Why doesnt more people do new builds than just flipping?
Hilo, HI · Member since 2014 · 30 posts · 10 votes
Why doesnt more people do new builds than just flipping?
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Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
10yOriginally posted by @Mana Silva:
Aloha everyone, Im an investor in Hawaii and I build homes from the ground up. Just out of curiosity, why doesnt more people do new builds in the Real Investing World? Majority of the investors that I come across in Hawaii have never done a new build or they only flip houses. Its just a thought. For me, when I do a new build there are no unknowns as far as the construction goes. Everything is a step by step system and there hasn't been any unknown surprise, if anything maybe only some scheduling rearranging, but nothing major like flips. What are your guy's thoughts on this?
My answers are never as detailed as Jay Hinrichs but I believe it is more or less folks don't know.
All the resellers or gurus, not one of them is preaching or teaching new construction( that I now of ). I rather keep it quiet and just keep in building. Watching other folks telling them you are correct low end deals are the way to go.
So most of the folks here and in the local meeting are failrly new. I see it daily here as they flock to the meeting then jump in the low end deals. The truth is the market tells us what to do and why. Right now for us in NC and SC it is cheaper to build then buy. Jay is correct capital is needed and most folks don't have that.
We are building both retail and turn key rentals here in both markets.
Enjoyed your post though
Alex
Flips, rehabs are not even in my conversation any more unless it is an apartment building.
48 Replies
- Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes10y
Originally posted by @Mana Silva:
Aloha everyone, Im an investor in Hawaii and I build homes from the ground up. Just out of curiosity, why doesnt more people do new builds in the Real Investing World? Majority of the investors that I come across in Hawaii have never done a new build or they only flip houses. Its just a thought. For me, when I do a new build there are no unknowns as far as the construction goes. Everything is a step by step system and there hasn't been any unknown surprise, if anything maybe only some scheduling rearranging, but nothing major like flips. What are your guy's thoughts on this?
My answers are never as detailed as Jay Hinrichs but I believe it is more or less folks don't know.
All the resellers or gurus, not one of them is preaching or teaching new construction( that I now of ). I rather keep it quiet and just keep in building. Watching other folks telling them you are correct low end deals are the way to go.
So most of the folks here and in the local meeting are failrly new. I see it daily here as they flock to the meeting then jump in the low end deals. The truth is the market tells us what to do and why. Right now for us in NC and SC it is cheaper to build then buy. Jay is correct capital is needed and most folks don't have that.
We are building both retail and turn key rentals here in both markets.
Enjoyed your post though
Alex
Flips, rehabs are not even in my conversation any more unless it is an apartment building.
- Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes10y
Hello and welcome to BP! I think the biggest difference between new and everything else is the time involved and the seller motivation that will allow you to purchase a SFH lower than the market value. You can buy a property for less than it cost to build a new one and it is more flexible to buy a house allready built than to build a new one. There are more options with an allready built house than r a new one. Location can also be a factor. You can target closer to a city when wanting something allready built vs a new one. Good luck!
- Appraiser · Pasadena, MD · Member since 2016 · 8 posts · 4 votes10y
Im a builder. Around here, anne arundel county, maryland, a lot of rehabs/flips will be in need of repair, as well as having an additional buildable lot. So having the ability to do both is useful in that few people know what the extra lot is, so you can get it basically free after the flip.
A couple other things to note:
First off, every one is complaining about the time aspect. Permits around here can take 2-3 months, however, i typically will put a lot under contract contingent on a building permit. So that when I buy, I begin construction the next day.
I also have the ability to leverage my money great. For instance, If a lot costs 50k, and construction will cost 160k. If i get a hard money loan, they will want 20% on the PURCHASE PRICE. So, I only invest 10k total to buy the lot. The same lender then gives me a construction loan for the new house. I usually put the house on the market during construction and sometimes have a contract before the house is built. So, say the total money in is ~240k (interest/points, loan, lot cost, unknowns), I then sell the house for 300-310. Ill make 40-50k total, and only invested 10k, plus my time, which is primarily babysitting with new construction.
- Builder, House Flipper · OKC, OK · Member since 2012 · 42 posts · 15 votes10y
It's real simple. Anyone can put lipstick on a pig (flip and rehab) but new construction requires a little more expericance with building codes and a working knowledge of the entire construction process.
I flipped houses for 7 years before I started building. I'm a fulltime home builder now and still love to chase the flip every once in a while. As Mana said though there are no hidden suprises in new build like there are in flips. Average build time is 4-6 months and construction cost runs $85-$95 per foot with a net profit margin of around 12-15% is what the builders make. I build about 25 a year and it's all I want. One thing I will say about new construction. I (myself) feel that new construction is a lot more stressfull.
- San Francisco, CA · Member since 2015 · 786 posts · 717 votes10y
Aloha! I am a Seattle land developer originally from Waianae and graduated from Kamehameha.
