I still like new const over rehabbing

Land & New Construction
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I still like new const over rehabbing

Rich Weese
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

I've previously posted results of homes built recently compared to rehabbing. Due to our area BOOMING with new buyers, my most recent closing is what I consider a home run. From first shovel to receiving escrow closing check, less than 90 days.(and that was going through Thanksgiving, Christmas and New Years Holidays!)

The most recent home closed on schedule last week. Nice homecoming present after 2 weeks in Dubai. Here are facts of deal.

Lot purchased 1 year ago for 50K.
Total const costs including loan costs $201,140.22

Total Costs $251,140.22

Sales price $349,900

Net proceeds after all costs, commissions, etc.from closing $330,809.12

Net net $79,668.90

My investment was 50K and return was approx 160% in one year. I still feel there is much more potential in many areas doing new const rather than rehab. Anyone else agree with that? I'm just starting home # 5 and building same plan in same area. #6 should start here in 30-45 days. Rich

p.s. If I'd started this home right after acquiring lot, return would've been over 500%. Home just started is on lot just purchased for 68K. This one could be even better return. CRAZY good in my area

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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
13y
Originally posted by Travis Haigler:

As Steven Hamilton II said, all I had to do was ask. I did, and I got one heck of an education! It's great that Rich is willing to take the time and help those of us just starting out in real estate!

Like many of us here, I'm guessing Rich has had his share of help along the way from other investors who were more experienced than he was at the time, and now he's paying it forward with other new investors. When ethical, hard working investors volunteer their time to help up-and-coming investors get started, it helps the entire industry, as those values are instilled in the new investors from the beginning.

Just a good reminder to all of us who have had help along the way that we should be paying that forward, not just for the satisfaction of helping others, but in order to better our industry as well. Also a good reminder that despite how much many of us will disagree on some stuff here on BP, when it comes to the really important stuff, most of us are on the same page.

Rich is definitely one of the good guys, and I'm sure there are a lot of people here who owe him a good bit of gratitude for their success...

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    No comparison, new is the way to go, you choose the location, price range, market, easier to finance, not only for construction but to the buyer, better appraisal with new construction. While you could have a punch list with either, probably less with new construction.

    OTH, most rehabbers don't have the experience to knock out a new home, certainly more issues in developing the dirt than walking into an existing building, so there is the issue of entry to the market of new construction getting started.

    That's a good yank Rich! :)

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    13y

    I have experienced the opposite as rehab flips produce better than spec builds, however, as we all know, every market is different and it just does not make financial sense in some areas and does in others.

    Question, only $19,091 In costs? That is 5.45% which seems very cheap. How about holdings costs, debt service, and the cost of holding the lot for a year? Including these items will affect the return, however, a $100k gross spread is great no matter how you slice it and if I could do that here, I would!

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  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    13y

    Thanks Bill- I did post threads dealing with building a new home from start to finish to help motivate some folks thinking in that direction. It is on BP somewhere and might wet the appetite. Rich

    0Reply
  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    13y

    Will- lot was bought for cash, commission was 4% (3 to selling office), title insurance $1233, $295 closing fee, and a couple small costs. The loan was 2 pts and 9% interest. It is included in the total costs and was small since home only took 3 months and not much interest accrued. I did forget to add in property taxes for 2012 which was $649, so return drops to 159%. This next one should be even higher-same floor plan and area with lot just purchased. Fun area and very little risk. Rich

    0Reply
  • Glenn Espinosa
    Rehabber · Alexandria, VA · Member since 2011 · 446 posts · 171 votes
    13y

    Rich,

    I definitely agree with you and my hope is to break into new development later this year if not next year.

    The learning curve that I need to get a firmer grasp on is the demo, and lot preparation. I'll probably shadow a builder to understand that portion of new construction.

    In my area there has been a migration into new development and a lot of the former big flippers have adjusted strategies and are now doing tear downs and rebuilds as well as huge additions, I'm talking about 90% new construction when they're done.

    The ARV on these new homes are around the 220k-240k range whereas a rehab of the existing home would net only 150-170k.

    There's still opportunity in my area for rehabbing since you attract a different buyer pool when you stay under 170k, imo. With the influx of people moving into new construction there is some opportunity to capitalize on these lower priced rehabs.

    Thoughts?

    1Reply
  • Glenn Espinosa
    Rehabber · Alexandria, VA · Member since 2011 · 446 posts · 171 votes
    13y
    Originally posted by Bill Gulley:
    OTH, most rehabbers don't have the experience to knock out a new home, certainly more issues in developing the dirt than walking into an existing building, so there is the issue of entry to the market of new construction getting started.

