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.

[Scott P.]

Thanks for sharing your in-progress story! :-)

[Bruce Woodruff]

Quote from @Douglas Gratz:

Question, do you know of any comparable sidings to plac clad acm panel that is cheaper in price but looks just as good and just as durable?

No. If you're going for that high end look you will have to pay the price. Or back down on your expectations and use a product like Hardi. Can be made to look pretty fancy, but much lower cost.

[Andrés Uribe]

Quote from @Douglas Gratz:

@Bruce Woodruff well thats because money only takes away one stressor of life, bills, might allow to buy things that make you happy for a week, but its not sustainable....Question, do you know of any comparable sidings to plac clad acm panel that is cheaper in price but looks just as good and just as durable?

Look into Nichiha Fiber Cement Panels. They have an awesome product with lots of profiles to shoose from for a high end look. I think they are cheaper than ACM about $15/sqft material only maybe less. https://www.nichiha.com/custom...  

[Douglas Gratz]

Quote from @Scott P.:

Thanks for sharing your in-progress story! :-)

 Anytime, glad you like it, thanks

[Douglas Gratz]

Jan 31, 2023

After denied denied denied for funding I caught a huge break! Was one month away from selling and we PRE -SOLD the first of two! Construction not even started!

Now,

1. with the AOS and 220k down payment deposit, non refundable, the lumber yard will lend wood with a 3% loan, the supply house, the same for windows.

2. There is probably more I can get loan on but overall now I will need less to fund it

3. With the AOS I will get funded!

Thank you g-d!

[Bruce Woodruff]

Good fortune comes to those who persevere....!

Be careful to not use their money and under-deliver..

[Derek Bell]

Wait, so you used their down payment to fund the construction? And you have no idea where the remaining funds will come from to complete the construction??

[Bruce Woodruff]

Quote from @Derek Bell:

Wait, so you used their down payment to fund the construction? And you have no idea where the remaining funds will come from to complete the construction??

Yep, that's what it sounds like..... That's where I was going with my previous comment. This is how newbie contractors get into huge trouble. Huge.

[Derek Bell]

@Bruce Woodruff

That’s beyond ballsy. To the gentleman doing this deal….don't do this deal. Please. 

I wish you nothing but the very best for your future, but this will not end well. I give you the upmost respect in your hard work and enthusiasm, but anyone rooting you on in this endeavor is not helping you in the slightest.  

[Paul H.]

This is not a risk I would take or even feel comfortable reading about.  Please exercise caution and consult an attorney before spending any deposit money.  You'll need more capital just to survive just between the construction draws and inspections and that doesn't even include overruns.

[Douglas Gratz]

Quote from @Bruce Woodruff:

Good fortune comes to those who persevere....!

Be careful to not use their money and under-deliver..

 Nah their money stays in escrow

[Douglas Gratz]

Quote from @Derek Bell:

Wait, so you used their down payment to fund the construction? And you have no idea where the remaining funds will come from to complete the construction??

 No no, i used the signed AOS to get it funded from a lender

[Douglas Gratz]

Quote from @Paul H.:

This is not a risk I would take or even feel comfortable reading about.  Please exercise caution and consult an attorney before spending any deposit money.  You'll need more capital just to survive just between the construction draws and inspections and that doesn't even include overruns.

Where does it say I’m using deposit money/

[Douglas Gratz]

Quote from @Bruce Woodruff:

Quote from @Derek Bell:

Wait, so you used their down payment to fund the construction? And you have no idea where the remaining funds will come from to complete the construction??

Yep, that's what it sounds like..... That's where I was going with my previous comment. This is how newbie contractors get into huge trouble. Huge.

 THAT is not all what it sounds like, i think it says i can use the AOS TO GET FUNDED sorry for the caps it went on by accident. I went to a lender with ihe AOS

[Paul H.]

Quote from @Douglas Gratz:

Quote from @Paul H.:

This is not a risk I would take or even feel comfortable reading about.  Please exercise caution and consult an attorney before spending any deposit money.  You'll need more capital just to survive just between the construction draws and inspections and that doesn't even include overruns.

