@J Scott inspired me with his diary of a new construction project to do one of my own. So not to be outdone, I'm actually going to do two. This one will be for a project that we have recently completed. I'll add new content every couple of days that represents a week's progress. The other thread will follow the project we just crowdfunded on iFunding.com.
Just for some context, this is our 12th new construction project, so they are starting to look kind of familiar by now.
So with that let's get started on 1106 Berger.
This is an East Austin lot about 6500 sqft. That number is important because it is too small to build a duplex, so it has to be priced to build a single family home. It has a large tree on it, but it's near the property line. We later found out it is one of the largest trees in the county.
It's a corner lot too as you can see which means setbacks are going limit our buildable space. It's also near a creek, so we'll need to check the flood plain. It turns out that it is in the 100 year flood plain which is ok. We can build the finished floor elevation 1 foot above said plain and according to the models it shouldn't get wet even in a 100 year flood event.
The Floor to Area ratio requirement is 40% (This is specific to Travis County, Texas) or less which would mean the maximum house size we could build is 6500 * 40% = 2600 sqft. Sounds great right? Well, we don't want to build too much house for the neighborhood or we would price ourselves out of the market, so we went for a simple 1500 sqft 3 bed 2 bath design.
The comps in the area at the time of purchase of the lot were about $180/sqft for new construction exits. So our target exit would be $270,000. We want to have at least a 20% margin after all costs are tallied and we budget $110/sqft to build for this area, although we are pretty good at coming in under this if the lot is not complicated. This buys us room for surprises and if we beat our target we can give a little more back to the investors.
That means we are going to spend $165,000 on design, engineering, permitting, utilities, sidewalks, bushes, grass, fences and house construction, $19,000 on transaction costs (7% of sales price), and some amount on land. We want at least 20% of our out of pocket costs (land + construction) in profit. This is critical because it means we can stomach a 20% dip in home prices and still sell the project without losing money. You can speculate on future prices, but that is what gets you killed during a market down turn.
This leaves a max land purchase price of roughly $45,000 which we were able to achieve. The light is green, let's go buy it!
The story behind this lot is kind of neat. The neighbor owns it and just used it for a place for his kids to play as they grew up. They have since left the house and now he doesn't use the lot, so there was only a small tool shed on the lot to demo which didn't cost very much.
John, did you look into the possibility of adding a garage or mother-in-law apartment? Some neighborhood plans allow a second home of <850 SF on lots this size. You could then set up a condo regime and sell the 2 residences separately. (I know you know this). The 850 SF second homes are bringing higher dollars PSF than the main home.
Thanks for letting us see your project in detail.
Thanks for sharing this John, will be following along through the process!
Interesting John- I just purchased a lot about the same size (47X130); the coverage ratios in my suburb are expressed in terms of the building envelope and footprint not total area.
Are you sure the 40% is a floor to area ratio and not footprint? A quick search of Austin zoning reveals SF-2 is 40% building coverage not total square feet of building over total lot size. O well just curious...it surely wouldnt prevent you from building a 1,500 sq foot home as you intend.
As an example:
6500X 40pct= 2,600 (footprint incld garage)
with a standard two car garage (20X20) that leaves you with a 2,200 sq foot footprint (1st level). 2nd level 2,200 for a total square feet of living space of 4,200.
Off to the races! I know there's a lot of people that will be monitoring this thread, in fact, I had two messages just this morning on new construction, so I'll message them the link!
As a follow-up, I now see the FAR (floor area ratio) is one of the principal regulations in Austin. But I am still curious as this seems like footprint not total gross living area.
Account Closed suggested.
However this lot has a few challenges. It is a corner lot with a long frontage that has a 25' setback so we are actually pretty constrained by that alone. This lot is in 78721 which is further east and doesn't have comps as strong as 78702, so we weren't comfortable building a large home here because it would have put the total price tag for the house on the higher end of the market for that area. So we are managing our risk by building something more modest.
When did you buy the lot? How far must you be from the big tree?
How are you acquiring your properties through direct mail campaigns??
Originally posted by @Jon Klaus:
When did you buy the lot? How far must you be from the big tree?
We have had this one for over a year. We found it through a wholesaler locally. This is one of the very few (less than 5%) deals that we have ever bought from a wholesaler and of course the contract was all screwed up and needed massive revisions to make it work.
The CRZ for the tree was large. I don't remember the exact distance, but we had to work with The City Arborist (John calls him Radagast ;-)) and Watershed for a long while to get things cleared. Luciana Corwin did this design for us.