    Bill,

    You've hit the nail on the head for me. Dirt development is where I'm stuck right now and it's preventing me from being able to analyze potential deals.

    Time do do some more research!

    0Reply
  • Lynn Currie
    Investor · Austin, TX · Member since 2013 · 452 posts · 309 votes
    13y

    Hi Rich,

    I'm doing similar projects in Austin. My percentages aren't as amazing as yours, but I'm happy with the returns.

    I'd love to read through your new build thread. Do you have a link to it?

    Thanks,

    Lynn

    0Reply
  • Andy Chu
    Involved In Real Estate · Las Vegas, NV · Member since 2010 · 341 posts · 86 votes
    13y

    Since we are seeing an uptick in sales and inventory is still low, it is a good way to go. However, in a lot of the areas around the country, replacement cost is above current sales price. With that said, I would love to pick your brain to see if its a good venture in our current area.

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    I'm building in Austin, too, with similar numbers. We pay more for our lots, but less on construction. The current challenge is that the city is taking 4 months to issue permits. Lynn, have you seem any improvement on permits?

    I agree that new builds have been more profitable than rehabs. Will, you must be an outlier with huge spreads on your luxury rehabs. I haven't seen anyone else here at BP with rehab spreads like your high end deals.

    1Reply
  • Clay W.
    Commercial Real Estate Broker · San Diego, CA · Member since 2012 · 37 posts · 1 vote
    13y

    Hi Rich -

    I've had this topic in my head for quite some time so it is great to see someone with your diversified background supporting the idea. *I haven't read your book yet so I don't know your entire history...*

    I am relatively new to the RE arena and do not know how long it will take to get my game-plan up and running smoothly, but so far (from what I've seen from a lot on this forum and from a few acquaintances in the "flipper" field), the prevailing industry seems to be rehabbing, flipping, wholesaling, etc. etc.

    Not to say that any of this isn't a profitable approach, but I know I'd rather focus my energy in other niches - preferably building modestly in good neighborhoods *if* the numbers pencil.

    *I'd like also to cover the previous posts on "new build" if someone has it already pin=pointed.

    -Clayton

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    Clayton, check our related discussions under the bottom post.

    0Reply
  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    13y

    Glenn,
    I think your idea of shadowing a general contractor is a great idea. That is actually what I did many years ago and it has worked out very well for me. I certainly don't consider construction as rocket science! I've never had a general contractors license, but have always been able to find someone to work with me as the general contractor.
    Not knowing what area you are in, makes it difficult to give you any serious suggestions. I've never done any tear downs, but it seems like it would be easier to start with the vacant lot and not have to do the demo before ever getting started on the new product. In both the areas I build in, it is somewhat easy to find single lots and I know that isn't the situation in all parts of the country.

    Lynn,
    I am an old guy and those on bigger pockets no I am not very tech savvy! I normally just plead for Steve Babiak to find any threads that I need. Hopefully he'll do the same in this or anyone else on BP that can find those threads, feel free to point them out. I don't plan on hitting a home run on every transaction, and in fact the last home I built which I also posted here on bigger pockets had a much smaller return. I learned from some functional obsolescence that I built into the previous home and corrected that on this one. I think the one that I am just starting has a couple more changes that will make it even better.

    Andy,
    feel free to try and pick my brain any time since I only use it part of the time anyway! I have to admit even though I'm only 100 miles from Las Vegas, I don't pay a lot of attention to the market there. Las Vegas is an area where big builders come in and build a giant subdivision and use up all the land themselves. In both the areas I building, I'm really only competing with local builders that do much smaller subdivisions. There are also many single lots left over from earlier construction decades ago. That makes it much easier for me to acquire single lots and not have to compete with the large builders.

    I am fighting the urge to buy raw land and develop 30 or 40 lots of my own in my area. I keep wanting to spend less time doing real estate and more time staying in shape with golf, softball, and pickle Ball. I will be relocating to the northern coast of California in approximately 3 weeks and plan on living there for at least six months. I have contacted a few people that might be interested in joining a venture here and possibly even overseeing it. Just not sure how I feel about that. Rich

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Rich Weese - as Jon Klaus pointed out, the threads are in the "Related Discussions" at the bottom of this thread. But I'm putting links to them here just to make it simple:

    http://www.biggerpockets.com/forums/44/topics/68978-anyone-really-interested-in-construction

    http://www.biggerpockets.com/forums/44/topics/72278-update-on-building-home-instead-of-rehabbing-for-profit

    0Reply
  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    13y

    Jon K- Thanks for pointing out other thread.
    Clayton- now dig into some more learning and position yourself well. Rich

    0Reply
  • Larry Flanagan
    Investor · Midwest, USA · Member since 2012 · 204 posts · 33 votes
    13y

    I was recently kicking around the idea of a new build. But I was getting rough bids for a 1500 sf ranch with 3c attached garage for about $100/sf = $150,000. Plus $40,000 for a lot = $190,000 and these are only selling for $225ish. So after paying a realtor there is barely anything left. I'm not sure how the builders can eat with margins like that...

