Land and New Construction financing

Land & New Construction
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Land and New Construction financing

Raphael Cuthbertson
Charlotte, NC · Member since 2015 · 65 posts · 15 votes

Hi folks, 

Got an opportunity to pick up 5 lots in existing neighborhoods from same seller.  Seller has been building houses but will be returning to Medical School in July of 2016.  ALL TAP FEES ARE PAID.

He will give me a juicy discount on the land if I buy all five, and a lesser discount for picking single properties.

What I want to do is buy them, and build houses one at a time.  But first, I need to find out how much to pay.  I had a newish real estate agent run comps in the neighborhoods. I see the surrounding house comps ($130k - 179k range for AVM), but cannot determine from the comps what the raw land is worth, save for the meaningless county assessment.

I was told by the seller (a broker himself) that the general rule is 25% of what the new house would sell for.  On the other hand, a long time investor told me that I should be looking at $25 of the cost to build (figuring a 2100-1300 sq foot home at around $35/sq ft).  Which rule do you use?  

On top of all that, I'm not necessarily penniless, but do not have the capital to buy the lots, let alone build homes.  I understand that land is hard to find private money for, but I still would prefer to develop these lots rather than wholesaling them.  I keep asking myself "what's in it for an investor in the land?".  How do I get investment money on 5 lots, then turn around and get investment money on the builds too?

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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y

You need to know how much it will cost to build a house on each lot, and then subtract that cost, plus your fixed costs and your desired profit, from the ARV.

That is what you can pay for each lot.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    10y

    You need to know how much it will cost to build a house on each lot, and then subtract that cost, plus your fixed costs and your desired profit, from the ARV.

    That is what you can pay for each lot.

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    5Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y

    Seems like you haven't built before, without experience, buying lots should be a rocket science. In LA some permits go for 130k, some go for 50k, I could imagine in a regular state, that would break the deal already, for houses to sell at 130k.

    1Reply
  • Keith Bloemendaal
    Contractor · Carolina Beach, NC · Member since 2014 · 157 posts · 89 votes
    10y

    I have purchased 10 lots this year, ranging from $91,500 to $106k, that cost alone ends up being ~25% of my total sale price. (Homes are $380-$420k). But I would follow @J Scotts advice, run the numbers backwards to see what you can pay for the lots. 

    1Reply
  • Raphael Cuthbertson
    OP
    Charlotte, NC · Member since 2015 · 65 posts · 15 votes
    10y
    Originally posted by @Manolo D.:

    Seems like you haven't built before, without experience, buying lots should be a rocket science. In LA some permits go for 130k, some go for 50k, I could imagine in a regular state, that would break the deal already, for houses to sell at 130k.

     That is correct. I have never built.  I have pulled permits though in CA when I was there (GC pulled permits for commercial projects that I managed) and do remember the insane prices.

    0Reply
  • Devon Garbus
    Real Estate Agent · Tampa, FL · Member since 2015 · 467 posts · 57 votes
    10y

    In tampa 20-30% of land value to final sale price is correct, depending on the price point exit. Higher end homes higher %.

    1Reply
  • Devon Garbus
    Real Estate Agent · Tampa, FL · Member since 2015 · 467 posts · 57 votes
    10y

    FWIW- Get the property under contract if you can buy it in cash free and clear. Get yourself a contingency or DD period so you can interview local builders to see who would want to lien the property and build it as a JV.

    1Reply
  • Chris Field
    Investor · Milford, CT · Member since 2015 · 200 posts · 69 votes
    10y

    I can't really help you without knowing your area, but typically with land I just simply buy it with cash. Cash can be yours, a partners, or a hard money lender. For something that is going to sit that your going to be paying juice on yours is better. 

    I have no idea what the land is worth you really need to talk to someone with some experience in your market to determine that. However if the FMV of a finished house is $179k the land isn't going to be worth much.

    0Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y
    Originally posted by @Raphael Cuthbertson:
    Originally posted by @Manolo D.:

    Seems like you haven't built before, without experience, buying lots should be a rocket science. In LA some permits go for 130k, some go for 50k, I could imagine in a regular state, that would break the deal already, for houses to sell at 130k.

     That is correct. I have never built.  I have pulled permits though in CA when I was there (GC pulled permits for commercial projects that I managed) and do remember the insane prices.

