Every Contractor Is Treating Me As A Client And Not As Developer

113 Replies

I'm currently trying to build my first infill spec home. I have most of my soft costs figured out and have a piece of land I'm ready to go under contract on and have vetted. I now need an estimate on the cost of what it would take to build the home I have plans for. This is where I'm having a problem.


I've contacted about 9 general contractors and home builders and they either don't respond or the bid they give me back seems to be priced as if I'm a client building a custom home (I guess I technically am). I make it clear that I'm an investor/developer looking to sell the home once it's built. The plans I have are simple. Cost-effective. I do tell them that I will be building several of these a year if this first home works out but still nothing.

I can see why they're charging me as if I'm a client building a custom home to live in because why should they lower their price just for me? They're getting plenty of business from custom clients so why take my work for less? I guess I'm struggling to find where I fit in here in terms of making a profit. Yes, ill be taking all of the financial risks but so are their custom clients.

How can I better approach these contractors to make it possible to use their services and still make a profit? Or am I just approaching the wrong ones?


Thank you all!

@Johnny L.

Until you develop relationships with some of these contractors and develop a reputation, you are a client/customer.  Lumber prices are extremely high right now and that is definitely affecting build costs right now. I would suggest find the best one you can and build the first one. After that, you can talk about how you might get a better deal if you can give him consistent and repetitive work.

If your making a profit depends on others making less of a profit for themselves than the market allows for then I think you are approaching this in the wrong way.  You usually get what you pay for so if you find a low cost contractor then you will most likely receive low grade construction from an unexperienced contractor.  If multiple GCs are submitting similarly priced bids then it is reasonable to believe that is what it costs to build what on your plans.  So, if your due diligence doesn't indicate you will make a profit at those costs then its a bad deal for you and you should move on to something else that will be profitable.   Otherwise you have 2 choices to possibly make it work: 1) descope to lower the build cost (smaller overall footprint, less rooms, smaller kitchen, etc., or 2) value engineer your project by asking for lower grade finishes.

When you go to sell the house if an "investor" wants to buy it, despite no history of them being an investor or guarantee of future sales- are you going to lower you sales price?  It would seem to be the same logic you are using on the contractors. 

I've come across the same situation several times.  

That's when started to investigate manufactured homes.  

Please don't look down your nose at these--they are NOT trailers or double wides.  They are manufactured in a huge factory to spec.  They can be set on a foundation, and all you need is a small setup crew, plumber and electrician.  Done.  

Pricing is the same or better than stick-built.  I suggest you take a tour of some manufacturers--it will blow your mind.

Originally posted by @Dustin Allen :

@Johnny L.

Until you develop relationships with some of these contractors and develop a reputation, you are a client/customer.  Lumber prices are extremely high right now and that is definitely affecting build costs right now. I would suggest find the best one you can and build the first one. After that, you can talk about how you might get a better deal if you can give him consistent and repetitive work.

Definitely see what you're saying! Lumber prices are having an impact for sure. Do you believe once lumber prices come down this may be more viable? I think I may do what you're suggesting and just build one to start building the relationship. However, with the bids I've been getting back I wouldn't even be able to turn a profit or my margin may be very slim. 

@Johnny L.

If lumber prices come back down, it could help with prices. Contractors may still desire a premium if demand continues anyways. NAHB (National Association of Home Builders) projects demand to remain high for new construction through 2022.


Originally posted by @Eric Lefteroff :

If your making a profit depends on others making less of a profit for themselves than the market allows for then I think you are approaching this in the wrong way.  You usually get what you pay for so if you find a low cost contractor then you will most likely receive low grade construction from an unexperienced contractor.  If multiple GCs are submitting similarly priced bids then it is reasonable to believe that is what it costs to build what on your plans.  So, if your due diligence doesn't indicate you will make a profit at those costs then its a bad deal for you and you should move on to something else that will be profitable.   Otherwise you have 2 choices to possibly make it work: 1) descope to lower the build cost (smaller overall footprint, less rooms, smaller kitchen, etc., or 2) value engineer your project by asking for lower grade finishes.

