Partnering with a general contractor to build a spec home on my land
Member since 2024 · 2 posts · 1 vote
Partnering with a general contractor to build a spec home on my land
5 Replies
- 2yJosh YoungPro MemberRental Property Investor / REALTOR® / Property Manager · Gilbert, AZ · Member since 2023 · 385 posts · 421 votes
@Stanley Blackman I really like the idea of partnering with a contractor. I recently partnered with my contractor on a flip, he is also one of my close friends and we trust each other, but it has been good because our interests are aligned.
One thing I would be cautious of in your situation is if you are only bringing $120k in land value and nothing else and he is bringing $800k to build the house and managing the build. It seems like he is bringing more capital and more work, so why is he giving you half the profit instead of just buying your land and keeping all the profit for himself?
Is he making a percentage of build cost like most general contractors do, so when he says $800k does that really mean $600k and he is getting paid $200k as the general contractor? I do really like the idea of partnering with a contractor but not as much if they are making money on the project outside of the profit share, that could be a conflict of interest.
What would happen if he went over budget and the house ends up costing what it's worth, do you sell and basically get nothing for your land?
What would happen if he ran out of money half way through the build?
I would have the conversation about these things beforehand so you are on the same page and then I'd write it all down so you are both in agreement.
- NYC · Member since 2022 · 39 posts · 18 votes2y
I agree with Josh. It is not that simple and it looks like the builder already factor in a 200K (3Ksf x 200/sf). You have to have a sound agreement and cater for hicups along the way.
I have a lake front property in Clermont Florida that values $175K and would like to do the same thing but don't have that experience. I had discussions with two local prospective builders but nothing was making logical sense to me so I put it on hold. I am interested to know your experience with this venture.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Stanley Blackman:
I own an acre of land that is ready to be built on in a community of homes in the $1,000,000 range. I have been talking to a contractor about entering into a partnership to build a new 3000 sq. ft. custom home on my lot. He would pay the total build cost of the house and I would contribute my land at the amount of $120,000. All contributions would be reclaimed at COE and the balance of shall be split 50/50. All fees, interests, closing costs, interest will all be paid prior to the equity split. His goal is to build under $800,000 and sell for $1 million plus. Does this seem like a sound strategy? What risks am I taking versus just selling the land outright? I am in my late 70's, married and in sound financial shape. My land is totally paid off. Borrowing money from a bank for the whole project is not feasible.
I HATE the idea of partnering with a contractor. Why? Because to even get an agreement in place would take a long time.For example if the builder is going to charge costs, what if the framer goes out of business and a new framer takes 2x. What if the foundation was poured incorrectly and its a $50k fix. Well those are costs and who absorbs those?
IF you are going to partner, partner with an experience developer who does not have a conflict of interest.
Lastly, if this home were to sell for $1M even, your $120k plus their 800k (lets round down to $900k) - you split $100k profit which is $50k. To me that is not close to being worth the risk of $120k where so many things can go so wrong.
My recommendation - sell the land and invest that money in something less risky.
7e investments53 Reviews - Member since 2024 · 2 posts · 1 vote2y
Thanks Chris, your recommendation is sound advice. I have had 2 realtors list the property but with no luck. It seems to me that their interests are in selling homes, not vacant land. I have tossed around the idea of selling it myself, but marketing it is a problem. Realtors want high commissions to sell land plus at least a 6 month contract. Any advice on selling it myself?
- New Orleans, LA · Member since 2019 · 127 posts · 66 votes2y
Builder and agent here. I agree with what everyone else is saying, something seems very off about this. He's definitely trying to just take a larger cut by inflating his build cost ... which honestly would be fair if he was just upfront about it. He is putting in more work and more money, he should be getting a larger share of the profits, but to pretend like he's giving you 50% is fishy as hell. I'd run in the opposite direction! You can't have a partnership with someone you can't trust.
As far as selling the land ... you've had the property listed twice and it hasn't sold? How long was it listed for?? It's either overpriced or your market is just slow and stagnant right now (that's what we're dealing with in my market) in which case it's probably not the time to be building spec anyway. If vacant lots aren't selling, that likely means homes aren't selling, otherwise there would be plenty of existing and experienced builders / developers ready to buy your land. You certainly can list the property yourself, and I'd say typically you'll get less money for it and it'll take longer to sell if you do it that way, but if you really don't want to pay commission then go for it. Not sure what the issue is with a 6 month listing agreement, that's pretty standard where I am. Feel free to DM me if you want to discuss further. Good luck!
Join the conversationCreate a free account to reply, vote on answers and follow this thread.