How to start a new construction

16 Replies

Hi, I am new to this but it looks like this is the place to start.  

I have a wooded lot in Deltona right off I-4 by a small lake.  It is in a developed community so the water and electricity should be in place.  I am thinking to apply for a loan to build a house on it and sell it for profit.  I have never done anything like it and I don't know any GC's or construction companies.  Could someone please tell me if this thinking makes any sense. If so, what is the step by step procedures I need to follow to get this started? Is there a special consideration involved since it's by a lake?

My apology I'm a newbie and still learning the lingos here.  Thank you in advance.

first.   There are a thousand things you need to know.

1. What are the covenants for the property

2. Who approves the planned project in the community

3. Find a plan that will work

4. Talk to you local Home Builders Association, bankers, local lumber yards, to find a reputable GC. 

He/she will have tons of excellent references, all licenses, and insurance. Don't get scammed. DO NOT believe what the GC says about themselves, listen to several people they have built for and worked for.  To me this may be the most critical. If you get a bad GC you will have the worst nightmare.

Pay the GC extra to walk you throughout the building process(basically share the builder profit with him).

You can do this, but it won't be easy. A lot to learn. A lot to manage.

I hate to say it but with zero  experience in  development, or real estate for that matter, it would be near impossible to obtain financing from a bank without a huge amount of skin in the game, like 40-50% or more.  First step, call around to banks and run your situation by them.  You will get a good idea of your options after a few calls.  

Good luck.

Do not try to do this by yourself the first time.  You are very certain to get yourself into a very expensive and possibly unrecoverable mess.

Hire a General Contractor and watch every step they do.  Let an experienced builder show you the ropes.  Picking your GC is critical.  Like @Arlan Potter  said, go by the word of the customers of the GC.  Most will promise you the moon and the stars regardless of how good they are.  Ideally you want someone with 20+ years of experience in your area. 

You are likely not going to get a 'deal' from this GC.  You are going to hire an experienced professional who is going to teach you a lot, so don't expect to bargain a lot of fees away from them.  

The least expensive GC is probably going to cost you the most in having to redo their work with another GC that is more experienced.  In most cases, the lowest bid always ends up costing you the most in the end.

Good luck,

Originally posted by @Cathy Y. :

Hi, I am new to this but it looks like this is the place to start.  

I have a wooded lot in Deltona right off I-4 by a small lake.  It is in a developed community so the water and electricity should be in place.  I am thinking to apply for a loan to build a house on it and sell it for profit.  I have never done anything like it and I don't know any GC's or construction companies.  Could someone please tell me if this thinking makes any sense. If so, what is the step by step procedures I need to follow to get this started? Is there a special consideration involved since it's by a lake?

My apology I'm a newbie and still learning the lingos here.  Thank you in advance.

 Cathy, I'm a fourth generation builder and built my first house 2800 sq ft plus basement in 2005, before I built it I was running a remodeling Co for 5 years. I lost on that house over 100k plus worked for free, the house was beautiful (949 Trellis St, Jordan MN)

But I didn't give up and built a second house in 2007, 2000 sq. ft two story inside of the City, address 4238 20th Ave S, Minneapolis, MN. And market crashed, I lost 80k on it :)

Then I built 3m house and made money on it, and do not build houses any more (too much work and too much competition). But I flip a lot of houses still

What I'm trying to tell you, that you will never be able to build cheaper than other builders. Builders when they build try to get 15-17% gross profit margin, but from that profit they pay for overhead (licensing, insurance, phones, office, etc) Plus builders buy materials cheaper and have cheaper labor. 

Somebody mentioned, hire a builder and follow him. It will save you a lot of problems

Originally posted by @Arlan Potter :

first.   There are a thousand things you need to know.

1. What are the covenants for the property

2. Who approves the planned project in the community

3. Find a plan that will work

4. Talk to you local Home Builders Association, bankers, local lumber yards, to find a reputable GC. 

He/she will have tons of excellent references, all licenses, and insurance. Don't get scammed. DO NOT believe what the GC says about themselves, listen to several people they have built for and worked for.  To me this may be the most critical. If you get a bad GC you will have the worst nightmare.