Yeah, as you're saying it may just be the cost to build. However, if the market doesn't require a contractor to take less profit why wouldn't they just raise their prices to keep up? Therefore eliminating my profits again. Where do I come in as a developer? 

I've asked for builder-grade finishes on the builds but will have to explore those options more as you mentioned! I thought my plans were simple enough when discussing it with my architect but perhaps I can make changes.

Thanks for the reply!

 

Originally posted by @Tiffany Roberts :

When you go to sell the house if an "investor" wants to buy it, despite no history of them being an investor or guarantee of future sales- are you going to lower you sales price?  It would seem to be the same logic you are using on the contractors. 

I see what youre saying! So what would be your solution? To guarantee them more work?

Thanks for the reply! 

Updated about 2 months ago

The question youre asking is exactly what im asking as well! Doesnt seem like its possible to make a profit building a sinjgle spec. Why would the builders do so when they dont need me! My question was to see if i was missing anything.

Originally posted by @Dustin Allen :

@Johnny L.

My pleasure. Relationships will be the key. Your deal flow has to be a value add to the builder. Find a good one who wants the volume and build the relationship.

Best of luck!

 I have to find some way to build that relationship with them. I guess I'm still having trouble seeing what value I bring other than the financial risk I will be taking. Perhaps volume is the answer, unfortunately this will take more time to save up some cash. 

Thank you!

 

Originally posted by @Marc Winter :

I've come across the same situation several times.  

That's when started to investigate manufactured homes.  

Please don't look down your nose at these--they are NOT trailers or double wides.  They are manufactured in a huge factory to spec.  They can be set on a foundation, and all you need is a small setup crew, plumber and electrician.  Done.  

Pricing is the same or better than stick-built.  I suggest you take a tour of some manufacturers--it will blow your mind.


Hey Marc! 

I definitely don't see anything wrong with manufactured homes as I've sold several as a realtor! I have to see if the covenants allow these because if they do it may be an option I can look further into! 

Is this what you currently build and sell? 

Would you sell the house for less to someone that fancies themselves a "flipper" and intends to then turn around and sell it to someone else? Likely not. This is effectively the same as a contractor reducing his profit on your project just because you identify as a developer and not a homeowner.

As mentioned by others, relationships are key, and the more opportunities you can bring to the contractor then the better the relationship gets.

Technical question:  whats the difference between a 'client' and a 'developer' in this scenario?

@Johnny L.  If I understand your question to me correctly my answer would be that you won't be sharing your profit margin with the GCs.  Therefore, they won't be raising their prices to keep up and eat up your profits.  They only bid on the plans.  Hope this helps. 

Originally posted by @Shawn L. :

Would you sell the house for less to someone that fancies themselves a "flipper" and intends to then turn around and sell it to someone else? Likely not. This is effectively the same as a contractor reducing his profit on your project just because you identify as a developer and not a homeowner.

As mentioned by others, relationships are key, and the more opportunities you can bring to the contractor then the better the relationship gets.

Hey Shawn!

So are you saying theres no room for a developer in this model? Thats what I seem to be realizing.

When you mention the more opportunities I bring are you saying I try and bring land where I can guarantee him three homes to be built or are you saying I try to build one at full cost potentially lose money and then hope he lowers his price the second or third time?


Thanks for the reply!

Why would a contractor charge you less because you plan on reselling the home?

Originally posted by @Eric Lefteroff :

@Johnny L.  If I understand your question to me correctly my answer would be that you won't be sharing your profit margin with the GCs.  Therefore, they won't be raising their prices to keep up and eat up your profits.  They only bid on the plans.  Hope this helps. 

 Hey Eric!

Yeah, it definitely does help! It could be that right now construction costs are so high that my margin is diminishing and lower construction costs could bring my margin back up. I just see so many homebuilders buying land and doing everything themselves and I don't blame them! Thats why I find it difficult to see where I fit in. I would never work with a developer! 

Does a developer come in when the contractor has all of their own money tied up and cant build and need someone else's money?

