Hey Guys and Gals,

I need help analyzing a new construction deal I am very interested in pursuing. Since I have limited experience in this field I think it would be best to have you guys triple check my numbers! Here goes

Lot:55k

House:275k

Total Property Value: 330k

Build Time: 4 months

Sale time: 1-12 months (can be sold while under construction)

My plan is to get approved for a construction loan. I have found a bank that does a 80-20 LTV interest only construction loan and they will also credit me the GC fee (up to 16k) and all the real estate sales fee (6% so 19.8k) The max they will lend out for the 330k price point is 264k. My lot fee comes out of that so 264k - 55k is 214k. Now I only have 214k to build the house itself but with the GC fee and Realtor commissions added as a credit (35.8k in total) that puts me at 249.8k of the banks money to build the 275k house. I will have cash to cover the difference (25.2k, but will have extra just in case).

Recap

Actual banks LTV ratio is a 92-8 on a 330k new construction property. The interest rate of the loan is 5.5% (interest only).

I have negotiated a deal with the builder and he is willing to build and develop the lot for 5k. He is a well known builder in the area and very reputable. He states that generally he makes 7% of the total cost of the property in profit for himself. (330,000/100 = 3300 (1%)) (3300 x 7 = 23,100). I have negotiated a flat fee for the builder of 5k. If he is only taking 5k off his normal 23.1k profit that leaves 18.1k left in the property for profit. First question, does 7% profit as a builder sound like a legitimate number?

Now, there are interest payments and holding costs to consider. The loan is 5.5% interest but only based on the money pulled out for construction. The draws would be around 1/4 of the total loan 264k. The builder says that he can build this building in 4 months. There have been many instances of people buying these homes before they are even finished being built in the market I am looking in. I am not banking on it, but it is a pleasant thought. The property taxes per month on a 55k lot come to 96$ a month. The total interest due after 4 months of construction come to $3200. In 4 months the total holding costs will come to $3584.

So we have the $18,100 profit minus the holding costs of $3584 which comes to $14,516 of profit on the table once the building is completed. 

For every month after the final draw I will owe interest on the totality of the loan (264,000 at 5.5% interest comes to $1210 a month in just interest. When we include property taxes it will still be evaluated at 55,000 which means my property taxes are still $96 dollars a month. So every month I have to pay $1300 in property taxes and interest). 

If the building is sold before it is finished being constructed (theres a good chance in the neighborhood and market, but not guaranteed) I would make $14,516 on a $25,200 investment. Plus I would be the Realtor on the sellers side so add that commission. Every month after month 4 means I have to pay $1300 in interest and taxes which cuts into my profit. It would take 11.16 months just for the deal to break on just the money that the builder is keeping in the deal. 

Do these numbers coming from my builder sound correct? Am I missing any costs? I have always been taught when something sounds too good to be true, it probably is, but JUST IN CASE ITS NOT go to BP forums ha

Thanks for any and all advice