, maybe by the time we are done building the first house, the economy is better and out of the recession we are going into and if not, maybe by the time we finish the second house we are in a better place, materials go down before we start the second house, housing prices appreciate a little (this particular location is kind of in a bubble, and by that I mean, it's not affected as much by the macroeconomic environment) so by the time the second home is built my profit margin is a lot higher and makes up for maybe having to sell the first one for less and or build for more and make less, who knows (shrug emoji)....

[Douglas Gratz]

@Jim Flynn this is my first new construction and I used DesignBlendz as my architect.

I have done over 15 full gut flips and have a bunch of rental properties as well

[Derek Bell]

maybe I am missing something in your posts, but why didn’t you just parcel the big lot into two, sell one, and keep the other to build on? It would help give you a little bit of cash. And that’s what you need….cash. And bringing in partners never solves this problem in my opinion. Just muddies the water. What you do have is guts and a hell a lot of ambition. 

[Bruce Woodruff]

@Douglas Gratz You better get going buddy......winter is not the best time to start a build!

[Douglas Gratz]

@Bruce Woodruff I am well aware :/

[Bruce Woodruff]

Quote from @Douglas Gratz:

@Bruce Woodruff I am well aware :/

I know :-).....is your permit far along enough yet so you can do underground utilities and pour slab before the freeze hits? Or get a separate permit for that maybe? I have no idea where your engineering is at this point....?

[Douglas Gratz]

@Bruce Woodruff The building permit or separate permit for this stage? If its a seperate permit, I will have my builder start the paperwork however, I am worried to start before everything is locked in. Why waste more money, I will know more tomorrow, but I am getting impatient with the bank and might end up selling the lots to a buyer who has been asking me for them for a while now, he is not going anywhere, he plans to hold them for a few years, so the market is not scaring him off, he knows their worth will just grow

[Bruce Woodruff]

Quote from @Douglas Gratz:

The building permit or separate permit for this stage?

 No, I'm asking about the permit status. Is it approved yet? Are the plans stamped? I'm guessing no, or you would be going already?

I'm suggesting getting a separate permit for Prep/Demo/Underground utilities/Etc, so you can get going before snow.

[Douglas Gratz]

@Bruce Woodruff if I had the capital at a lower interest rate, I would be holding the land for 2 years before starting at this point, I really dont like the economic climate at ALL, more variables at one time than I have ever seen

[Bruce Woodruff]

Quote from @Douglas Gratz:

@Bruce Woodruff if I had the capital at a lower interest rate, I would be holding the land for 2 years before starting at this point, I really dont like the economic climate at ALL, more variables at one time than I have ever seen

There have been recent times with more variables. IMO, if you're gonna do this, just do it. You can be smart by building in a recessionary period (hence some labor and prices will be down) and then sell when the economy returns to 'normal'. Could be a double win for you if you do it right.....

[Douglas Gratz]

10/29/22

Quick update, and let me tell you, its about to get real! Did I fail?

So on October 27th after a lot of thought, around 11pm I called my father so that I could talk to him about how I was feeling.  The call was to tell him the bank is taking to long, it should not take as long as it has and it was time to sell the land  the longer I wait the, with rates rising, the less I will be able to sell the land if I could even sell at this point......telling him  that I failed and how bad it feels to feel defeated after all the hard work and money I put in.  To date, I sold my home during the boom and profited 60k and I sold 3 of my rentals for a total positive cash flow of 160k all of which went towards this investment. I was talking to him and was like "I regressed father, I owned a personal home and now I rent, I had 12 units and now I have 8 units, and lastly I am out 220k (included the 160 from selling things) " I said "Dad I feel horrible, I put so much into this heart and soul and I am going to end up with a big loss, nothing ever goes smooth for me" I went into a little pitty party because I swear I have to work 4x as hard as the next person on the same things because of my luck, and of course I get the land of a life time at such a discount, and I cant finish it off :(....

At the same time I was also telling him, how am I supposed to feel? In truth, I did everything I could.  I got the land at a great deal, I subdivided it to maximize profits, had an exit plan, went though all scenario, and overall in buying the land I made a very good educated investment and it turns out, it was just not the right time, when I bought it, all was good, but who could have foreseen what was to come with Ukraine and other uncontrollable factors. Maybe I could have for-seen inflation, but I did not. At the end of the conversation, I did not feel that bad because I know I made a good investment and did my UTMOST best, I cant control what I cant control. I learned so much! still will make enough to pay off all my debt, made so many connections with banks, lenders, loan officers, other investors, and builders. I would not have created a network like this had I not tried. And this network will help me expand. The lenders both hard money and "a" bank believe in me, so when the time comes, I know have the ability to quickly say yes to deals knowing one of the above will give me a mortgage on it with 20% down.

Prior to this, i was always buying my rentals with cash and doing a cashout refi 6 months later where as now, I can use the 20% down and with 100k buy 5 rentals! before I could only do 1 or 2 every year because I had to wait 6 months in between. SO THATS HUGE and thats why this new perspective has lifted my defeat because now I can really get to work and expand 10x faster than before.  If I come across I nice piece of land, I have the lenders lined up if I have a profitable project, so that to is HUGE. So yeah I lost my personal home and 3 rentals, making just enough cash to pay off my debts, but its not that bad ya know. PERSPECTIVE IS EVERYTHING.

I am not going to lie though, in making the decision to sell, I was very conflicted, I wanted to wait longer and longer because the thought of admitting defeat was horrible, its not easy to throw in the towel.

