Spec House Financing

Land & New Construction
12yFollow

Spec House Financing

Graham MinkPro Member
Rental Property Investor · Stowe, VT · Member since 2013 · 102 posts · 27 votes

I am looking for financing advice for a spec house I am planning on building. Here are the details:

I own 5 rural building lots that I can't sell as vacant land. I bought the raw in 2005 and by the time they were ready to sell the market went south. No land is selling in the town they are located in, about 10 lots in the past 5 years and all for deeply discounted prices. In 2013 alone, 21 sfh have sold, so there is a much stronger demand for them so I am considering building a spec house. I know that it is risky to build Spec but I am getting eaten alive by taxes and interest payments and I have to do something. At this point I will be lucky to break even on the whole deal. I want to get out of the land development business and stick with the buy and hold cash flow properties that I have success with.

Here is my plan:

I have the cash to build a basic starter house on the property this spring. From doing my market research I can build the house for roughly $140k (which doesn't include the land) and sell it for $175-180k. I would break even on the construction and make $35k on the land. I have been trying to sell a lot for $30k for the past 2 years and, although I have had interest, no one has pulled the trigger. I won't sell for less than $30k for financial reasons that I don't want to bore you with the details on. If the house doesn't sell this summer I can rent it out and cash flow roughly $5k a year on it which isn't great but is better than a sharp stick in the eye.

My question is:

If I have to hold the property for more than 3 months what is my best option for financing the house to pull my money out so I can invest in something else?

My options are:

Heloc, which is difficult to find for NOO and has a variable rate.

Conventional financing as a rental, which is expensive and difficult to get.

Commercial long term financing, easier to get than Conventional but more expensive.

Are there any other options I could consider? Does anyone else have experience in deals like this?

I appreciate any comments or advice that you have. Thank you!

Podcast Guest on Show #119
0Reply
21 views

Most Popular Reply

Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y

Seems to me you're stuck with a lot, tried for 2 years to sell it and had nibbles. You wanted 35, you'd take 30.

Then you have 145 to build the spec, you build it and make 35 getting your land sale price, you end up with say 143.5 with sale costs selling yourself, with a realtor listing that's 10,500 for the Realtors, say 12,000 on costs of sale.

So, after you build the house, your labor, time, etc. you net 163. less 30 as a lot sale, just assuming you have a pressing obligation, you have 133, you lost 12,000 but dumped the lot.

What if you used your 145, paid off any pressing issue with the lot at 30 and you still have 115 cash and keep the lot for sale. 18k difference. 30k in land, 115k in cash = 145.

It's going to take 4 months to build that house, if it doesn't sell you have all your money in a rental and you'd be down 145 and still be stuck with the lot. A whopping 3% coc basically. Assuming you net that 5k.

I think I'd pay off my lot with any issues, use 115 to do 2 or 3 properties in those 4 months, contact the nibbles from the interest in the lot and cut my price to 25 subject to you building a contract home instead of a spec house and you'd be making about 25 on the house and getting rid of the lot, net difference to you 15K plus, you'd not have Realtor fees with the custom build.

115 from that cash should about 155 k in other properties, from your estimate on rents, that's 4,650 instead of 5k. plus your 15k profit, no lot.

I think I'd rather go with the last option, take less risk of all my money being in a spec-rental, get rid of any lot issue immediately, have other deals going on for 4 months to make money and possibly get a contract job with the perception of a much better lot price. :)

1Reply
See this reply in the discussion

11 Replies

Jump to latestLatest
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Seems to me you're stuck with a lot, tried for 2 years to sell it and had nibbles. You wanted 35, you'd take 30.

    Then you have 145 to build the spec, you build it and make 35 getting your land sale price, you end up with say 143.5 with sale costs selling yourself, with a realtor listing that's 10,500 for the Realtors, say 12,000 on costs of sale.

    So, after you build the house, your labor, time, etc. you net 163. less 30 as a lot sale, just assuming you have a pressing obligation, you have 133, you lost 12,000 but dumped the lot.

    What if you used your 145, paid off any pressing issue with the lot at 30 and you still have 115 cash and keep the lot for sale. 18k difference. 30k in land, 115k in cash = 145.

    It's going to take 4 months to build that house, if it doesn't sell you have all your money in a rental and you'd be down 145 and still be stuck with the lot. A whopping 3% coc basically. Assuming you net that 5k.

    I think I'd pay off my lot with any issues, use 115 to do 2 or 3 properties in those 4 months, contact the nibbles from the interest in the lot and cut my price to 25 subject to you building a contract home instead of a spec house and you'd be making about 25 on the house and getting rid of the lot, net difference to you 15K plus, you'd not have Realtor fees with the custom build.

    115 from that cash should about 155 k in other properties, from your estimate on rents, that's 4,650 instead of 5k. plus your 15k profit, no lot.

    I think I'd rather go with the last option, take less risk of all my money being in a spec-rental, get rid of any lot issue immediately, have other deals going on for 4 months to make money and possibly get a contract job with the perception of a much better lot price. :)

    1Reply
  • John Moore
    House Flipper · East Stroudsburg, PA · Member since 2013 · 1k+ posts · 205 votes
    12y

    Why not make up some brochures and attempt to sell a custom home at an attractive price. Have the buyer get the construction loan and you might have the best of both worlds and you might get rid of some of your other lots. House and lot packages sell better than most raw land. Another thought would be to advertise the land and offer owner financing, have the buyer build equity until he can build. I would think building now you would miss the selling season in your area. Just food for thought.