Pay the GC extra to walk you throughout the building process(basically share the builder profit with him).

You can do this, but it won't be easy. A lot to learn. A lot to manage.

 Thanks Arlan for the advice!  So if I somehow found a good GC, s/he will take care of 1, 2 and 3? It's good to know there is Home Builders Association. I will do some research there.

Originally posted by @Albert Hasson :

I hate to say it but with zero  experience in  development, or real estate for that matter, it would be near impossible to obtain financing from a bank without a huge amount of skin in the game, like 40-50% or more.  First step, call around to banks and run your situation by them.  You will get a good idea of your options after a few calls.  

Good luck.

Thanks, I definitely can see that I might have huge obstacle in getting the finance.  I will follow your advice.

Originally posted by @John Blackman :

Do not try to do this by yourself the first time.  You are very certain to get yourself into a very expensive and possibly unrecoverable mess.

Hire a General Contractor and watch every step they do.  Let an experienced builder show you the ropes.  Picking your GC is critical.  Like @Arlan Potter  said, go by the word of the customers of the GC.  Most will promise you the moon and the stars regardless of how good they are.  Ideally you want someone with 20+ years of experience in your area. 

You are likely not going to get a 'deal' from this GC.  You are going to hire an experienced professional who is going to teach you a lot, so don't expect to bargain a lot of fees away from them.  

The least expensive GC is probably going to cost you the most in having to redo their work with another GC that is more experienced.  In most cases, the lowest bid always ends up costing you the most in the end.

Good luck,

 Thank you John, yes I did hear horror stories about GC's I assume that if I share the profit then it'll be his interest to do a good job.  Right now is the very beginning stage: gathering information. it will be a long while, at least later next year, or following year before I actually start.  But I will have to see how the market moves. just in case if there is another crash coming

 @Pavel Sakurets:

 Thank you Pavel for the insight.  

I am little confused with the term Builder, GC, developer... maybe someone can help to clarify:  If I did this new construction I would be the builder? or the construction company?  the GC is someone overseeing every aspect of the building process?developer is someone who invested in the land and own the idea and project?

Also, do I need to have survey done to see if the lot is buildable? for example level is too low and need to fill and raise the level?  Again, apology for such "dump" questions.  

much appreciated with any helpful tips and reply.

Some guy in my neighborhood bought huge lot for very cheap couple years ago and divided the lot into 4 and built 2 houses on it, now building the 3rd and 4th house.  I walked by and got to talk to the GC, he said that it costs about 90 to 100k to build those 3/2 houses in my neighborhood (lower middle). But I don't know if that includes everything like a plan, survey, his share of profit, etc.  before the actual construction. I think those house could sell for 130 to 150k if not more. that's what gave me the idea of doing new construction.

Originally posted by @Cathy Y. :
 @Pavel Sakurets:

 Thank you Pavel for the insight.  

I am little confused with the term Builder, GC, developer... maybe someone can help to clarify:  If I did this new construction I would be the builder? or the construction company?  the GC is someone overseeing every aspect of the building process?developer is someone who invested in the land and own the idea and project?

Also, do I need to have survey done to see if the lot is buildable? for example level is too low and need to fill and raise the level?  Again, apology for such "dump" questions.  

much appreciated with any helpful tips and reply.

 Builder is the one you hire to build, GC could be you or a builder. Developer is the one that develops land and sells it or builds on it. Listen to what other guys have told you, hire a builder. Builders make 10-18% gross profit from new homes if they lucky, but they carry overhead as well. Builders get things done cheaper than you would, because they have subs that they hire who knows the builder and give them better pricing than they would give you, builders also buy materials cheaper then you would. Maybe you can buy tile, cabinets, carpet, hardware, etc (finishing materials) to save $.

Yes, you will need a survey done and then find out what is the maximum foundation and impreviuus surface should be, then choose a blue print that will fit these requirements. 

