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Lawrence Joshua Flanagan
  • Real Estate Agent
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Building Homes for a Profit

Lawrence Joshua Flanagan
  • Real Estate Agent
Posted Jun 21 2022, 23:25

Hello to every one,

I am currently thinking about building a home for profit instead of doing a fix and flip. I currently do not have a lot of cash on hand, however, I know a couple of people who do have quite a bit of money. The plan that I have been thinking about is to have the private investor purchase the land and then acquire a construction loan to build the home and then sell it for profit. How can I properly structure this deal to where the investor and I both get compensated.

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Taylor Dasch
  • Real Estate Agent
  • Temple, TX
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Taylor Dasch
  • Real Estate Agent
  • Temple, TX
Replied Jun 22 2022, 06:31

I did the math on this in my market and that would be quite difficult with construction prices today ( in my market at least) However I do think you could make a really good profit if you were to scale that by purchasing a larger piece of land and developing a neighborhood if that is an option for you. 

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Scott E.
  • Developer
  • Scottsdale, AZ
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Scott E.
  • Developer
  • Scottsdale, AZ
Replied Jun 22 2022, 07:22

It costs around $300/PSF to build a nice new home in my area right now (minimum). The price can soar to $500/PSF+ if you are building luxury or dealing with a more challenging lot. This means an average sized home around here costs $1 million or more to build, and that's not even factoring in the lot cost.

Because of this, small developers who do infill projects are only able to build in areas that command $750/PSF+ on the sale side. And even then you need to be very particular with the lot that you choose. No negative external factors like a busy street or power lines. Needs to sit on a nice street within a great neighborhood. Ideally should have some views of the mountains or the city.

Building homes for a profit is possible as a small developer. And if you play your cards right, there is a LOT of money to be made. But this is not for the faint of heart, and in my opinion the strategy should be reserved for the most experienced and sophisticated investors. You didn't tell us about your background so it's not clear whether or not you're ready to take on something like this.

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Mike Klarman
  • Specialist
  • New Jersey
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Mike Klarman
  • Specialist
  • New Jersey
Replied Jun 22 2022, 10:04

I can add this as a lender.  GUC loans have the most stringent guidelines.  If you have 0 GUC experience most won't even deal with you.  You'd need to find a guarantor that has built homes from the ground up before.  When the lender sends an appraiser out to land that will have a house on it he needs architectural designs, blue prints, itemized costs for materials.  It's very extensive and can get messy and drag on.  I have a GUC deal closing in the next week and I've been pushing this deal up the hill for 3 months.

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Mike Wood
  • Developer
  • New Orleans, LA
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Mike Wood
  • Developer
  • New Orleans, LA
Replied Jun 22 2022, 12:52

@Lawrence Joshua Flanagan  Its very unclear what your role in this project is.  I also agree with other that getting a construction loan is not easy to do, especially if you don't have experience and its clear to the bank its an investment.

In your scenario, are you the one getting the construction loan?  Most banks will require at least 25% of total costs as down payment (if including the land in the loan) or equity (if using the land value as your 25%) for a construction loan.  If the land is owned by someone else, and your not putting any money up for the construction loan, I think your dead in the water.  The bank would see that that you have little to no skin in the game and not be interested.  Construction loans are very risky for the banks, as they almost always loose if the loan/project goes sideways.

If your investor gets the construction loan, what are you bringing to the project?   Without more details, its impossible to say how to structure the deal.