Originally posted by @Gautam Venkatesan:
How are you acquiring your properties through direct mail campaigns??
All sorts of ways. This one was bought from a wholesaler. We don't do mail campaigns in general. We buy from other folks that do campaigns or other forms of marketing.
I frequently read of "Texas soil issues" with regard to foundation problems.
I bought a custom home lot which had been compacted and "certified" years before... Because I did not trust the "certification", I hired a grader and had the 82x42 pad re-compacted, just to be on the safe side.
I was present while the dirt was removed and then replaced/compacted. The lot sunk another 1.5 feet... So much for the prior "certification."...
Here on bigger pockets, I have never seen anyone mention the cost to compact new construction lots prior to building. If Texas really does have huge soil stability issues, why do I never see "lot compaction" costs included in estimates. I don't have my files handy right now, but I think I paid $5-6k to have it done.
Is $5-6k such a small amount that it's never mentioned as a new construction cost?
I'm very curious.
NA Martin We are building a house right now in San Clemente, CA and just finished the dirt work (excavation) of which compaction was a part of that. When we figure those costs they go in with excavation and lot prep costs.
Soils in east Austin tend to be a mix of clay and regular soils. We design out this risk by having a soil analysis completed for every project, so we know the soil composition and water content 15 feet down. Our engineering firm designs the foundation to suit the soils. In many cases we use pier and beam which is adjustable as it ages and can deal with a slowly shifting soil. If the conditions are appropriate, we pour a slab. In either case, the engineering firm takes the liability for the foundation. We get pre-pour inspection letters to ensure that we build what the engineers designed. As such we often have very deep and wide piers to manage the soils. At the end of the day, it's an engineering problem.
That makes sense.
Karen, in your experience does California ALWAYS require compaction? If so, what is the minimum, three feet of remove/replace/compact? If it is true that California always requires compaction, then when we see discussions about "How much does it cost per square foot to build new construction", I guess those building in CA should always add another $3-$4 per square foot when estimating...
NA Martin The costs vary based on what is going to be required by the soils engineers. We are building a house on a lot that has a large amount of dirt that is being taken out, and re-compacted, etc. However; there's different types of soils in the various areas here, those in the coastal areas have more sand, etc., so there's no pat answer. You go on a case by case basis. That's where experience comes into play. However; when figuring out the costs, compaction is just part of the excavation costs we figure. (I don't do the cost breakdowns, John does, and though he knows the number, I am not sure he actually breaks it out on the cost breakdown, but i'll check)
So we've gone through our checklist.
1 - Flood - yes, 100 year
2 - Trees - yes, engage the City of Austin arborist to determine setback requirements
3 - FAR - yes, plenty of room on paper, but the long 25' setback is going to squeeze us
4 - Survey - the key element in this case is getting the 100 year flood plain line and elevation certificate. The FFE will need to be 1 foot above this certified elevation.
5 - Plat/CC&Rs - you always want to read these for any gotchas. They are less likely to be an issue if you are building something that the neighborhood is already full of, like a small single family house in this case. So here the risk is low. We verified there were no restrictions.
6 - Design - Since we're building way under the 40% max FAR this is less of an issue, but we have our architect plan a design rough to make sure we can fit within the setbacks and stay away from the tree.
You need to do all of the above before you sign a contract to purchase the land. Once you have and you are confident in the project, lock it up with 60 days to close. You will need that time to complete the detailed work above, raise your capital, and spin up a bank loan if you are using one. You can do it in less, but try to get some extra time if you can. Surveyors don't show up on time. People are out sick. Holidays close the banks and the city. There are dozens of little delays that can keep you from getting your diligence done.
After all of the above are done and you're under contract, get a design rough from your architect. This is a simple 2D drawing produced by the architect which has dimensions and a rough layout without much detail. The purpose of the design rough it to make sure your design is appropriate for the market and that you can make changes before the architect has spent a lot of time (and your money) implementing something you don't like. This is where you want to have your sales agent review the rough design to make sure it has what the market wants. Other things to consider at this stage.
1. Is there enough room for the HVAC equipment? Can it be accessed?
2. Where is the water heater going to go?
3. Do you meet all access, entry, and egress requirements?
4. Do the bathrooms all make sense? Do all of the doors open the right way so there are no doors blocking sinks or other key features.
5. Is there enough room for the refrigerator?
6. Add up your cabinet volume. Is it sufficient for the house size you're designing? A small kitchen will not sell well.
7. Do the grocery experiment. You just got home with a load of groceries. How do you get them out of your car and into your kitchen? Does anything stand out or impede this task? Thought experiments about your most common activities at home are great for flushing out the details. A good architect will know these and create a great rough from the start.