Originally posted by @Pavel Sakurets :
Builders get things done cheaper than you would, because they have subs that they hire who knows the builder and give them better pricing than they would give you, builders also buy materials cheaper then you would. Maybe you can buy tile, cabinets, carpet, hardware, etc (finishing materials) to save $.

While I agree that someone with no experience shouldn't be trying to tackle new construction, I disagree with the premise that a typical builder can/will build for less than a seasoned rehabber/investor who is building a small volume of houses.

A builder is typically going to hire turn-key companies, for several reasons:

1.  It makes their job easier;

2.  It reduces their risk;

3.  It increases their profits (since they are typically paid a % of the build costs)

But, turn-key contractors are typically more expensive than smaller subs, and by using smaller subs and managing the process yourself (or having a separate PM manage), you can significantly undercut the pricing a builder would charge.

As an example, when talking to builders in Atlanta (where we did our first few new construction projects), we were being quoted $90-110/sf for lower-end new construction.  We decided to manage the process ourselves, use our own PM and hire our own sub-contractors, and our build costs ran between $61-64/sf on our first few projects -- about 50% less than the builders we spoke with.

We just did our first new construction in Maryland and the builders we spoke with were quoting $120-150/sf for mid-grade construction.  We ended up managing the process ourselves, and will finish at about $90/sf -- again, nearly 50% less than the builders.

I know others here on BP who are also building themselves for far less than than what a typical builder in their area would charge.

Originally posted by @J Scott:
Originally posted by @Pavel Sakurets:
Builders get things done cheaper than you would, because they have subs that they hire who knows the builder and give them better pricing than they would give you, builders also buy materials cheaper then you would. Maybe you can buy tile, cabinets, carpet, hardware, etc (finishing materials) to save $.

While I agree that someone with no experience shouldn't be trying to tackle new construction, I disagree with the premise that a typical builder can/will build for less than a seasoned rehabber/investor who is building a small volume of houses.

A builder is typically going to hire turn-key companies, for several reasons:

1.  It makes their job easier;

2.  It reduces their risk;

3.  It increases their profits (since they are typically paid a % of the build costs)

But, turn-key contractors are typically more expensive than smaller subs, and by using smaller subs and managing the process yourself (or having a separate PM manage), you can significantly undercut the pricing a builder would charge.

As an example, when talking to builders in Atlanta (where we did our first few new construction projects), we were being quoted $90-110/sf for lower-end new construction.  We decided to manage the process ourselves, use our own PM and hire our own sub-contractors, and our build costs ran between $61-64/sf on our first few projects -- about 50% less than the builders we spoke with.

We just did our first new construction in Maryland and the builders we spoke with were quoting $120-150/sf for mid-grade construction.  We ended up managing the process ourselves, and will finish at about $90/sf -- again, nearly 50% less than the builders.

I know others here on BP who are also building themselves for far less than than what a typical builder in their area would charge.

 Josh, NOBODY could build a house cheaper than National Builders. Nationals' target profit margin is 17%. From that 17% they pay a production manager who manages construction and pay for overhead, etc. Nationals get best prices on labor, land and materials and they make higher margins only on selling options. That's why after all expenses are paid Nationals who are in S&P 500 show average net income of only 4-7%

I suggest when you finish your new construction project, calculate your total cost per sq. ft and add the time of the person managing construction and overhead, then you will know the true cost to build per sq. ft. 

I'll be paying builders $105/sq ft all day long of they could build for $90 and make $15 off me, but don't know anybody who can do it. And I completed over 500 projects within last 14 years. Maybe prices are lower where you are at, but I think you are in the Midwest where I'm.

If builders would of making 50% GPM on their houses like you mentioned, everybody would be a builder. If you don't know. the average life span of a builder is 6.7 years according to National Association of Builders, because they make very little $.

Originally posted by @Pavel Sakurets :
Josh, NOBODY could build a house cheaper than National Builders. 
....

If builders would of making 50% GPM on their houses like you mentioned...