     You pulled it or GC pulled it for you? Regardless, you can't compare maintenance permits to a build permits. I can't begin to imagine over the counter approvals for build permits.

    0Reply
  • Raphael Cuthbertson
    OP
    Charlotte, NC · Member since 2015 · 65 posts · 15 votes
    10y
    Originally posted by @Manolo D.:
    Originally posted by @Raphael Cuthbertson:
    Originally posted by @Manolo D.:

    Seems like you haven't built before, without experience, buying lots should be a rocket science. In LA some permits go for 130k, some go for 50k, I could imagine in a regular state, that would break the deal already, for houses to sell at 130k.

     That is correct. I have never built.  I have pulled permits though in CA when I was there (GC pulled permits for commercial projects that I managed) and do remember the insane prices.

     You pulled it or GC pulled it for you? Regardless, you can't compare maintenance permits to a build permits. I can't begin to imagine over the counter approvals for build permits.

     I typically pulled small renovations that I played GC myself.  Larger projects, like building a new data center from foundation up, I had the GC pulling them.  These days, in the small reno's I usually manage, I have the subs pull their own.  Then again, this is North Carolina, not California.

    0Reply
  • Adam McClure
    Residential Real Estate Broker · Oakland, CA · Member since 2015 · 7 posts · 6 votes
    10y

    You really need to follow J Scott's advice. There are plenty of "land opportunities" that have negative equity due to construction costs being greater than the finished product can produce. In other words, in many cases the land owner should actually pay you to take the land because it is worthless and a tax sinkhole. There are plenty of deals like that out here in CA even where the average resale is $700k+ due to soil issues, foundation costs, permitting and utility fees, etc. When you talk to a GC he/she will only tell you what their costs will be to construct. Labor and materials don't include permits, utility fees, financing costs, staging, commissions, other costs of sale, etc. If you've never built ground-up before then diving in on five lots is a great way to lose a lot of money. If you want to buy your tuition in this business that's one good way to do it.

    Perfect example. I got into contract on a piece of land in a high-value area for $1.1M. Included all the entitlements and permit fees but not utilities. It also didn't include $300-400k for soil remediation because there was a landslide zone right underneath the home site. Also, the architect made a gorgeous modern home but there were so many clear span areas stacked on top of each other the whole thing was built out of steel which made construction costs $100k higher right out of the gate. Add to that the final resale was really pushing it to get more than $3.5M and basically it was almost a loser from the get go. It's six months later and the same guy hasn't dropped his price and is listing it as a built-to-suit for $3.8M (nice renderings) and no takers. He will maybe get more realistic once he gets close to his entitlements expiring. I said I would be a buyer at $600k. In your case, you have so little margin on the other end I can almost guarantee the land is worthless. Paying him $25k each will just bury you.

    1Reply
  • Raphael Cuthbertson
    OP
    Charlotte, NC · Member since 2015 · 65 posts · 15 votes
    10y

    I see.  So, using the current owners model of 25% of AVM (comps are in that $125-179 range) for a comparable house build on those lots is not a good formula?  I definitely know things change.  He apparently was doing this but is jumping out.  He has had these properties since around 2008.  I guess I was wondering in the back of my mind why he paid tap fees and never built.  Considering the high cost of the land itself, not enough margin.  I'll pass these along to some builders I know as a wholesale if I can get them interested.

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    10y
    Originally posted by @Raphael Cuthbertson:

    I see.  So, using the current owners model of 25% of AVM (comps are in that $125-179 range) for a comparable house build on those lots is not a good formula? 

    Depends on whether you can build for the price he's building for, have the same fixed costs he does and if you're willing to accept the same profit he's making...

    Presumably, he ran the numbers I mentioned based on his cost to build, his fixed costs and his desired profit, and determined that it was a good deal at that price.  But, he may be able to build for a lot less than you can (especially if he has a lot of experience), he may have lower fixed costs than you (especially if he paid cash and you won't be), and he may be willing to accept a smaller profit than you (especially if he does these in volume).

    Also consider that his holding time would likely be shorter than yours if he has a lot of experience and money -- which means his fixed costs will be lower and his ROI will be higher.

    Most importantly, consider that if this were truly a good deal from him to buy and build, why is he now selling instead of finishing up the builds?  My guess is that he realized that the deal isn't as good as he thought and now just wants to get out of it...even if that's not what he's telling you.