HOWEVER I happened to speak to soon. the next day 10/28/22 the bank called! and later that day I had the term sheet and a binding commitment letter. When I first talked about how I found a bank at 6%, same bank, but with rates up, its up to 10%. Thats okay, I used that number in my prospectus anyway. SOOOO we are getting closer FINALLY.  I really needed that phone call, even with all the good that came from failing, it was hard to swallow. Thankfully I do not have to admit defeat just yet :) Until next time, I will keep you posted, take care!

[Bruce Woodruff]

What a story! Don't feel too bad, you still have 8 rental units, which is far more than your average Joe.....

I would re-run your numbers before you proceed EVEN THOUGH YOU GOT THE LOAN......

You did your original prospectus/budget a long time ago now and the numbers certainly have changed.....do they still work? Is it still worth it?

Don't go through all this just to make $100k....

[Mike Smith]

Quote from @Bruce Woodruff:

Quote from @Douglas Gratz:

@Bruce Woodruff if I had the capital at a lower interest rate, I would be holding the land for 2 years before starting at this point, I really dont like the economic climate at ALL, more variables at one time than I have ever seen

There have been recent times with more variables. IMO, if you're gonna do this, just do it. You can be smart by building in a recessionary period (hence some labor and prices will be down) and then sell when the economy returns to 'normal'. Could be a double win for you if you do it right.....

@Bruce Woodruff I normally agree with almost everything you say, but I don't agree with the above statement at all.  I agree that most housing prices will fall due to the dramatic increase in interest rates.  However, I am not seeing reductions in building costs.  Sure, lumber has come down from ridiculous highs, but every other labor and material items required to build a home are at all time highs.  I think it will be at least twelve months before we start to see substantial reductions in costs, with the exception of lumber.

So, now is not a good time to build a spec home, as costs are very near all time highs, and we know the retail price is being reduced due to interest rates.  If you think rich people aren't affected by increased rates, you are very mistaken.  

[Bruce Woodruff]

Quote from @Mike Smith:

@Bruce Woodruff I normally agree with almost everything you say, but I don't agree with the above statement at all.  I agree that most housing prices will fall due to the dramatic increase in interest rates.  However, I am not seeing reductions in building costs.  Sure, lumber has come down from ridiculous highs, but every other labor and material items required to build a home are at all time highs.  I think it will be at least twelve months before we start to see substantial reductions in costs, with the exception of lumber.

Ok, I'll go along with you.....In order for my opinion to work, all costs need to drop at least somewhat.....

[Peter Tverdov]

I give OP credit because a lot of people gave him crap about trying to do this but also 3 pages ITT and no shovels yet. Can't imagine how that feels.

I am also doing my first new construction project on a 2 family that I will keep. I am the builder and the bank so it's a little easier. But I have a development coming in 2023 if I get my approvals God willing. Helpful feedback from the OP. Good luck dude.

[Caroline Gerardo]

Still got you in my prayers. Make the best decision for you. 

This market is worse than 2008 with all the same problems. 

[Bruce Woodruff]

Quote from @Caroline Gerardo:

This market is worse than 2008 with all the same problems. 

It's a lot 'weirder' is the only word I can think of. Inflation and recession. Stagflation. Or maybe a new word will be coined....

The OP has big cajones or........

I was one of the naysayers in the beginning due to his lack of experience and complete inability to 'get' a lot a basic building stuff. But ya gotta like his persistence, right?

[Judy Parker]

Thank you for sharing this with us.

[Douglas Gratz]

Quote from @Caroline Gerardo:

Still got you in my prayers. Make the best decision for you. 

This market is worse than 2008 with all the same problems. 

 @Caroline Gerardo what are your reasons to think this?

[Douglas Gratz]

11/7/22

Spoke with the institution again today and they gave me a term sheet. After LTV I get $1,200,000 however, 170k comes out to pay off my house because they want it as collateral and 100k goes into interest reserves. I have $200,000 so that should make up the difference. At the same time, negotiations are not over, I very might get the loan increased.

But the BP community has me just about to sell the lots. @Caroline Gerardo said we are worse than 2008. @Mike Smith says I am mistaken that riche people are not affected by rate increases. I don't think I mean that exactly, I guess what I meant to say is there are reckless rich people out there. I am headed in the direction of selling because I have family, the risk get worse by the day. I mean I still think regardless if I cant get the 1.8-2M I am looking for, I do think at the cost of the loan I could easily sell it for and take about 150k loss. It has more to do with than just money @Bruce Woodruff, yes I have re-run the take offs, and everyone dont get me wrong if I knew I was only making 100-200k, then its me more about the money (in that I would sell) but I am in this for the experience , get known and know people, and make a profit. If I take the risk and can keep it the loss at a low number (given everyone saying its worse than 2008) I might keep on chugging, but my spirits are low right now....

What do you think @Bruce Woodruff you have always been brutally honest. If I sell know I think I could make 200k?

[Bruce Woodruff]

Quote from @Douglas Gratz:

What do you think @Bruce Woodruff you have always been brutally honest. If I sell know I think I could make 200k?

I may not be the best person to ask this of, but at least you know I will not blow smoke up your skirt.

You mention taking a 'low number loss' just to get exposure and experience. I would say no. You can get both of those other ways and keep your money. Unless you have real deep pockets and the loss literally means nothing to you, but even then it sets a bad precedent in your mindset.

If this deal isn't going to work, just suck it up and move on...there will be others. It isn't just losing the money you should consider here, you are losing time (which is of ultimate value, and not replaceable) and putting yourself under a great deal of stress. None of us need that in our lives......

Just my .02, but best wished in whatever you decide.

PS - Next project, start smaller and let some of us run your numbers up front for you :-)