Partnering with a builder vs Hiring a Builder; What do I Do?

Question

After couple years of wholesaling deals to developers and investors, I thought I was in a good place as it relates to knowing what to do in the event I decided to take down a deal myself. When I say "myself" I mean hiring out the work. Find a builder, a GC and He would take it from there. Wrong,...kinda. After speaking with lenders, just a hand full, I realize there is a gaping hole in what I am attempting to do here in Memphis.

If I were to partner with a builder how can this scenario be structured? I have the land and the plans. How do I partner with a builder. Why am I partnering with a builder? After speaking with Lender, their requirement is experience doing Ground Up construction. Obviously, I do not have that experience so what benefit is it to a builder to work them in with the Lender as a partner?

Reason I am digging into this question is because making it known that my plan was to hire a builder, that scenario wouldnt suffice in the situation. Any thoughts on the matter?

Mike Wood · Answer

@Jamie Parker  I would start talking to local banks/credit unions that do investment property construction loans once you have identified the project and have some details.  Just asking about vague concepts is likely to get no good responses (banks might think you're just dreaming).  You will need to big picture things like, house area/neighborhood, size, costs, timeframe etc.

I think most banks will require you hire a GC/Builder prior to closing the loan.  You have not mentioned all your numbers, but if you pay cash for the land, you should be able to use that as part of or all of your required equity in the project.  Unfortunately, building houses is very cash intensive.

Lastly, I personally think right now is a hard to build houses.  High interest rates make the costs of the construction loans very high (~10% at a bank) and with mortgage rates so high, there is little buyers out there which could lead to long holding times.  I build to rent, and currently find it very hard to make the numbers work right now with new builds in my area.  In addition to the rates, material and labor cost remain very high.

Mike Wood · Answer

@Jamie Parker The answer to your question is money.  If you need to borrow money to build the project, how will you get the financing.  With no experience and not crazy strong personal finances to pledge to the bank/lender, its doubtful many banks/lenders will provide the construction loan on a spec build.  Simply too much risk for the bank.

If you can do the finances, simply hire the builder.  If not, then you will need to find a builder that has access to capital to fund the project.

Personally, I would never partner with a builder, I hire them.  That puts all the risk and all the reward on me.

Currently most banks want 25-30% of the total costs in cash/equity/downpayment.  Most will take the value of the land as part or all of the cash/equity/downpayment.  I don't know of any banks any more that will do a construction loan on investment properties based on completed value (i.e the finished value with the built in equity).

Bryant Brislin · Answer

In my experience, a hobbyist builder (i.e. you), would want to hire a GC to build their project. If no construction lender can get comfortable with you as the builder (aka principal, sponsor) regardless of you hiring a well-qualified GC, then maybe the solution is to give some piece of the equity to another builder/principal who would oversee the GC, and whom has the track record to satisfy the lender. Not sure if you can easily find someone like that or not, but that's the only solution I can think of. The lender may want that co-GP/experienced builder to be a guarantor on the loan, too, which they may nor may not be comfortable with.

Jamie Parker · Answer

In The buil-to-rent space, is the lending broken up in phases? Acquistion, construction, long term financing?  Or do you have capital or relationship with lenders? After finishing a project, are you renting for 1.5x mortgage, 1%(seems tough to hit 1% on new construction) or…str?

Jamie Parker · Answer

@Mike Wood Yessir you are correct. response to @Bryant Brislin I have talked to 2 lenders. One of which wants cash reserves of 30k on a 200k loan to get going. Since this particular lender isnt requiring ground up construction experience, based on our conversation,  I will have land purchased, drawings, construction documents for permits, and surveys complete at that time.  I agree to not give away equity on the project because the GC wants to charge a GC Fee of 20% anyway. From my wholesaling days, that comes with the territory. This is looking to be a more complex lending situation due to lack of relationships established, but I have to start somewhere i suppose. When is the best time, in your opinion, to start shopping long term financing on as the project carries on?

Jamie Parker · Answer

@Bryant Brislin thanks for the insight. At this point i guess being a hobbyist builder sounds pretty good to me. The 2 lenders: 1 requires Ground Up experience and the other one has not mentioned it, yet after speaking at length about the matter said that about 30k cash reserves would be required to get things going [with the loan]. Now giving some equity in the sub market Im starting in is kinda a venture capital-esque move. Not saying you wont get paid because there are some comps, thought not many, for what I am seeking to do.

In terms of giving away equity; I am not sure if this is too far down the road, but getting long term debt on the property is a consideration as an exit. When should I start shopping long term financing? Once everything is permitted before breaking ground? or is there a check point along the way the would be more suitable?

Partnering with a builder vs Hiring a Builder; What do I Do?

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