You're incorrectly inferring three points from my last post:

1.  I never said I could build for less than large builders.  I merely said that I could build for far less than large builders would charge to build for me if I were to hire them; 

2.  I never said builders were making 50%. I said that builders were charging 50% more than what I am able to build for. Since they are likely making much less than 50%, that indicates that their costs are well above mine. Which makes sense, as they are typically using more turn-key subs than I would typically use; and

3.  My name is not Josh.

Now, that said, your comment about nobody being able to build for less than NAHB members is ridiculous. My partner is a member of NAHB. I am not. We build for the exact same amount because we use the same contractors, use the same the material providers and pay about the same for our PMs. In fact, I'm a better negotiator than he is, so I probably build for less than he does.  His membership in NAHB has nothing to do with his (or my) build costs.  In addition, I know plenty of investors who build for less than my partner and I do (and plenty who build for more), and they aren't members of NAHB.  One has nothing to do with the other.

Like I said, I build for $60-65/sf in Atlanta and about $90/sf in Maryland, and I've never met a professional builder who would build for me for anywhere near those numbers.  

As for you not being able to build for $90/sf -- it's quite possible that build costs where you live are higher than they are where I live.  It's also possible that you're just paying more than I do -- which isn't necessarily a bad thing if you're getting some benefit from the additional cost you're paying.

@J Scott 

@Pavel Sakurets  

I think you guys are talking apples and oranges...  I think Pavel was inferring that on one can build as cheap as Lennar or DR Horton or companies like that that build 20 to 30k houses in multiple markets per year... And I would agree with that their purchasing power is far greater.

I think J. Scott is referring to a General Contractor who bids a build job as a lump sum.. so said GC is making a pretty hefty profit ...

What I think I hear @J Scott saying is that he takes over the Roll of the GC and hires the subs direct thereby cutting out the GC that bid lump sum.

J Scotts build prices are on par with what we experience. I have not built in Atlanta but I have seen plenty of mid to starter new builds there and yes they are built very fast and very cheap I would concur with those numbers and I would also say they don't include land unless the land was bought a few years ago when you could get lots in Atlanta for 1 to 5k each.

90 a foot is commensurate with what I pay in Oregon and in Charleston SC were I am currently building. My projects on the ORegon coast are a little more as we have to build to hurricane standards... and sideways rain. and ocean air.  My last 5 or so that I completed last 2 months we were at 77 for a two story  does not include land.. but it did include building permits of 12k... in another city were my building permits were 30k we are closer to 90 all in... And these are 9 foot ... Hardy  with some rock  slab granite 10k cabinet pac's builder grade stainless upgraded flooring  nice paint and other touch's  front landscaping no fence etc.. depends of course on quality of finish's and other factors hill side or not...

And it include my GC fee.. I am a licensed Developer that allows me in Oregon to build and sell for profit.. But I am not a GC and I do not know how to build form scratch.. So I hire experienced ( in my case very) GC and I pay them a set fee. between 8 to 12k per house .. So that is included in my per sq ft build cost as well. If I was a GC and really new how to build a house from ground up my cost would be that much less. But I control the money. It is my cash my construction loans and I pay these GC's the draws then they in turn pay subs.. But I get all sub bills direct there is no market up for subs...

Wow, great information.  Thanks Jay, J. Scott, and Pavel.  

So if I get a Builder (whether it hires turnkey or sub),  it will quote me a price that includes everything (permit, plan, survey, cost to build, other fees, possible GC profit share if apply, etc.) Do I get to choose, or buy my own light fixtures, cabinets, countertops, vanities, etc? 

If instead hiring a builder, I find a GC myself, this GC could use his connections and resources(skilled labor, sub)  to get the house built.  He will give me a quote on the cost of to build, may or may not include permit, survey, plan and his share of profit; his share of profit is negotiable; Do they usually include the cost certain fixtures, cabinets, countertops, flooring and appliances. or do I need to provide my own? I assume it's all negotiable.

I was walking my do today and saw a charming little two story home recently built and sold. I found in the public record that it was, I believe, a husband/wife team that built/gc the house. I am considering contacting them to find out more.

Thanks again,

Cathy

@Cathy Y.  The answers to all of these details should always be in the contract. I would never assume that, across the board, all builders or GCs will include or not include something. 

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