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 · 17k+ 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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  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    13y

    Will- I thought I did address all your points previously. If there was something I missed, let me know. We'll just have to agree we won't see things the same at all times. Nothing was meant as an attack on you. Yoy've already agreed with the main point. Rehab/flip is gone as far as the easy money. Yes, CA is a tough place to make sense of new construction spec building. Yes, I'm in great places for specs. Yes, the rehabs now ewquire more extensive work in MOST cases.

    I already answered your commission question in previous post. again, 4% with 3 to selling office. Yes, I paid cash for lot and 100% loan for build. There wasn't much interest paid since first bills were after 30 days and loan was less than 90 days TOTAL. As I said several times, this was a home run. Being that I'm starting the SAME home again, 4 lots away and just bought the lot (68K) IF I can duplicate this home, the return will be closer to 600%. Yes, I'm a believer that my area is red hot and am looking at developing some dirt. I will post those stats also. I think that addresses your recent questions. Rich

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

    Rich, was there a reason you waited 9 months before building on your lot?

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

    Will- When I moved back to St George, I wanted to test the waters and bought 2 lots. Remember, 1 1/2 years ago things were still turning around. I wasn't trying to get rich, just keep juices flowing. I could see those went well and bought 2 more 9 months ago. I've only built one at a time. Now I will build on last of 4 lots and 1 I just bought. 10 days for permit current one. So, I'll have 2 at same time and no more lots. With the current situation SO good I've been convinced to develop some dirt and am working on a parcel that will provide 38-40 lots. I really didn't anticipate doing this, but can't resist it.

    It seems like this thread has lost its' allure, just you and I. I'll have to try a new Topic, I guess. Rich

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

    I see, so you anticipated the dirt value and land banked it for a small period of time. I believe you picked a great time to buy, there are some major players here who recommend buying dirt (infill only) for the expected coming build in a few years. Looks like our timeline may be over two years, but who knows for sure.

    I don't see any lost allure here, perhaps others will still jump in. Maybe I should check out St. George for spec building. If you do get the itch to do multi lots/ develop large parcel into multi lots, I could be interested in picking out a portion.

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

    I think the post is strong when focused and clear for all to follow ...

    Originally posted by Will Barnard:
    You can not build for $65 per square in Southern CA and you likely cant buy dirt for under 20% of exit value as you are able to do in your area.

    Will - is this 20% (rule-of-thumb or ?) typically what most would consider the lot/parcel value of a property's "exit value?" ... In other words, If I want to build a property and I came to the conclusion that the exit value was "x" (for whatever type of property is was), then as a builder/rehabber, etc., would you typically value the land at 20% of "x" ? - say if it was a tear-down, for example.

    -Clayton

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

    Clay, fantastic question and the specific answer is no. The 20% I mentioned was solely based on Rich's deal. In other words, had he paid 20% for his dirt, he still would have made a nice profit.
    The answer as a whole is that you simply can not base any % of exit value to dirt to calculate if a deal will or will not work because the dirt and building costs can range dramatically in different areas.

    What you need to do is calculate both building costs and dirt costs, add them together and compare that to exit value. If your spread is there, great, if not, pass. There is no dirt to exit rule of thumb.

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  • Sean Brennan
    Rental Property Investor · Manchester, NH · Member since 2013 · 447 posts · 81 votes
    13y

    I just appraised a few lots in an affluent suburb of Boston. Lots are going $500k (teardowns) and newly constructed homes are at $1.2. Pretty crazy %'s there. But they are making plenty of money beacause it is happening over and over.

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  • Clay W.
    Commercial Real Estate Broker · San Diego, CA · Member since 2012 · 37 posts · 1 vote
    13y
    Originally posted by Will Barnard:
    ...The answer as a whole is that you simply can not base any % of exit value to dirt to calculate if a deal will or will not work because the dirt and building costs can range dramatically in different areas.