Once you've come up with a good rough and sign-off on it, let the architect go do their work. I think it is very important to have the project manager get this sign-off with a letter or stamp. This makes sure you don't end up re-designing later after the architect has spent a lot of time on it.
For 1106 Berger, you can see the building fits snugly on the lot right up against the tree's critical root zone, and we used pier and beam so that we could build closer to the tree. A slab wouldn't allow us to fit much here. This is also not the rough, it is the plot.
While the architect is working on the rough, order your soil analysis and have your GC start getting bids for what it will take to grade the lot, remove any previous structures, foundations, removable trees and driveways. In general you want to be preparing to start the foundation.
You can't start with a lender until you have the near final plans and a budget. We'll save that for the next post.
It seems like there is a lot of time and effort spent on the design of each new build. How feasible is it to create a "standard" floor plan that you can simply tweak as necessary (or just use one that you've used before)?
That is a very prudent plan for a subdivision because you can control the lot size and create a reusable design for a standardized lot. However, when doing infill construction with unique lot sizes and constraints on each lot, this is hard to achieve. The following variables generally dictate that we create a unique design per infill project.
1 - Inconsistent lot size
2 - Trees push around the borders
3 - Setback rules
4 - Lot slope
5 - Market for single family vs duplex - the same size building doesn't work in every market
There is also one large benefit from doing unique designs which is just that. Every house we build is different from the last, so it is unique. This has a huge attraction to buyers since they know theirs is the only one like it.
It does cost us more to design each house, but because we are not doing subdivisions it's worth it. That being said, one of our projects is a small subdivide that uses one duplex design twice, so we did save some money there where it worked.
If we get lucky we may be able to use the basis of a previous design on a lot if the dimensions and market are the same, but in general we use a new design every time.
The architect presents a rough design that you approve after feedback from the builder and your sales expert. Once the architectural designs are complete we send it to the engineer so they can create a foundation and framing design. These are both required to submit for your permit (in Austin TX at least)
To prepare for doing the foundation, all of the following need to be considered.
1. Grade the lot - A flat lot is a good lot. Having a slope introduces lots of risk, all manageable though. You may have to step the foundation and create retaining walls. Make sure you have a plan for drainage to get rain water to the storm drains. You may need mira drains around the foundation. In the case of this project we did not need any of those. The lot was flat, so drainage wasn't much of an issue.
2. Remove any previous structures, foundations, removable trees and driveways.
This lot had an old tool shed with no utilities and a very old driveway. Driveways are usually concrete and cost just as much or more to dispose of the old concrete as to actually bust it up. Knocking down the shed was a simple task with the same back-hoe that pulled up the concrete.
If you have an existing structure, make sure you disconnect the services and have the utility pull the lines back away from the house. Even if you disconnect the service, if the lines aren't pulled back they can still cause a gas leak or electrical line discharge.
Time spent preparing your budget is time well spent. You make all of your money on the spread, and the budget is that plan. Work here will save you time and money which means it will increase your IRR. After you have done a few, they will take less work, but at first spend a good amount of time preparing and understanding your budget. You can use $/sqft generalities, but every project will have places that will cost more and less. Areas that cause price swings tend to be:
1. Foundation design - soils, slope, flood status and trees all influence this. Flat dry lots are the least expensive. Drainage and extra concrete to deal with a slope add cost.
2. Framing - This is generally an easy one to be consistent on. Exterior siding, special windows and roof types can be big cost influencers.
3. Mechanicals - The core set of AC, Electrical, and plumbing are pretty easy to predict. Big cost movers are fixtures, number of bathrooms, and number of can lights. HVAC is usually related strictly to size. If you have a two story unit you can spend more on a two zone HVAC system.
4. Insulation/Sheetrock - These are pretty standard rates and shouldn't fluctuate much. They are based on size of the house. Spray foam insulation costs a little bit more but is far more efficient. We us it in most of our homes.
5. Interior Finishes - The sky is the limit here. This is where you price out your home based on the area. You can make nice looking inexpensive homes with builder grade carpet, flooring, and countertops. You can also cut into your margins by buying things you think are nice, but you don't need for the market you are selling in. Don't price yourself out of the market or build the nicest house in the neighborhood.
6. Fencing and Decks - These can get expensive depending on how high you make them and what material you use. Stained treated pine looks great and costs less than cedar. Vertical fences are fine in most places, but horizontal ones look really sharp but are more expensive. They do have a big curb appeal though.