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    I agree with John, sell a contract job, several in fact. You can subordinate the lot for financing on the client's dime. But, contractors have a problem now seller financing residential lots, subordinate to the bank for construction-end loan financing and that should do it. :)

    0Reply
  • Graham MinkPro Member
    OP
    Rental Property Investor · Stowe, VT · Member since 2013 · 102 posts · 27 votes
    12y

    @Bill Gulley

    @John Moore

    Thank you both for the responses. For some reason I wasn't emailed when you responded so I assumed no one replied to my post. Very thoughtful and helpful information, I apologize for not replying sooner.

    I am a real estate agent so I can list them myself and save some money there. I have been trying to sell the land with owner financing for the past year with no quality interest. I also have had build packages listed and have gotten 0 interest in 5+ years. I own 5 lots still and have $100k in debt on them. My holding costs are $7k annually. I'm really in a pickle here.

    Bill, your idea about lowering the lot price to $25k and then contracting the house is a great one. I am going to try that immediately. At this price point ($30k) every other phone call I get is from someone who wants to put a mobile home on the property. There are covenants that run with the land that prohibit this. Lowering the price more might increase the number of calls I get regarding mobile homes. Curious to hear your thoughts on that.

    My thought on building a spec house then renting it if I couldn't sell it was to cover the $7k holding costs that I currently have. If the property was almost breaking even I could stomach holding onto the land for as long as it takes.

    I have the following ads on CL one for the land and one for a build/partnership:

    http://burlington.craigslist.org/reo/4195095482.html

    http://burlington.craigslist.org/reo/4161982887.html

    Any advice?

    Podcast Guest on Show #119
    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    I'd take the story telling ad listed first above, off, tonight!

    The second is okay. As a contractor, you won't be seller financing. Selling any lot that a residence may be built on, since you don't live in/on the property falls under the SAFE Act.

    If you had a note, you won't be able to service it next month, servicing meaning collecting payments. Need to search the SAFE Act here on BP, you may like to drink alone.

    As I said, lower the price and build a custom, that lot could carry a 2000/2200 sq ft home with real buyers. Nice land! Nice view too. :)

    0Reply
  • Graham MinkPro Member
    OP
    Rental Property Investor · Stowe, VT · Member since 2013 · 102 posts · 27 votes
    12y

    I will look into the SAFE Act, it doesn't sound good, but I don't drink so it can't be THAT bad...

    I will take the first Ad down. Do you think it makes me look too desperate? I am, and I thought being honest might attract some people, and I did get one response, but it didn't pan out. Can I edit out anything to make it better, or should I scrap it altogether?

    As an aside, I bought a commercial property in August 2012 that is owner financed. I bought it for $110k and he lent me $82k and I still owe $77k on it. The owner passed away 6 months ago and now I pay his estate directly. Does the SAFE Act say I can't pay that note anymore?

    I also have a loan from the town the building is located in to rehabilitate the property, to the tune of $125k. Is this loan "illegal" as well? I will do more research but I thought I should ask the person who probably knows more about it than anyone on here.

    Thanks Bill

    Podcast Guest on Show #119
    0Reply
  • Marc Faulkner
    Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
    12y

    The SAFE Act covers residential deals, not commercial deals!

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y
    Originally posted by Marc Faulkner:
    The SAFE Act covers residential deals, not commercial deals!

    Right! No issue with commercial properties.

    That's great that you don't drink the nasty stuff, but you might start after reading the SAFE Act. :)

    0Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    12y

    @Graham Mink Our niche is new spec construction. I have no idea what the market in your area is. Are houses appreciating? What is the inventory of homes on the market? What is the competition for new homes?

    When we moved to southern California we thought we'd do remodeling, or rehab and resell houses. However; the competition in that market was tremendous. Lots are hard to come by here, but we were able to find a bank owned lot, where the prior house had burned down. We put it into escrow.

    Our son drew up house plans, and did a rendering for a house to be built, and I put it on Postlets. The first people that called wanted to purchase the house. We already had a relationship with a private lender, and they financed the construction. We built the house and closed, and now we're doing more.

    You can find a draftsperson/architectural designer to draw up the basic floor plans and exterior rendering for you (unless an architect is required in your area). To begin you won't need all the detailed drawings (basically you just need "concept drawings" to start) Then, make up flyers, a sign for the property, etc. and try to pre-sell the house. Talk to a contractor to get an estimate of costs, etc. and see if the numbers make sense. You may even be able to get a contractor to joint venture it with you.

    You're lucky in that you already have the land, so it's very easy for you to market a "house to be built", and find out easily if it's marketable or not. If not, then you have to find a buyer for the lots. Good luck!

    0Reply
  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    12y

    @Graham Mink - since you're a realtor, have you put a listing out on the MLS with a photo or rendering of a new home that you would build, along with some pics of the beautiful property (I'd love to have that land!), preferably even some video of the property. You need something tangible to appeal to people emotionally and viscerally as well as logically, so you need photos/videos to get people excited. I agree the CL ad with all the text needs to be revised and replaced with mostly photos.

    I assume people can use USDA zeo down financing for a starter home in such a rural area, much cheaper than FHA mortgage insurance. Pitch this as well.

    I think with a little effective marketing, you could build those lots out and make a nice profit. If you could line up several pre-solds, hopefully you could negotiate better material prices as well. I'd talk with all the other agents in the area to see what their candidate buyers look like, try to line up prospects. Don't be pound foolish by shunning agents to try and avoid commissions.

    You mention that there is quite a bit of selling activity in the area. Sounds like the demand is there.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free