Where does it say I’m using deposit money/

 Well, more than myself thought the same thing. If it's in escrow and you got clean funding, good luck to you! I look forward to the updates as you go.

[Bruce Woodruff]

@Douglas Gratz Hey Bud, you're way too uptight. People are trying to give you really good (and free) advice. Don't blow it....

[Douglas Gratz]

@Bruce Woodruff I feel ya, I am a little amped and tight. Its been tough, and to have an AOS and still trouble funding, those comment straight made me angry I suppose from you " this is how newbies get into trouble"  to @Derek Bell making assumptions and @Paul H. saying "This is not a risk I would take or even feel comfortable reading about"

All that yeah, made me pissed, because it wasnt at all what I said nor implied

[Bruce Woodruff]

Quote from @Douglas Gratz:

@Bruce Woodruff I feel ya, I am a little amped and tight. Its been tough, and to have an AOS and still trouble funding, those comment straight made me angry I suppose from you " this is how newbies get into trouble"  to @Derek Bell making assumptions and @Paul H. saying "This is not a risk I would take or even feel comfortable reading about"

All that yeah, made me pissed, because it wasnt at all what I said nor implied

Those comments are not insulting at all and were meant with good intent. Your post implied that you were using the money as a down payment of sorts. Your words not ours.....you were very unclear. This whole forum has been very supportive of you. So get over yourself.....

[Mike Smith]

@Douglas Gratz I think you need a reality check.  You are over the moon happy because you got a pre-sale.  You've spent at least 12 months on this project and accomplished what seasoned builders would have done in 1-2 weeks.  You haven't even started construction yet, and the pre-sale makes this build much,much more complicated.  Being your first build, you will make mistakes.  On a spec home, you can simply just live with them.  On a pre-sale, the buyers will make you tear out/remodel anything that doesn't meet their expections.  Because you are new and this is a very high end build, you are going to struggle to set proper expectations/understandings with the buyer.  

I struggle to set expectations with buyers despite:

1. Been building houses for 24 years now.

2. Have multiple completed spec homes/model homes for buyers to tour.  Many times the exact floorplan they are puchasing.

3. A 5000 SF idea home/design center where they select every finish going into the home with a professional, full time designer.

4. My homes are 1/4 the complexity of your build.

You don't realize it yet, but the hard work and heartache is just starting for you.  You haven't reached the finish line, you just now arrived at the starting line of a grueling 18 month grind.  If this build is a 50k endurance race through the mountains, you just walked through the parking lot to the signup table.

[Bruce Woodruff]

Quote from @Mike Smith:

@Douglas Gratz I think you need a reality check.  You are over the moon happy because you got a pre-sale.  You've spent at least 12 months on this project and accomplished what seasoned builders would have done in 1-2 weeks.  You haven't even started construction yet, and the pre-sale makes this build much,much more complicated.  Being your first build, you will make mistakes.  On a spec home, you can simply just live with them.  On a pre-sale, the buyers will make you tear out/remodel anything that doesn't meet their expections.  Because you are new and this is a very high end build, you are going to struggle to set proper expectations/understandings with the buyer.  

I struggle to set expectations with buyers despite:

1. Been building houses for 24 years now.

2. Have multiple completed spec homes/model homes for buyers to tour.  Many times the exact floorplan they are puchasing.

3. A 5000 SF idea home/design center where they select every finish going into the home with a professional, full time designer.

4. My homes are 1/4 the complexity of your build.

You don't realize it yet, but the hard work and heartache is just starting for you.  You haven't reached the finish line, you just now arrived at the starting line of a grueling 18 month grind.  If this build is a 50k endurance race through the mountains, you just walked through the parking lot to the signup table.

Mike, of course you are right. I spent an equal amount of time building high end homes. Very high end. That type of build attracts people with big money (we used to call it stupid money for a reason) These folks will change everything constantly. This will cause you to run way over budget and schedule, and the builder will get 100% of the blame for both. This kind of project can have a seasoned builder to wake up screaming at night (ask me how I know :-). With a newbie in charge this could very well (maybe probably) be a nightmare.

The OP has been advised over and over but what else can we do....?