Thank you!

Originally posted by @Johnny L. :
Originally posted by @Shawn L.:

Would you sell the house for less to someone that fancies themselves a "flipper" and intends to then turn around and sell it to someone else? Likely not. This is effectively the same as a contractor reducing his profit on your project just because you identify as a developer and not a homeowner.

As mentioned by others, relationships are key, and the more opportunities you can bring to the contractor then the better the relationship gets.

Hey Shawn!

So are you saying theres no room for a developer in this model? Thats what I seem to be realizing.

When you mention the more opportunities I bring are you saying I try and bring land where I can guarantee him three homes to be built or are you saying I try to build one at full cost potentially lose money and then hope he lowers his price the second or third time?

Thanks for the reply!

Nothing to do with the model, there very well may be room for a developer if the costs are low enough to support it. Just need to make sure your acquisition and development costs leave enough for you to end up with money left over after you sell.

By opportunities I mean projects. If you bring a contractor 10 projects a year his pricing to you will be lower than it will for a one-off, all else being equal. He'll become familiar with working for you, will be able to anticipate common issues on your projects, better project contingencies, and of course you'll get the "volume" discount for keeping him busy on multiple projects. He doesn't have to spend as much marketing for your projects and more than likely lower overhead (assuming you don't go around changing things constantly).

Volume discount is similar in principle to buying widgets wholesale. You buy 1 widget at $2.50/each, but if you buy a truckload your per-widget cost may only be $1.50.

Originally posted by @Russell Brazil :

Why would a contractor charge you less because you plan on reselling the home?

 Hey Russell!

Thats exactly my question! Where does a developer come in? Why would a contractor need anything from me?  Im just an investor and realtor. They can just build and sell on their own. From what Ive read on here its possible to build individual spec houses but I cant seem to find where I fit in.

@Johnny L.

Hey Johnny the only way I see this working for you is to find a start up contractor in your area.  Find someone who is as hungry as you are to show the world what you are capable of.  Both of you are going to set the world on fire together.

Of course your risks will be increased but you may be able to hit your numbers financially this way.  

Other then that I don't see why an established contractor who has too much work to choose from would lower his cost for you.

Just a thought.

Good luck!

If you're working with a builder, you're going to be paying retail on the construction.  Unless you are doing high-volume, it's unlikely a builder is going to give you much -- if any -- discount these days.  Which means that unless you are getting a significant discount on the land, you're probably going to find it near impossible to make money on a spec build these days (using a builder).

The other option is to be your own GC, thereby saving on the build cost...

Originally posted by @J Scott :

If you're working with a builder, you're going to be paying retail on the construction.  Unless you are doing high-volume, it's unlikely a builder is going to give you much -- if any -- discount these days.  Which means that unless you are getting a significant discount on the land, you're probably going to find it near impossible to make money on a spec build these days (using a builder).

The other option is to be your own GC, thereby saving on the build cost...

Hey J! 

Thanks for your response!

This is the answer that solves it for me I believe! I couldn't find where I fit in as an investor and developer....because I don't! Nothing is stopping these builders from building their own houses and selling them because of the market right now. They don't need my money or need me tot ake the financial risk. Their custom clients take the risk or they know it will sell and will take the risk themselves!

Was it ever possible to hire a GC and make a profit on a spec house when the market was different? 

Whats your opinion on manufactured homes as specs?


Definitely looking into getting my license even though it may take a couple of years!

 

Johnny, 

Developers are like team leaders.  They bring together a team made up of lenders, builders, A&E professionals, investors (or just their own money), attorneys, real estate brokers, city planning department officials, etc.  Developers take on significant risk that the development will provide a desired rate of return and will be fairly compensated for the their risk exposure.

The contractor on the other hand provides a service.  They take the plans and build what the architect and engineers specify for a fee.  They also have risk that they have accurately estimated the costs it takes to build what is on the plans.  If so, they make a profit.  If not, they could lose a lot of money.  They should also be fairly compensated for their risk exposure.  

There are developers that are also builders.