Considering making the leap from flipping to new construction

17 Replies

Hey BP-ers, I'm looking for advice from anyone who has made the leap from flipping to new construction.  Here's what I have:

- A lead on a not-yet-listed $2M lot in an up-and-coming coastal town in the San Diego area that can be developed into eight condos that could go for $500k each, if done correctly of course

Here's what I don't have:

- Any experience with new construction

- Any experience working with city planners or drawing permits (my previous flips were mainly cosmetic)

- A relationship with a contractor (I recently moved to San Diego and have not even done a flip here yet, after doing seven in Nevada last year)

- And, oh yeah, $2M (not to mention the other monies needed)

Any suggestions?  I'm ready to move up from the minors to the big leagues but my skills are still little league...

Hi Vicent,

Glad to hear you are thinking of making the transition from flipping to new development. If done properly it can be a rewarding experience. I know of a broker based out of San Diego and Palm Springs that has experience with new construction, architects, contractors, financial syndication and experience working with the city. They do a great job building mid century modern homes and new construction and could be a great connection for you. Message me if your interested in more details. 

Best,

Aaron 

Hey Vincent,

It sounds like an exciting project.  I work in Coronado so I'd be happy to sit down over coffee and walk you through the steps involved.  

Regards,


Colin

Medium fb clad logo 2017 rgb lgColin L., CLAD Inc. | http://CLADinc.us

@Vincent Aiello nothing better than an off market property.  Get some interest from those you trust and go after it!  Number one is get with your broker who is doing the deal as they should know the players in the market.

@Account Closed , feel free to reach out. I am CalBRE Broker and work with Private Lender here in San Diego. We finance new construction. I also work with Investment Firm that acquires properties with value-add potential including new development. Having a strong team is essential in development projects. Maybe we can meet to discuss in further detail? I am sure I can provide some resources for you.

Good luck!

Hi Vincent,

In my experience you want to work with a developer or architect who understands working with municipal building and engineering departments.  This can pay for itself many times over in avoided costs. For example, the consequences of not knowing restrictions on the land upfront or geographical limitations (fire code, permitted use, moving dirt/excavation, etc.) can cost a fortune when it's too late.  A clever builder will essentially pay for him/herself by recognizing potential pitfalls upfront.

Let me know if you need some tips.  You can check out our website to see some pics of quality new builds which have worked out well for us. Might give you some inspiration.

Good luck and have fun!

@Account Closed 's offer to check out her projects and pick her brain. I have visited her projects personally, and they are impressive. She also has a wealth of information regarding the construction process, especially with the nuances of dealing with properties close to the coast.

@Account Closed mentioned, it would probably be best that you partner with someone that has experience, or start with something sfh or duplex.

I had an opportunity this week to build 12 unit apartment in Simi Valley for a friend of my uncle, and the land costs around 500k and halfway paid, soils test and some other stuff done. Im proposing a town house rather than an apartment.

@Karen Margrave Thank you! Yes, they are ground up construction built to the original floor plans which we have licensed.  The building materials are brought into the 21st Century to suit today's preferences, including eco-friendliness and energy efficiency. The original character is preserved with finishes like custom cabinetry for a throwback feel. These homes are seriously cool!

Hey everybody, I greatly appreciate the feedback.  I have already reached out to some of you--I will contact the rest soon and I would love to meet / visit with you all.

Thanks again!

Originally posted by @Manolo D. :

@Account Closed mentioned, it would probably be best that you partner with someone that has experience, or start with something sfh or duplex.

I had an opportunity this week to build 12 unit apartment in Simi Valley for a friend of my uncle, and the land costs around 500k and halfway paid, soils test and some other stuff done. Im proposing a town house rather than an apartment.

 I agree with Manolo. The asking price is too high. Just by looking the figures, it is not a profitable project. It probably will cost you much more than $1m to build a 8 unit condo. If it is raw land, you will need to finish the lot. This cost could be high too. So your profit will be tight if not a loss.

@James Stout

  did Eichler  build in So cal... We had them all over Palo Alto and Cupertino I think they built 40k of them in the 50s'  guy copied them up here in Oregon and called them Rummer's they are sold for a premium not real practical in Oreygun though

@Account Closed

 knows this stuff   and is most help ful to fellow courteous BPers'  :)

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

@Jay Hinrichs  Yes there's a lot of Eichler homes down here. Fullerton has some great neighborhoods with them. In fact, I was tempted to buy one for a fix/flip, not too long ago, as it was close to the university, etc., but.... price was too high, and though it would have been fun, didn't make sense 

Medium house plansKaren Margrave, Parlay Investments | [email protected] | http://www.parlayinvestments.com | CA Contractor # 680782

@Jay Hinrichs

 You're right, Eichler developed a majority of his homes in Northern California.  Palm Springs was largely developed by the Alexander Company, which followed a similar model.  We're bringing the original Eichler plans into the 21st Century as new construction on wonderful view lots in Palm Springs.  The first one sold within 4 hours of hitting the market and we've got two more under construction now.  A little different vibe than good ol' Oreygun.

I agree with everything Karen has said (as well as the others.) Karen is spot on with the fact that jumping from a cosmetic reno to a multi-million raw development sounds like a potential trip to the bankruptcy court. 

My advice is to be incremental here. Find a SFH that needs a complete gut or tear down (to the foundation.) That will enable you to learn to deal with all of the utilities, architects, regulatory folks, and develop a relationship with a builder without betting the farm on a single project.

Once you're successful with the complete gut, then develop raw land into SFH, and move on from there. This is what my group has done, our first project was an easy gut and flip row house, then a tear down, then new development, and condo conversion.

As far as the money goes, we don't do private equity AT ALL. Instead, we put deals together and just take a small equity stake (usually 15-30%) for putting the deal together, managing the project, and getting the property/properties sold. This limits our exposure and allows us to give really good returns to our investors.

Vincent,

Those are FUN deals.....when they work.  I much prefer new construction.    Unknowns are minimal,  you get to build the structures the way you want them, they are beautiful from foundation to shingles when you finish, and there should be no maintenance issues for a few years.   

That said,  please proceed with caution.  What happens if you get the $2M, you get the property developed, and you get your buildings under construction.  Say you're leveraged to the tune of about $3M and the market goes soft, or plummets.  Can you service that debt?  This is very similar to what happened to me.  I was rolling in it and got stuck with this kind of debt in 2007.   I carried my debt for almost 2 years but finally ran out.  

The lesson I learned:  Put yourself in a position so you can take on a little water; but not so much you sink the ship.

Slow and steady is not as much fun, but it can save you from losing everything.  Make the deal, develop the property, build the structures, but don't lose site of your exposure at ALL times. 

Timing is everything in a deal like this.   From start to finish you're looking at 2+ years probably.   Are you prepared for that?

STAY AWAY FROM CONDOS!  If you are making the big leap from rehab to new construction.  Get your beak wet with some single family homes or custom build homes.  Condo's are not a joke.  It definitely takes longer and consumes more of everything.  But single family homes can be just as promising and you have some experience from your previous flips (looks like).