[Joel Forsythe]

My take aligns with the spirited warning, cautions, expressed by Mike and Bruce above. I am probably guilty of near reckless gambles in my life, so I hope you come through this to see some profitability.  You might not want to go it “alone” if you’ve never built a home from scratch or managed a client under those terms. You need to interpret what merits the “alone” part.

My $.02

Control your contract terms. Control your client expectations. Control your construction schedule. You allow wealth and entitlement based clients to view you as “hired help” or an “all you can eat” buffet, instead of a contractural commodity provider, you’re screwed. Pro operators know how to give clients the “custom” experience, bill them for the extra work that goes into it, but also NOT let them f*k with your schedule without $$$ penalties. Productivity is everything. Residential custom contracting is the nemesis of productivity. The best position for you to be in is remove all obstacles to an active job site, every week. No money issues, no client selection delays, no excuse for dark days. Factory floor time, get it done.

PS, Mother Nature is not your friend. Especially before you are shelled up. She will single handily destroy your schedule. The tip here is, losing the schedule early is like stumbling out the gate, good luck making back the loss. I think Mike’s note above is letting you know, you are already at a disadvantage as we see it time-wise, you gotta hit the ground running productively.

Seriously, good luck!

[Bruce Woodruff]

Quote from @Joel Forsythe:

Pro operators know how to give clients the “custom” experience, bill them for the extra work that goes into it, but also NOT let them f*k with your schedule without $$$ penalties. Productivity is everything. Residential custom contracting is the nemesis of productivity. The best position for you to be in is remove all obstacles to an active job site, every week. No money issues, no client selection delays, no excuse for dark days.

Well said. If at all possible, ban clients from their own property. Sounds crazy, but if possible it is a game-changer. No bringing friends and family over to look at the project (they'll all suggest changes because of course they are experts from watching HGTV :-)

If they change anything, make it hurt. Double the cost. Hell, Triple it. Note time delays right on the CO. Time delays and schedule changes are your two biggest enemies. A) Because they obviously cause delays and start bad feelings. B) They will kill you in terms of $$.

[Douglas Gratz]

2/24/23- Journal Entry THE MIRACLE (READ THROUGH IT ALL)

                                  I Pre-Sold one of the homes for

                          $2,250,000 but first let me say a few things:

Hello friends who have been with me for this journey ! I am happy to have something great to tell you and post, but before I do I would like to say, that I stood strong! The odds were against me from the very beginning and I knew this, I knew this and I only bought the land because I knew I Could sell it for more as an exit plan if it came to that, BUT I DONT HAVE TO! I have pulled off a miracle.

Filled with mountains of stress, depression, guilt, and sadness, I kept pushing forward. I had decided that if I have not got funded by the end of March I would sell the lots at a loss (due to carrying costs) but not only would I have taken a monetary loss, but I sold my home, and 3 rentals so that I could get more time, so I did that, and when I realized I would have to take this loss, well it was a very hard pill to swallow. The failure hurt, the guilt that my father would not recover the money he so lovingly lent me for this venture, not just this one, but to start my business and buy my rentals, it was his line of credit, and for this particular venture I have drawn it to zero and not only was my livelihood at stake, but so was his. This is why I was feeeling so guilty, sad and depressed, mostly not because I failed but because of the consequences of this failure. As a matter of fact, I only saw it as a failure because of the consequences to others, to me I learned so much, I showed my self I have courage because well to risk it all against all odds , you need courage and bravery. Knowing these things pushed me just a little further before throwing in the towel

So I told my agent, get a HUGE print of a 3d rendering and put the homes for sale, a house near by sold in 15 days for 2.4M and they had a lot of showings. Once on the MLS in two days A MIRACLE HAPPENED, someone who lost out on the bid for the 2.4M house called my agent, signed an AOS, put down 300k and began customizing the home.

The deposit is non refundable as she was taking customization to another level, we met with the architects, she elongated the first floor where the two garages sat, so she could have a third (this requires amended drawings and steel and money), she picked out all her tiles, moved walls, etc etc…..She payed for it of course, anything over out budget was on her, and because of this we knew she was not backing out, it would cost her a lot to do so.