7. Landscaping - This is usually pretty fixed. However in hot climates like Texas I would recommend going with what they call xeri-scaping or no-scape designs that are mostly rock and cactus. Once you put that grass down, it starts dying. It's very hard to keep alive while you are showing your new home. It has to be cut and becomes a maintenance headache. A nice pretty rock garden it maintenance free. Be careful about your market here. This doesn't work everywhere.
8. Contingency - Plan for 5% to 10% of your budget in contingency for surprises. Worst case you will have a little left over. More likely there will be some surprise that this will cover.
I know you're probably thinking, what does each area cost? Well the prices I have are just for my area, so they are not reliable for all markets. I can't link a budget in the post, so you'll have to ask me directly and I'll send you my budget.
For each line item, use a cost code as well so you can track how much you are spending from project to project and make the book keeper's life a little easier.
If you are using a construction lender which is likely, make sure you get permission from the bank that it is ok to do grading and demolition before the loan is originated. Most banks will allow this assuming you can provide lien releases. They want to stay in first position. They will also want to see the full design plans and budget for what you are going to build. Their appraisers will generate a price for the finished property to determine if your loan is well under that price for the bank's tastes.
You will need to purchase builder's risk insurance before closing on the loan. The bank will need to be listed as additionally insured. I only buy enough insurance to replace my building costs, not the retail amount. This insurance just pays for material lost to vandalism, fire, some natural disaster. Check your policy.
You can submit the plans and budget to the bank while the permit is going through the city or your legislative equivalent. Some banks may want to see an approved permit first, some may not. Ideally you can time the bank underwriting process to be complete at the same time the permit is ready. This is a tricky game, and rarely do they happen at the same time. You'll want to get the permit first if you get to choose, otherwise you will be paying for a note without a permit in hand, wasting money. Small local bank underwriting usually takes about 30 days to complete. Once you develop a good relationship with a bank and have performed several successful loans, that time may go down.
The bank will also need a construction contract between you and the builder unless you are the builder. That contract should do two primary things
1) Establish a price and schedule for the project
2) Set liability on the builder for insurable items. This ensures that the builder uses contractors and subs that carry insurance. These laws vary greatly by state, so make sure you protect yourself from an injured worker scenario. Each sub contractor should carry the insurance to cover these types of accidents, and your construction contract puts the liability on the GC to ensure that he hires contractors with the insurance required by your state's laws. Secondarily, you should carry a general liability policy for your company or yourself. These are generally not very expensive and cover you in a worst case scenario.
The construction contract covers a lot more than that, but those are the two key components I am most concerned with. I am not a lawyer and am not giving legal advice. Please consult your attorney to determine an appropriate construction contract for your business.
You will also need formation documentation for your entity. If you have a partnership, the controlling partner will need to be clearly laid out in your corporate docs so the bank knows who they will be dealing with and who has what power.
Now that you've assembled all of that, your bank file should be ready for processing. Good luck at the loan committee review!
The bank will usually take about 30 days to process your loan. Most of that time is waiting on their appraiser. I've had some bank appraisers use comps in a separate zip code 12 miles away across a large body of water, so you may run into appraisers who don't know what they are doing, especially if they are new. Assuming your loan is approved, you'll need to set up a closing and sign your life away, well your debt guarantee at least.
Once the bank loan is closed, the first thing I do is double check that the builder's risk insurance is paid and has the bank on as a additionally insured. You will have completed a construction contract by now as well. The next part is the first draw which is a tricky one.
For the 1106 Berger project our land was pretty inexpensive. We paid $28,000 for the land but our loan was $140,000, so the loan to cost started at 83% which is too high. So we needed to bring some more cash to the table to put some more equity on the ground. We added $32,000 in cash to the project to do the pre-starts and foundation. This put our loan to cost at 70%, a number the bank was comfortable with.
So we were able to start the foundation with our own cash. However you need to make sure you get the loan complete before you spend your own money. Again, we're making sure the bank keeps first position here. So once we have the loan, we can spend our own money. Sounds a little weird, but that's the way it is.
Here are the pictures of the tool shed and demo of the driveway. There were no utilities to the shed, so that means we saved a few weeks waiting on the utility companies to pull the lines and secure them. Normally you want to get an all clear from all of your utilities before starting a demo.
With the ground cleared, we can start on the foundation. So far we have not made our first bank draw.
This is a pier and beam foundation which serves a couple of purposes.
1) It can be placed closer to a tree without impacting the critical root zone
2) You can elevate the Finished Floor Elevation for less because you're dealing with less concrete. This is also great for getting out of a flood plain
3) It can be adjusted over time so if the soils sink, you can shim the piers.