Perhaps you are asking the wrong question. Why don't more investors BOTH flip and develop?
Flip to make a high velocity on money.
Develop to create massive wealth.
I don't see how I could do one without the other. It's nice to have a bunch of singles and doubles while looking for the right pitch to hit it out of the park on a development deal. When I look at my balance sheet for 2016, 85% to 90% of my profits are coming from land development. But the flips are great for cash infusions and to help pay for some of the "soft costs" in development.
Couple of notes regarding flips and development.
1) I think flippers don't know what they don't know. When you open up walls on an old house, almost everything is a code violation. This makes construction for flips very challenging particularly if the deal is on a limited budget.
2) We use a different HML lender on development than flips.
3) HML may take a chance on you on flips if you are newer if the deal is great and you have a big downpayment, but they will not take a chance on a newer developer.
4) At least in my market, I think it is much easier finding a great development deal than a flip. My specific niche is finding development deals where I don't pay for the land.
5) Lot to know in development. May take years to learn.
6) Big time difference between flipping and developing although lots of Growth Area/"urban village" type projects can take 3 months for permits rather than 12-months.
7) Development is more susceptible to market timing than flipping. Real estate crashes tend to happen 12-months after a major stock market crash. As a flipper, you have to pay very close attention when the stock market crashes but you should have time to get out of the market. In development, it's a lot easier to miss time the market.
8) In development, you'll need a lot more cash to play... for acquisition costs, soft costs and holding costs. So why not flip to help pay for some of the development costs.
- Flipper/Rehabber · Shelton, WA · Member since 2015 · 18 posts · 7 votes10y
Following. Thanks for the knowledge Ryland.
- Investor · Pampa, TX · Member since 2015 · 27 posts · 10 votes10y
In my area builders are buying the lots and selling homes before the house is built. However, you need a large amount of money to buy quantities of land and build in the areas being sold. I can buy a lot and build but it won't be in the area people want to be and the house would be on the market longer. Hopefully in the near future I will be buying these large quantities of land to build and sell.
- Investor · Sharon, SC · Member since 2014 · 77 posts · 40 votes10y
I think @Alex Franks and @Jay Hinrichs pretty much nailed itm, but I will expand just a bit and offer a few different perspectives.
It is a different game and really a different industry. To build ground up you are a General Contractor or are hiring a GC. To rehab/flip that isnt necessary.
The other thing as alluded to is risk. If you buy a $30k house, its hard to do something to that house to render it worthless. You might make it worth $20k mid rehab but it still has intrinsic value to a large segment of the home buying (both retail and inner industry) world. A new construction project where the builder goes belly up half way through, watch those sit for years. No one wants to touch it. Yet you have the same $30k invested and seemingly no value if you cant complete.
To me green field projects present the most repeatable profits, albeit at a smaller gross margin per door. The challenge I have seen over and over is new home builders always scale beyond the end of their financial boots, and when the pull back happens. And it always happens. Most new home builders lose it all. Then they are back swinging big lumber in a few years on the next cycle.
I really need to get up with Alex though and we have been talking abut it for a few months because build to rent is an interesting concept to me. The final piece of the puzzle is if I save up $100k and want to turn it into $1,500.month, I can do that ion 30 to 45 days. buying and rehabbing. Depending on the area it will take me that long to get a building and use permit to start a construction project.
There is also something to be said for established and mature neighborhoods vs new neighborhood and the inertia of change for both but Ill leave that to the experts...
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ron T. in most markets the banks will not let you get to far over your ski tips.
my bank will only give me 12 specs at once... but if I have a bonafide presale those dont count
most smaller builders starting out would do well to get one loan at a time maybe two.
hard to scale and to make any amount of money at that pace.
and the market is very hot in my areas that I am building Charleston and Portland.. but I am still cautious I like the market between now and 2018..
Also my relationships iwht my banks have a doomsday button.. if for some reason I get stuck with inventory they will give me 5 year loans to ride it through and we rent them.
the builders who had their loans called in 07 to 09 lost it all no doubt about that.
- Investor · Seattle, WA · Member since 2015 · 195 posts · 101 votes10y
I'm in the process of building two brand new homes in the Seattle area. My family already owns the land, each lot has a single family rental home on it. The homes were both built in the early 20's and they're in need of major component replacement. We thought about flipping/rehabbing them but have found that they'll be worth more if we re-build. If I take two homes with the exact same specs, finishes, etc. and compare them side by side, the newer home seems to fetch a higher asking price.
With that said, I'm brand new to this type of investing. I've read books, watched videos and read through the forums but I've quickly learned that the only way to know if this is viable is to do it, so I'm doing it!