So from the beginning the odds were stacked against me, I have spent the last 7 months trying to get funding. To buy some time I refinanced the land out of hard money and it was a blessing, for the person who held the mortgage on the land was the person who decided to fund the project.

There was a catch though, this person knew I was backed in a corner AND HAD ME BY THE BALLS and offered crazy terms, 18% 2pts in 2pts out, but I was grateful because It was unlikely that I ever got to this stage and 18% or rather building the homes was far better than selling the lots. If I sold the lots I would take a loss HUGE loss and walk away with around 300k. If I build, the first home even at 18% would net 420k and get my expenses back and walk away with close to 600k and still have one house to build.

But I was still not out of the woods, I was just about out of capital, had just enough to pay interest for another year. So I had to find a partner so I could afford the loan and I did. A friend who helped me once when he worked at a rehab and I was the patient. I knew him for only 2 weeks maybe and this was in 2018. I have some rich friends here that I have known for a while and even with the home sold they would not help, but this guy Rudy, who know owned his own rehabs, did not hesitate, as my long term friends should not have for I was offering 50% return on their money.

I needed 220K max, so my friend Rudy signed a contract contribution at first 180k, with a max of 220k if we need it in return for 20% of the net profit which is around 90k. He was wary of the 18% and I was out of options so in the contract I stated he would receive no less than 90k from the net proceeds if the net profit becomes less due to an unvarable loan. I could not afford him to back out, and something was better than nothing. So long as I build I will come out on top, so I agreed or more so gave these terms to my friend freely without him asking, it was my idea for I could not risk him backing away.

So here we are, the proforma

Expenses for one lot- 300k land+1.1M construction cost + 80k soft costs+101k closing costs+45k transfer costs+60k interest for land + 220k interest and costs for loan+50k management fee = $1,906,000

Income- 2,250,000  Net profit = $344,000 - 90,000 for my partner leaves me with $254,000 in my pocket in profit. Upon the sale I get back my 80K in soft, 60 in land interest, 50k management since I am managing 

So at closing I will walk away with $444,000 with still one house to build and profit from and we are inches from having a buyer for that as well. I split up the soft cost unevenly so I could get more back on the first build So on the second home

Expenses, 300k land+1.1M construction +30,000 land interest +40,000 soft costs +45 k transfer +180k construction Internet (I hope to get this down by getting a 12% loan from the bank having shown that I can pull this off already and the house will be pre sold) +50k management+101 closing cost net profit = 2,250,000-1,846,000 =404,000 NET PROFIT + 40K BACK IN SOFT +50K MANAGMENT+30 INTEREST AND I WALK AWAY WITH $524,000+$444,000 FROM THE FIRST HOSUE

TOTAL $968,000 There is something wrong with this math as my proforma shows me walking away with cloister to $750,000, I am writing this on the fly, so to not deceive lets stick to the math I did on excel , So when all is said and done I will walk away in the green plus my costs back and comes out with  $750,000 give or take……compared to selling the lots at a loss and walking away with 250-300k

Some may say 18% is absurd but to me, I am grateful for it because there was slim chances of me getting to this point and even more so, selling the lots would bankrupt me and make life hard on my father, so 18% is fine with me.

I dont know if I ever mention this, but I bought this land and took this risk for the sole purpose of being able to pay my dads Line of Credit back in full and have 6 duplex,s 12 doors to show for it. My father is the best man I know for he risked his lively hood to see his son succeed in what was a very unlikely situation. He told me that I could keep 150 of the total so that I can keep going forward and with the experience of this build, I should be able to set my eyes on large ambitions with experience to show the banks that I can take on and complete large project and with this I hope they will lend for future and bigger projects. I have my eyes set on an apartment complex, but who knows where life will lead me, however that is the end goal and willlretire on that apartment complex when ever that maybe

So to those out there who have been following this post. Let this story give hope! Let this story show that if you work harder than everyone else, you will succeed, that with courage, bravery, and the guts to stick it out, things that seem impossible become that much more attainable….I have truly been given a miracle, for without selling the home (never breaking ground yet) this would not be possible , and to sell without breaking ground,well other than larger communities, I have not seen it much. But be wary, things are still tough, even with the AOS, I could not get a bank to lend.

