New Construction options right now?
Bought a BRRRR deal that came with 2 full size vacant lots behind it with road frontage to a nice neighborhood, I was very excited to dive into my first new construction project. After talking to my contractors, it doesn't seem like any sort of development works on them. Duplexes wouldn't cash flow and the price to build a single family wouldn't be much better than the price it would sell for. New to this side of things but very eager to learn, is this a common problem right now with material costs and interest rates being so high? Should I keep talking with other builders to try and find better quotes? Or is now just a good time to sit tight and wait it out. I would hate to just dump the lots if there was a possibility to make something bigger or more longer lasting out of them. For numbers if it helps. the properties are values around 25k-30k a piece, I'm getting estimates around 350-400k for a nice single story, 3 bed side by side duplex. Rents would be in the 1800 a side range. Around the same numbers for a regular spec home and in that neighborhood the ARV would be about the same as that cost to build. Thanks for any help or advice, look forward to connecting with everyone!
I’d suggest talking to someone in your area that is very familiar with local zoning, besides potential contractors. There may be creative possibilities that your contractor isn’t considering. Or, if they’re hillside lots, earthwork and retaining walls will price out most viable options. Not sure of your construction experience, but if it’s on the low to none side it might be worth finding a partner with lots of construction experience for your first new build deal. There’s a lot more to new builds than renovations.
Hello Luke! Congratulations on the deal and additional opportunity. Unfortunately new construction verse resale will always have a decent spread. Since every market is different you could pull a general search for resales that have sold around that are in a certain square footage vs. new construction. The price per square foot should help give you some general guidance on what you would be looking at to build new vs. finding another existing home. Keep in mind it's always more cost effective to build up instead of out...You mentioned a single story duplex. I'm not sure if a similar design would work with a smaller footprint but 2 stories? The huge "pro" to building new vs. existing is that you can typical get top rent, and have little to no capital expenditure. If your planning on holding the properties for long term you can't go wrong vs. buying a house that's 30 years old and holding it for another 20 years etc. Another perk would be that due to the proximity you would be able to somewhat force appreciation on all three of the potential homes. Overall, building is going to be rather expensive compared to existing homes but they will sell at a premium and with historical low inventory levels you may be surprised to see what you could get if you build and then sell (or rent out long term as a backup strategy). However, overall it's going to be rather cash heavy and at a potential higher risk.
Quote from @Eric Drum:
Hello Luke! Congratulations on the deal and additional opportunity. Unfortunately new construction verse resale will always have a decent spread. Since every market is different you could pull a general search for resales that have sold around that are in a certain square footage vs. new construction. The price per square foot should help give you some general guidance on what you would be looking at to build new vs. finding another existing home. Keep in mind it's always more cost effective to build up instead of out...You mentioned a single story duplex. I'm not sure if a similar design would work with a smaller footprint but 2 stories? The huge "pro" to building new vs. existing is that you can typical get top rent, and have little to no capital expenditure. If your planning on holding the properties for long term you can't go wrong vs. buying a house that's 30 years old and holding it for another 20 years etc. Another perk would be that due to the proximity you would be able to somewhat force appreciation on all three of the potential homes. Overall, building is going to be rather expensive compared to existing homes but they will sell at a premium and with historical low inventory levels you may be surprised to see what you could get if you build and then sell (or rent out long term as a backup strategy). However, overall it's going to be rather cash heavy and at a potential higher risk.
Thanks Eric, this is a great way to look at it that I wasn't before. I will definitely look into all of that
Hey Luke, I know this post is a few weeks old but just wanted to jump in here. Of course every market is different but yes, what you described has been the case in my area for at least 6 months now. As a spec home builder, we're just sitting and patiently waiting. There is practically no construction going on in my city right now at all, so it seems most builders & developers are doing the same. If you got a good deal on those lots then there is no harm in just waiting it out, the market will shift again eventually. Good luck.
My advice is keep the land, especially until you have a full understanding of what can be done with it. Read your local zoning ordinance to find the highest and best use for the zoning and lot conditions. If you have trouble with this it is worth having a real estate attorney look at it for an hour.
If the lots don't allow what you want to build, take a shot at getting a variance.
Material prices have come down a lot but finding workers is tough. It could be a good idea to frame out a 1,200 sq ft home at one of these sites if you can figure it out over time. If it goes well, repeat the process if not sell the other lot.