Before the foundation is done, the surveyor will have marked the lot and done a form survey that makes sure the concrete guy puts everything in the right place. A really fast concrete vendor can do a foundation like this in a week.
Once all of the piers are on, the subfloor is built on top. Even though this is lumber, I count it as part of the foundation budget as this is the platform you are going to build on top of.
Texas has termites, so every foundation needs to be treated for them. You may not need to do this depending on where you build.
It's also important to dig and pour your posts on the same day. If you don't, you can leave a big 6 - 8' pit in the ground that is a hazard. Someone can fall into it and hurt themselves, so make sure you don't leave any holes behind. If you dig it, pour it!
Originally posted by @John Blackman:
If you are using a construction lender which is likely, make sure you get permission from the bank that it is ok to do grading and demolition before the loan is originated. Most banks will allow this assuming you can provide lien releases. They want to stay in first position. ...
John, I believe you meant to use the term "lien waiver" rather than "lien release"; this was discussed in another thread where you even participated with a post:
Thanks Steve, I admit that I lazily use the two terms interchangeably. All of my lien releases have a dollar amount that adds up to the contract price. In Texas I use a standardized form that has an amount on it.
As you start the foundation, you should be thinking about the materials you will need two or more weeks out depending on your delivery time. We generally order windows when we start the foundation. There are many local lumber yards that we will get bids on for the entire set of plans before we start the foundation as well. If you are using specialty windows this can take longer. If you are using standard stuff like Plygem (our most common windows provider), most lumber yards can get that product to you in a few weeks.
We always get multiple bids for our lumber from three different providers. Each time a different provider will have a better price. Lumber yards are really commodity brokers. They make most of their money on a good purchase of lumber. So their prices moved based on how well they do with their purchasing power. As a consumer you can take advantage of this too. So don't stick to one supplier. Chances are you will be buying from all of them at some point. The key here though it to make sure you have your windows on time. That will allow you to button up the house and lock it up. It will also allow you to start siding. All the windows need to be in to complete that job.
Here we are on Berger with the rough framing up.
This house is pier and beam and several feet off the ground to make sure the finished floor elevation is above the 100 year flood plain.
That isn't typically a requirement, and if you are pouring a slab in a non flood zone you still want to make sure you have at least 6 inches of clearance from the ground to the top of the foundation. Any earth that is up against the edge of the foundation provides a vector for water to enter the house. Water is very bad inside a home obviously.
In Austin we have to balance being able to build inside the virtual ceiling height of a building and keeping the foundation high enough so that earth isn't at the seem of the foundation and framing.
You can also add drains around the foundation to help move water away from it faster. These add some extra cost but is well worth it if there is the possibility of water accumulation at the edge of a foundation. Water damage can cost tens of thousands to repair. Make sure your foundation is well clear of the earth.
The rough framing is always a great psychological victory. It goes up pretty quick and all of the sudden you can see a house. Things to consider in this stage:
1) Make sure there is enough space for your HVAC (actually this should be done in the design phase)
2) Make sure you have space for all of the HVAC conduit. Sometimes you may need to build furr-downs to house extra HVAC conduit if you have tight design constraints.
3) If you are building a duplex, this is where you want to ensure you can build a proper firewall and sound proofing between units.
4) Check your window heights and kitchen cabinet elevations that you are going to be able to hit the plan.
5) If you have big open ceilings, make sure you have enough support to hold them up. Architects aren't engineers and often do not spec the right materials to provide proper support. Your engineering plans should have this detail, but not all areas require engineered drawings for a permit.
6) Make sure you have access to all HVAC and mechanical equipment in the attic space. Most areas require a minimum amount of working space around your mechanicals to service them.
7) Double check your stairs. A bad framer can leave your stairs uneven which will not pass code. They should all have the same rise to run ratio meaning the height and depth of each stair should meet code. If they aren't right at framing time, it will be a bear to fix later.
8) Leave a path to vent your kitchen hood. Some builders put vent hoods that don't really vent anywhere but instead just recycle the air through a filter. Check your code to see what is required.
Sometimes architects do some hand waiving on these areas and the builder is left to interpret or 'fix' the architectural designs. Not all architects have a builder background and do not know all of the construction codes and variances that your builder does. This can create some conflict, so be ready to be the decision maker where design and implementation bump heads. Assuming this is a spec home and not a custom, avoid designing your dream home. Do what has the best ROI, is functional, and appropriate for homes in that market.
Join the Largest Real Estate Investing Community
Basic membership is free, forever.