    0Reply
  • Ryan R.
    Real Estate Investor · Central, TX · Member since 2012 · 479 posts · 165 votes
    13y

    Jon Klaus how are your deals structured? Are you the GC? How difficult was it to obtain the license for Texas? Or are you doing a cost plus with a GC?

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    I have different structures. I've been passive and active. With partners, I've done all cash, bank financing, and private money financing. Sometimes, I'm acting as GC with a partner on the ground in Austin. I live in Dallas. You dont need a license for GC, but you do for MEP. We contract out to those trades. And all the trades.

    0Reply
  • Ryan R.
    Real Estate Investor · Central, TX · Member since 2012 · 479 posts · 165 votes
    13y

    Thanks Jon. I was attempting to build a house a few years ago and was told by a few lenders that I needed to obtain a Texas GC license. I guess that may not be a Texas requirement, just those lending institutions' requirement.

    I've got some homework to do now, thanks.

    BTW, your caddostar ranch looks nice. Hope to have a place of my own like that one day.

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    Banks vary as to what they want. On one current project we are using another GC and they wanted his résumé and ran his credit. On another project with another bank I am the GC. I gave them a list of a bunch of my rehabs and two of my new builds with numbers and they were satisfied.

    Come visit the ranch and we'll talk real estate.

    0Reply
  • Ryan R.
    Real Estate Investor · Central, TX · Member since 2012 · 479 posts · 165 votes
    13y

    I understand. If you asked me for a loan, I wouldn't be asking too many questions either..

    I just may have to do that. My wife needs a get-a-way.

    0Reply
  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    13y

    Clay- For many, rehabbing, flipping and wholesaling has run its' course. The easy $$$$ has already been made (just read threads on BP) and now to make money in this process, you have to find certain niches, or good luck. It has become like finding a needle in a haystack. Some are taking an extreme approach to rehab, imo. Tear down, add on, or try MUCH more expensive rehabs and hope for the best. Many of these are using investors' cash to spread the risk in case market turns against them. It is still possible, but many on BP are trying different options now. The easy $$$$ is gone.
    Those that have the ability, knowledge, and contacts are trying to switch into other options-many into new const. Check the experienced investors on BP and you'll see what I mean. There are those that still espouse the rehab, flip, wholesaling mantra but research whether they need to sell that idea to stay in business.... There may be ulterior motives to sell this process and they may be a one trick pony. Do your research. Good luck.

    Larry- I'm not familiar with Iowa (1 of 3 states I have never even visited) but in my 2 areas, I can build for much less than $100 per sq ft. The GC may be rapeing the deal up front. There are different ways of structuring the deal- cost plus, share profit after a certain gain, etc. You can find many on BP that are building for considerably less with much larger margins. In the last resort, Iowa may just not make sense at present time. Good luck. Rich

    0Reply
  • Justin S.
    Residential Real Estate Agent · Chandler, AZ · Member since 2009 · 1k+ posts · 928 votes
    13y

    Rich Weese

    Are there people doing remodel flips in your area?

    0Reply
  • Larry Flanagan
    Investor · Midwest, USA · Member since 2012 · 204 posts · 33 votes
    13y

    What are your two areas?

    You are from Sioux Falls and have never been to Iowa??

    0Reply
  • Larry Flanagan
    Investor · Midwest, USA · Member since 2012 · 204 posts · 33 votes
    13y

    What would a house like i said (1500 sf ranch w/3c garage) cost to build in your market? Sale price? Lot cost?

    0Reply
  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    13y

    Justin- I don't know of anyone doing it here in SO UT as a business. It has really dried up. Several other BP members here-maybe they could chime in.

    Larry- I'm not a normal guy! My 2 areas are Rio Grand Valley, TX and st george UT. I "domicile" in SD for tax purposes since I don't have a homebase. I maintain vacation homes in ST George UT, Casa Grande AZ, cancun MX and next month Fortuna CA. We also travel a lot and use SD as our residence for mail, phone, Drivers License and voting. Rich

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