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    1Reply
  • Devon Garbus
    Real Estate Agent · Tampa, FL · Member since 2015 · 467 posts · 57 votes
    10y

    Using 25% of ARv on buildings under 200k is a little misleading. You don't have the square footage to spread out the cost of the land.

    Work it backwards.

    Does he really think you can BUILD for 35/ft? That is... unheard of in my market. THe biggest builders (i.e. best discounts on matierial) are building $40/ft in tampa. Anyone not one of them is at 60/ft.

    If you are selling at 175k using the 70% rule you can't be into the project for more than $120k. 

    As far as funding. Most hard money firms will finance the whole project ground up on reasonable terms (20% down up to 65% of construction costs at 10% interest is the going rate).

    0Reply
  • Raphael Cuthbertson
    OP
    Charlotte, NC · Member since 2015 · 65 posts · 15 votes
    10y
    Originally posted by @J Scott:

     Well, he is going to medical school starting in July, that I do know.  But the fact that he has not built on those lots, at least one of them since 2008, is what makes me think.  He was either waiting for more appreciation, or just didn't find the right cost.  He has been PM on his jobs, so no GC.  I've done that myself, but only in a commercial setting.  Obviously, there are marked differences between residential and commercial.  He wants to sell off all five lots, but is willing to take one at a time, for a lesser discount.

    Either way, I'm out.  Going to get some advice from some builders I know in the area and offer them the properties.

    0Reply
  • Raphael Cuthbertson
    OP
    Charlotte, NC · Member since 2015 · 65 posts · 15 votes
    10y
    Originally posted by @Devon Garbus:

    Does he really think you can BUILD for 35/ft? That is... unheard of in my market. THe biggest builders (i.e. best discounts on matierial) are building $40/ft in tampa. Anyone not one of them is at 60/ft.

     He actually stated that in Charlotte, if you are approaching $40/sqft for a build, you are "getting screwed".  When I think about it, the rate houses are popping up here, he's probably right.  I can confirm that with a few phone calls to some builders I know of course.

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    10y
    Originally posted by @Raphael Cuthbertson:

     He actually stated that in Charlotte, if you are approaching $40/sqft for a build, you are "getting screwed". 

    He's lying to you.

    Unless you're building with the lowest level of materials and the lowest tier of contractors, and even then, I don't believe it.

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  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    10y

    @Raphael Cuthbertson Let's invite @Kenneth Bell to chime in. He's in the area, and has experience with new construction and costs. 

    Every area is different as to the costs to build, permit fees, etc. Here in California if we can find lots at 25% of completed project value, we'd be in heaven! However; as J Scott mentioned, there's a lot that goes into determining what works for each builder specifically. There's experience, cost of materials, fees, cost of money, weather,design of the house in relation to the cost to build it, etc., in other words a lot of variables. 

    1Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y
    Originally posted by @Raphael Cuthbertson:
    Originally posted by @Devon Garbus:

    Does he really think you can BUILD for 35/ft? That is... unheard of in my market. THe biggest builders (i.e. best discounts on matierial) are building $40/ft in tampa. Anyone not one of them is at 60/ft.

     He actually stated that in Charlotte, if you are approaching $40/sqft for a build, you are "getting screwed".  When I think about it, the rate houses are popping up here, he's probably right.  I can confirm that with a few phone calls to some builders I know of course.

     I would like to invite their crew here, I will pay them $40/sf, I could rent a big house and let them live there while they are working on the project. I will be making tons of money if they agree. Build it for $40, sell it for $150. COOL! Oops, nope, too good to be true.

    0Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y
    Originally posted by @J Scott:
    Originally posted by @Raphael Cuthbertson:

     He actually stated that in Charlotte, if you are approaching $40/sqft for a build, you are "getting screwed". 

    He's lying to you.

    Unless you're building with the lowest level of materials and the lowest tier of contractors, and even then, I don't believe it.

    "3 guys with a truck and tools...Can build a house too" ?

    1Reply
  • Raphael Cuthbertson
    OP
    Charlotte, NC · Member since 2015 · 65 posts · 15 votes
    10y
    Originally posted by @Manolo D.:
    Originally posted by @Raphael Cuthbertson:
    Originally posted by @Devon Garbus:

    Does he really think you can BUILD for 35/ft? That is... unheard of in my market. THe biggest builders (i.e. best discounts on matierial) are building $40/ft in tampa. Anyone not one of them is at 60/ft.

