Good day Biggerpockets, I apologize if this post is lengthy. I think full context is helpful to receive thorough feedback. I live in Florida and am a licensed real estate agent. A year ago I had the observation that the modern/contemporary style is not common on new single-family home construction in our market, and ESPECIALLY at an affordable middle price point. I wondered the reason for this lack of market supply in the $300-500k ("affordable") range? I thought of a few possible causes: lack of demand, pricing of modern-specific building materials, lack of builder expertise in this type of construction, or lack of builder desire to create this product when cookie cutter sells so well in this price range. I have no construction or development background, so I reached out COLD to a bunch of modern home builders in Tampa via email and phone call. Most of these builders built homes in the $700k- $2 million price range. I asked if they had any desire to do similar contemporary homes in the $300-500k price point, a "stripped down" version if you will. A few told me to eff off or kick rocks, but one builder was interested. He said he always desired to build modern homes at an affordable price point, but his clients had dragged his price range UP with custom home jobs. He said the bottleneck or restriction in moving forward with these plans was A) lack of land opportunities in gentrifying communities, especially off-market (MLS deals typically were overpriced and left little room for profits and B) lack of capital to do multiple projects concurrently and make it worthwhile. He proposed the following structure: -I find off-market land opportunities in gentrifying neighborhoods. -We split land acquisition cost 50/50. -We use land as collateral to secure the construction loan. -A 20% developer fee is factored into construction loan. -I list and sell property with traditional real estate commissions. We split profits 50/50. For example, a single family project we are currently working on has numbers that look like this: -Land cost: $110k. (I put in $55k, builder puts in $55k) -Construction loan : $240k ( $200k cost plus $40k developer fee) -Projected sales price: $475k (low end.) After 8% closing costs, including commissions and taxes, this nets $437k. This means projected profit is = Net sales price - ( land cost + construction cost) = $437,000 - ($110,000 + $240,000)= $87,000 profit. $43,500 to each party. From land acquisition to the final closing of completed product averages 8 months. So ROI would be $43,500 on an initial investment of $55,000. A 79% cash on cash return. Is this a scalable business model? What am I missing here, what factors should I take into consideration? PS. This ROI is not taking into account two key factors. In the stated example, the builder also earns a $40k developers fee. So his ROI is $83,500 on a $55k investment. I am also not including my real estate commission. At 3% this is $14,250, bringing my total return to $57,750 on a $55k investment.

@Asad Shaikh Modern design simply costs more, which is why it is not common on lower price points. Do you really believe that you buyers will pay a premium, and if they are willing to pay, will the appraisers see any value? I would say no, but you likely now your market the best. As for the terms of your partnership, its stacked pretty heavily with the builder. The 20% developer fee is way too much for me. From what I see, your only saving 50% of the downpayment, but loosing out on almost $44k on profits. Why even partner with the builder, just contract with him. Finally, I would be floored if you could build a modern design house for close to $100/ft2. I just finished two duplex houses, one very modern in design, one more traditional. Similar interior finishes, the modern house cost me right around 20% more, both houses have the same square footage.

Be careful with informal joint venture and partnership structures. Unless you incorporate, you could become jointly and severally liable for the contractor's actions (e.g., an injury to a construction worker). Consider either incorporating or keeping the contractor at arm's length in all your transactions. This is not legal advice. Talk to a lawyer licensed in your jurisdiction about your unique situation.

@Kyle H. From a builders perspective, what advantages does such a partnership bring to you? Obviously the required down payment on the construction loan (likely in the 20-25% of total cost range) would be split, but then so is the profit? You obviously have the relationships with the banks, you have the people and subs, so if you have 50% of the down payment, can you not just get that to 100%? Or even using some private money as a loan with just interest and no equity stake for the down payment. To me, the way I see a builder/investor partnerships make sense is as follows; • investor brings all the required cash and access to the construction loan • builder does the construction at cost (no GC/builder fee) • partnership sells the house and each split 50/50. By the GC/builder not taking a fee during construction, it minimizes the construction costs. GC/builder would be guaranteed at sale at least the typical GC/builder fee (around 15% profit). But, I don't do partnerships, I contract and manage the builds myself. So the above might not be attractive to any builders.

@Asad Shaikh - We did a similar deal with a builder charging 10% fee and the listing agent only charged 4.5% listing fee (Listing agent 1.5% and Buyer agent 3%). This way you are keeping project costs low with both bringing your expertise to the table for maximum ROI Another thing we ran into was that some Builder line items costs also had some margin and they were making way more, apart from their fees. Its better to have an idea on construction costs per line item. Are you going to compete with national builders in the area? As a local builder you need to provide excellent finish out in the price range so that buyer wants to go with u vs a nationally known builder. I do agree that modern finishing costs more but there are some items like Stucco vs Brick vs Stone where the price difference are minimal. Select appropriate features in the price range and you can still build in your budget Keep us posted on how this goes. Good luck !!!

@Asad Shaikh We have a very similar structure in place with our partner who is a real estate agent like you (we are the builders), however we are @15% for the build. We do have a LLC and partnership agreements in place for our projects and while @Mike Wood makes a very good point in regards to just hiring a builder and creating more profits for yourself there can be a high amount of value partnering in a deal like this. Our partner had limited capital and no lending relationships and was hesitant to oversee a build project. Our first project together has gone extremly well and we are now in the process of buying two additional parcels that will hopefully yield 7 more homes. In addition, to echo Mike's point about building modern, you will certainly have a higher per sq/ft build price and a smaller buyer pool. There is a distinct reason that most modern style homes are contracted custom homes.

These are the type of finishes I am referring to when I say modern. Clean lines, neutral colors, no excess, no bulky features etc. All photos are from the same house, a project the builder did a while back. I am just struggling to understand how these finishes are more expensive than the average?

Joint Venture Partnership Structure With A Builder: Thoughts?

Kyle H.

Investor · Bryson City, NC · Member since 2013 · 162 posts · 122 votes

8y

@Tae C.

Feel free to PM.

@Mike Wood

Nice job as always Mike, the places look great. Is your contemporary unit a back to back?

Joint Venture Partnership Structure With A Builder: Thoughts?

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