    What you need to do is calculate both building costs and dirt costs, add them together and compare that to exit value. If your spread is there, great, if not, pass. There is no dirt to exit rule of thumb.

    I heed your point and it makes sense ... It all depends on the area and what the market demands ... -again, the #'s have to pencil.

    Also in Sean's point about lots in Boston. I also see some speculators buying houses already valued, say, $400K+ and tearing them down, building and listing for $1.3m ++.

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

    Will-I did reply to your e-mail with answers to the various questions.

    Sean – you just accentuated the reason that I build where I do and not in areas like Boston and other extremely high cost areas. As I've mentioned before, I like to have an exit strategy in case the property does not sell. That exit strategy is renting for a decent return. That is impossible to do in my opinion when you get over a certain price point. I don't want to be involved in those high-priced properties when the market turns down again. And it will.

    Clay – I've never been one to really look at the percent spent on dirt as a percentage. I do look very hard at the over all numbers since I do believe a lot of the profit is made going in. Rich

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  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y
    Originally posted by Sean Brennan:
    I just appraised a few lots in an affluent suburb of Boston. Lots are going $500k (teardowns) and newly constructed homes are at $1.2. Pretty crazy %'s there. But they are making plenty of money beacause it is happening over and over.

    Don't buyers start having conventional/jumbo financing problems when the dirt is with more than a third of the property?

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  • Steve K
    Investor · Orlando, FL · Member since 2012 · 431 posts · 106 votes
    13y

    If you end up turning dirt Rich Weese can you give us some updates to what the costs are running these days? Development costs used to run us about $12-15k per lot in 2005 but i'd have to imagine fuel prices have driven that number up significantly.

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

    Steve K- My #'s might be skewed on the land. It'll be a JV with an Excavation company. Development portion at cost, rather than hourly on each machine or bid process. Currently getting engineering and digging test holes for soils evaluation. Hope to make some decision in 10-14 days. Rich

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    13y

    I agree that finding rehab deals has become harder in the past year or so. I disagree that you need to be building in order to generate decent returns, though. If you can make decent returns by building, that's great, but there are many areas of the country where you can't make decent returns with new construction.

    It may not be like this everywhere, but I'm finding that I'm getting better returns by wholesaling these days than I was getting rehabbing last year. We're buying the same types of properties we were buying last year, but instead of rehabbing them and selling them to retail buyers, we're just turning around and reselling them to out-of-state investors as-is for more profit.

    Our average rehab profit over the past 5 years has been $20K per deal. We're under contract to sell four properties in the next two weeks for a total profit of $100K+. All four are being sold to out-of-state (California) investors for cash. I don't have to deal with rehabs, don't have to deal with appraisals, don't have to deal with lenders, don't have to deal with inspection repairs, don't have to deal with picky buyers, and EM deposits range from 10-40%, so there's no risk there.

    We're also getting ready to start our first new build project. It will likely net about $80K profit, but the project will take a good bit of work over several months, and there is always risk in construction. I personally like my 4 wholesales better than I like my one new construction. :)

    Real estate is about flexibility...what worked yesterday may not work today...or tomorrow. If new construction is working for you, that's awesome. But, don't assume that's the only way to make money these days. I'm finding that making money is actually requiring less work than last year (wholesaling), not more (new construction).

    But again, things change in this business, so who knows what tomorrow will bring...

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

    JScott-Good for you. Glad you're doing all 3 (rehab, wholesale, new) in atlanta. That seems to make my point even better. You have "chosen" to change your methods somewhat. Also, no one said you NEED to be building to generate decent returns. The topic was "I still like new const over rehabbing" and I do in all my areas,

    Of course RE is about flexibility and no one has been more flexible over past 40 years than I, imo. Again, no one said or assumed that new const is the only way to make money as you implied I said.