     He actually stated that in Charlotte, if you are approaching $40/sqft for a build, you are "getting screwed".  When I think about it, the rate houses are popping up here, he's probably right.  I can confirm that with a few phone calls to some builders I know of course.

     I would like to invite their crew here, I will pay them $40/sf, I could rent a big house and let them live there while they are working on the project. I will be making tons of money if they agree. Build it for $40, sell it for $150. COOL! Oops, nope, too good to be true.

     HA!

    Keep in mind, you are comparing apples to oranges.  I've lived in Southern California.  You can't build a FRUIT STAND there for $40/sq.  It's a lot cheaper in Charlotte, but not having built a house here, I cannot accurately estimate what a house in those neighborhoods would build for, until I contact a few GC's or talk to my friends who buy lots and build houses (two of whom I will be talking to in the morning).  Either way, I'm figuring hard money for the lot purchase and build would be too expensive anyway, and any profit margin would be razor thin.  No room for mistakes or do-overs (although it is easier to hide a newly dead carpenter or electrician who crossed me under a freshly poured back patio).

    1Reply
  • Steffen Beck
    Tampa, FL · Member since 2015 · 17 posts · 4 votes
    10y
    Originally posted by @J Scott:
    Originally posted by @Raphael Cuthbertson:

     He actually stated that in Charlotte, if you are approaching $40/sqft for a build, you are "getting screwed". 

    He's lying to you.

    Unless you're building with the lowest level of materials and the lowest tier of contractors, and even then, I don't believe it.

     What would you say is a fair estimate for price per sq ft to build a 4 or 8 unit structure? 

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    10y
    Originally posted by @Steffen Beck:
    Originally posted by @J Scott:
    Originally posted by @Raphael Cuthbertson:

     He actually stated that in Charlotte, if you are approaching $40/sqft for a build, you are "getting screwed". 

    He's lying to you.

    Unless you're building with the lowest level of materials and the lowest tier of contractors, and even then, I don't believe it.

     What would you say is a fair estimate for price per sq ft to build a 4 or 8 unit structure? 

    I know people building in that area for $60-70/sf.  They have a good bit of experience, GC the builds themselves and get good prices on labor and materials. 

    I'm sure others are paying $80, $90, $100/sf or more as well.  And obviously, higher end builds are more expensive. 

    So, $60-120/sf is probably a reasonable estimate, depending on those sorts of things. 

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    1Reply
  • David Kosiorek
    Investor · New York, NY · Member since 2013 · 90 posts · 43 votes
    10y
    Originally posted by @J Scott:
    Originally posted by @Raphael Cuthbertson:

     He actually stated that in Charlotte, if you are approaching $40/sqft for a build, you are "getting screwed". 

    He's lying to you.

    Unless you're building with the lowest level of materials and the lowest tier of contractors, and even then, I don't believe it.

    I'm guessing this is the guy that post in the back of magazines, "Amazing Property ripe with unlimited potential build your dreams today".  LOL, I would run away from this.  

    0Reply
  • Gregory Walter
    Charlotte, NC · Member since 2014 · 101 posts · 40 votes
    10y

    NAR puts out a report every year with large builder self reported average price per square foot build costs (including materials, excluding land). I'm not sure if soft cost are included. I remember the The NE was over 100. SE being in the 60s-70s range the last one I read. I like to give people the benefit of the doubt - maybe he meant $45 a square foot for the labor, independent of the materials. That would be at lease reasonable and either inexpensive or expensive depending on specs of the build.

    Gregory Walter
    Greg Walter Realty
    www.GregWalterRealty.com

    1Reply
  • Account Closed
    Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
    10y

    Raphael, we discussed this yesterday I believe.  I really wouldn't trust what a seller says.  Furthermore, those costs seem unrealistic, as I do build in Charlotte.  My advice is to find a small track builder who can cheaply put out the 'vinyl villages' and see what he'd pay for those.  My guess is it's still not a deal, as some of those neighborhoods haven't rebounded to support new builds.  As I said yesterday, if this was a deal and he can build that cheap,  he'd find a way to do it while in school.  My 2 cents.. and I apologize if this is a different person or deal  :)

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