My biggest hiccups have been tenants (re-locating them, landlord tenant law), long wait times for permits (six month process so I've been told) and financing which has been the biggest headache. We're looking into hard money or cash deal now that commercial lending has been such a pain. For all of these reasons, I would think some might be more apt to do a flip. The return though on the new build should be more than a flip, so we hope! We compared rehab versus rebuild on both properties and determined that while the cost to build was much greater the return was also much greater.
- Hilo, HI · Member since 2014 · 30 posts · 10 votes10y
@David Faulkner Hey David, Ive been building homes for two years now. I got into Real Estate Development as soon as I was done playing in the NFL. This is my first real estate cycle that Ive been involved with.
- Hilo, HI · Member since 2014 · 30 posts · 10 votes10y
@Jay Hinrichs Hey Jay, I really like your point about financing. I've never financed any of my builds through the bank or a HML. I've considered it and sat down with my banker numerous times, but never went that route of financing through the bank. Another good point you made was about always having to search for the next rehab project, while in building you can have all your lots ready to go and just build. How did you first start getting into development? Also, how did you start financing with the bank?
- Hilo, HI · Member since 2014 · 30 posts · 10 votes10y
@Jay London Hey Jay, thanks for the comments. I want to build 25 a year. That would be awesome. The first project I invested in was a Brand New Build and from there I learned so many lessons. I am always learning new lessons. The last lesson was to never hire a really good friend. I tried to help him out being that his life was going all that well, but then we ran into some issues. It wasn't anything major, but it just made things a little more difficult. I really enjoy being a builder, but it does have its challenges.
- Hilo, HI · Member since 2014 · 30 posts · 10 votes10y
@Ryland Taniguchi Aloha Ryland, I graduated from Kamehameha as well. I am considering doing flipping as well. I like your point of flipping to help fund your developments. How long have you been involved with development? We should talk on the phone or something! Nice to see another local guy from Hawaii involved in Real Estate Development.
- Hilo, HI · Member since 2014 · 30 posts · 10 votes10y
@Nicole S. Hey Nicole, Im glad that you are taking this challenge on of building two spec homes. I know a lot of people that just watch from the sidelines and never take action. Good Luck with your Project! I did the same thing of building my first project and really going for it. I learned a lot of valuable lessons from my first project and Im glad I did it.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Mana Silva I got into as a HML... and when the crap hit the fan in 09 I ended up with 20 or projects were the builder went under and I had to take them over and finish them
it was at that time I realized I was the one taking the risk.. builder had a little cash in the deal but I had THE CASH in the deal... and it was a challenge at first since I did not know a thing about building just lending.
got an education and decided well since I am taking the risk I mine as well set up a building company and make the profit as well when market rebounds. Now we don't build with cash but I get the best financing available with the max leverage available so my returns are generally well over 100% COC in 6 to 9 months.. So its a nice gig..
I would love to build in your area.. NO HVAC build up on raised foundations.. pretty easy for your lower end product.
Banking relationships takes years in most cases to land.. unless your very well cashed up and have tons of experience.. I lacked experience but had the relationship and wherewhithal.
- Real Estate Investor · Rancho Santa Fe , CA · Member since 2016 · 323 posts · 107 votes10yYeah I have to say financing is diferent I am trying to do one now in Carlsbad and it's harder to find patterns or JV for a construction, but according to my number profit is way better
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes10y
A lot depends on your market as well. Flips suck royally in Austin right now. There are far too many people that have watched a house flipping show and are willing to spend 3-4 months, their own labor, etc. for a $10k - $20k "profit" (compensating them for their time) for much of what I consider the smart money to wish to compete with them.
Ground-up development is also quite a bit harder and requires more time. Most people are time-starved and thus this business won't fit with their life situation.
Getting spec loans from banks is also quite a bit harder than getting a loan from a hard money lender. You can use hard money for ground-up development too, but it really starts to eat into margins given the project duration.
- Builder, House Flipper · OKC, OK · Member since 2012 · 42 posts · 15 votes9y
There is no way I would use Hard Money on new construction. I feel that interest is the devil and paying 10-12% to someone is ridiculous. Just my opinion. I'm not going to do all the work and give away half the profits. The margins are just to tight on new construction. My goal is 20-22% net profit on new specs. I pay 6% and half point now at the banks. Double that % and profits aren't worth the risk.
My banks do 80% of appraisal no equity. Here a builder should have no problem building for that unless he's putting to much "fluffy-poopoo" in the house, which several do. The production builders around here just want to roll money, so all they care about is making 10-15K a house and build 100+ a year. So I get out of areas that those guys are in. I build mid-level homes 200-250K and I try to net 35K a house. 10-15 a year and about 5 customs a year. Customs make a lot more on margins. That's all I want to do. Add in a couple flips and maybe a commercial job I got all I can handle.
So all I'm saying is be careful on Hard Money. It's the devil or can be.
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