I didn’t really understand why being there there was relatively no risk anymore. God forbid the buyer passed away, her 300k would cover the loan, I could keep building and the home would sell. Having pre-sold such an expensive home is proof the high demand and low supply of “forever homes” Most homes in this area are for young working adults that make a good salary, but are too small to start a family in, so after a lot of research and pivoting I came to building 2 large homes instead of 4 smaller ones, for my research showed that people who love this area, want to stay there and build a family so 3 parking spots in the city, a grass backyard in the city, these things are hard to find, so I will build it and they will come. And so they did.

We break ground in 2 weeks, maybe a little longer as we await the amended plans, but WE BREAK GROUND! I can’t believe I am saying that.

There is a crux though, I need to pour the foundation on the home not sold yet because that street is to narrow for concrete truck, so I need to find a little extra cash (maybe max out my credit cards to do it) and or, not do the foundation and figure it out later (possible a pump to bring the concrete to where in needs to be instead of the truck needing to pour it) there is also the crux that if I pre sell it, how will I fund it? I hope the current lender who hold hte mortgage on the land will dish out another 1.1M since at 18% he is making good money and with the home sold, there should be no reason other than he doesn’t want that much on his balance sheet, so fingers crossed there. This lender is not even a lender by trade, he owned a roofing company and his son has been my consultant. He used his own money to give the loan for the land, and borrowed money from a bank at 9% for construction to give to me at 18%….But I will cross that bridge when it comes. FOR NOW I MUST LIVE VERY FRUGILE BECUASE UNTIL CLOSING I AM BROKE AND WILL HAVE TO LIVE OFF CREDIT CARDS UNLESS I CAN GET A SMALL 50K BRIDGE LOAN AND USE THE DEPOSIT MONEY AS COLLATERAL (I AM NOT SURE YET) BUT I KNOW THE NEXT YEAR WILL BE TOUGH

FOR NOW I BUILD! I MAKE A NICE PROFIT, PAY MY FATHER BACK IN FULL, AND GROW MY BUSINESS with all the things I have learned, the people I have met and networked with, and bank relations. Once both are built I will be able to show experience and I hope this helps propel my plans. I AM SO GRATEFUL AND CANNOT WAIT TO SEE THE FINISHED PRODUCT AND THE MARK I LEAVE ON THE GREAT CITY OF PHILADELPHIA!

TO BE CONTINUED…..WHEN CONSTRUCTION STARTS I WILL MAKE ENTRIES TO TELL ALL ABOUT THE CONSTRUCTION PROCESS AND HOW IT IS GOING GOOD OR BAD FOR ME AND WHY OR WHYNOT SO STAY TUNED! AND HEY IF YOUR READING THIS AND ODDS ARE AGAINST YOU, WORK HARD AND HAVE HOPE, YOU ARE MORE LIKELY TO SUCCEED THAT WAY.

[Bruce Woodruff]

Wow! Good story Douglas. I hope it works for you, there is still a looong way to go and there will be many roadblocks that you cannot even see right now. But just stick with it (as long as you don't entirely run out of money), and keep going. 

You can certainly use a pumper for that other foundation. But I would wait...once you pour it you are locked in to the floorplan....maybe someone will come along and pay more for something slightly different....

Let us know how it goes for sure...

[Douglas Gratz]

Quote from @Bruce Woodruff:

Quote from @Douglas Gratz:

@Bruce Woodruff I feel ya, I am a little amped and tight. Its been tough, and to have an AOS and still trouble funding, those comment straight made me angry I suppose from you " this is how newbies get into trouble"  to @Derek Bell making assumptions and @Paul H. saying "This is not a risk I would take or even feel comfortable reading about"

All that yeah, made me pissed, because it wasnt at all what I said nor implied

Those comments are not insulting at all and were meant with good intent. Your post implied that you were using the money as a down payment of sorts. Your words not ours.....you were very unclear. This whole forum has been very supportive of you. So get over yourself.....

 AGREED. And your right my apologies for going off the rail