    We don't agree on much, but maybe we can agree that the premise of my thread was correct- the EASY $$$ in rehab days are mostly over and"changes" are becoming necessary in MOST areas now. Whatever one chooses as his "change" less rehab/more wholesale, new const, or development are methods worth looking into in one's particular area.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    13y
    Originally posted by Rich Weese:

    We don't agree on much, but maybe we can agree that the premise of my thread was correct- the EASY $$$ in rehab days are mostly over and"changes" are becoming necessary in MOST areas now.

    100% agree.

    But, in my area and at this particular moment, I'm seeing opportunities that are MUCH easier than rehabbing (again, wholesaling to these cash-heavy investors).

    I don't think this will be a long-lived opportunity; I have a feeling these investors will soon realize that they're making some really bad investments and stop making them. At that point, perhaps rehabbing will get easier again (less buying competition) or it will still be tough and we'll have to focus on something else.

    But, right now, it seems money is easier to make than anytime since I've been investing (only since 2008). But, again, I have a feeling it's very short lived...so I"m just enjoying the quick ride... :)

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  • Sharon Vornholt
    Goshen, KY · Member since 2009 · 835 posts · 683 votes
    13y

    J Scott. How are you marketing your properties to west coast buyers?

    Sharon

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    13y
    Originally posted by Sharon Vornholt:
    J Scott. How are you marketing your properties to west coast buyers?

    Over the last few months, everything we've listed on the MLS has generated a lot of interest from these groups. We've gotten to know the half dozen or do agents who represent the big buyers and we're working directly with them.

    We don't even list on the MLS anymore, as we don't want to get the hopes up of our retail buyers (we got 19 offers on the last property we listed, 14 of them from retail buyers). So, now we just send email to the agents we know when we have a deal that an investor would buy... which is all of them these days... :-)

    So, short answer is, we used the MLS to help them find us and then we nurtured the relationship through pocket deals we've provided.

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  • Clay W.
    Commercial Real Estate Broker · San Diego, CA · Member since 2012 · 37 posts · 1 vote
    13y
    Originally posted by J Scott:
    Originally posted by Sharon Vornholt:
    J Scott. How are you marketing your properties to west coast buyers?

    Over the last few months, everything we've listed on the MLS has generated a lot of interest from these groups. ...

    We don't even list on the MLS anymore, as we don't want to get the hopes up of our retail buyers (we got 19 offers on the last property we listed, 14 of them from retail buyers). ...

    Since I'm new to the industry, this is the thing that seems to be the biggest hurdle. If I did my homework and had a strategy, and then each time a new deal comes around it's getting bid on 20, 30, 50+ times, ... then I fail to understand how the other parties "see" the deal and what they expect to gain from it (perhaps other than the speculative "appreciation" aspect).

    As Rich Weese and others have reiterated time and time again about how you need to make sure you position yourself well on the "buy-in," then can you all give me your theories and/or tell me what I'm missing here?

    -Clayton

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    13y
    Originally posted by Clay W.:

    As Rich Weese and others have reiterated time and time again about how you need to make sure you position yourself well on the "buy-in," then can you all give me your theories and/or tell me what I'm missing here?

    You're not missing anything -- these deals end up not being good deals for those who are buying them.

    It's very tough to get a good deal on publicly listed properties these days, as there is too much competition, and many investors are willing to pay prices that create negative cash flow for themselves. I don't think it has to do with expecting appreciation as much as it has to do with poor analytical skills...though I could be wrong on that.

    This is why -- these days -- you need to find the off-market deals to be consistently successful...

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  • Roc P.
    Philly Area, PA · Member since 2008 · 297 posts · 27 votes
    13y

    Awesome thread everyone!

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

    Great thread guys!

    As someone who is focusing on rehabs but would like to break into new construction my question focuses on the barriers of entry into new construction.

    I've talked to a lot of GC's in my area and even the ones who are building for the big guys (new construction is the way to go in my area as of late). and the going price from what I can tell is $85-$95/sq ft.

    When I do the math, things just aren't adding up. A 2,200 sq ft new construction house sells in my area for 225k. Here's my on a napkin rough breakdown:

    ARV: 225k
    - Quiet costs: 27k (12%, Im guessing here. I average 15% for my flips and I imagine bigger guys can bring costs down, hence the 12%)
    - Minimum Profit: 22.5k (10%, again I'm guessing here but I imagine these big guys would not build a house for less than 10% of the final exit price. My guess is that this is a VERY low number)
    - Land cost: 30k (I've been checking the prices on lots lately and in desirable areas a steal would be 40-50k. I'm using 30k in an attempt to make numbers work...)
    = $145.5k left for construction or on a 2,200 sq ft home $66/sq ft!

    Now, unless someone knows something I don't know, I just don't see how you can build a home for $85/sq ft and make a profit. If you look at my numbers, you can tell that I've played with them in favor for the builder yet I still can't come up with numbers anywhere close to making a decent profit..

    Any idea on what I'm missing here. The only possible solutions that I've come up with is to:
    #1 Buy a house with an oversized lot, flip the house and subdivide the lot in hopes of bringing your land costs to zero
    #2 Buy a small subdivision and divide in an effort to further reduce land costs
    #3 Reduce minimum profit even lower (unacceptable)
    #4 Buy materials in extreme bulk to receive deep discounts. Possibly lose any discount gained with storage fees
    #5 Just continue looking for a better land deal, maybe I'm not looking hard enough

    Thoughts? Thanks in advance.

    Glenn

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

    Glenn – I guess the biggest difference I see with what you posted and what I'm doing into different areas is the spread between your cost per square foot and the sales price per square foot. I'm not sure what area you are in, but it just may not be time yet to build new construction if the numbers are as you say they are. Maybe if you list the area you are in, you may find someone else that is building homes that could explain where your numbers could be changed.

    All I know, is where I build here in southern Utah, I'm at approximately $80-$85 per square foot for a very nice home. I just recently sold that type home for $140 per square foot which makes it a very nice spread. In southern Texas where I build, I'm able to build most recently for $60 per square foot and and the home appraised at $92 per square foot. That was also a very nice spread.

    As to your possible solutions that you mentioned, I have not done any of them. I guess the closest I came, was to your number three in that I did purchase a subdivision.

    List what area you are in and you might receive more answers to your question.

    Roc P-thanks for your compliment on the nice thread.

    Rich

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

    Glenn Espinosa - Rich is correct, the probblem is your area resale price points are not high enough to justify spec building and that is common in most areas of the country right now. I'm betting that if you selected 100 areas of the country, less than 5 of them would have a market to spec build for profit which means that the resale prices would have to increase more to make it work.

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

    Rich Weese - Thanks for the reply. I'm investing in the Hampton Roads area of Virginia, specifically in the city of Norfolk and Virginia Beach.

    After researching spec building in my area for a few months now, I've convinced myself that there has to be something I don't know in order for these builders in my area to continue building the homes that they are.

    Military is big in my area and with these new construction homes going at 220-230k, young military families are just eating them up with their VA loans and zero money down.

    Ultimately, I think the builders in my area are simply building homes for less than the $85/sq ft that I've been quoted, are using cheaper financing, and are finding and developing lots for less.

    My next step is to jumpstart my networking efforts with local builders - I need to find out how they're doing it and where the cost savings are coming from. I have a few builders in mind and I have a few value propositions I think I can offer these big guys. Rich - what would a young upstart need to bring to your table in order for you to open up you spec building operations to them?

    Will Barnard - Thanks for the input, Will. Generally, I agree with you and as I do more research in my area I keep finding that the numbers are simply not working. Not giving up yet, though. Some guys are doing it successfully and I wanna know how.

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  • Victor Belman
    Ontario, CA · Member since 2013 · 48 posts · 2 votes
    13y

    Nice discussion. Both new construction and rehabilitation have their own advantages and it depends on your choices what you want to make.

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