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?
Eastern Michigan · Member since 2018 · 81 posts · 144 votes
5y
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 this totally different than a lot of responses.
There are investors in almost every city buying in fill lots, hiring builders for the construction and making a profit.
You are focusing on the wrong costs/expenses. It’s the cost of the land and the value of the home after it’s built that matters. The builder does not determine your profit.
You just haven’t found the right piece of land in the right area yet. If I was flipping a house and bought it at full market value, rehabbed it, then sold it, of course I would lose money. It didn’t have anything to do with what the contractors charged me, it had to do with me buying a house at full market value.
You need to find a piece of land that is undervalued, most likely off market. In an area where the comps would support a higher value of your build cost + lot. These deals are not sitting on the MLS waiting for a first timer to make a profit, they involve constant searching and looking over lots of deals.
Telling a contractor that you plan to do this in the future over and over, or “guaranteeing” him future work won’t help. Contractors, Lenders, wholesalers, Realtors all hear this over and over. What brings back clients is if you provide a quality service at a fair price.
Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
5y
@Johnny L. I disagree with other than you can not make money buy building new homes for sale on an individual basis. I also agree with all that you will not get a discount, why would they, you can never give them to amount of volume needed for such a discount which would likely need to be 10+ houses a year.
Your market is likely just not supportive of new construction. Investors make money on new construction infill projects by being the capital needed for the project, and assembling the team. If the numbers dont work, then the area is wrong. Infill builders are not going to build to just make the money they would charge you, otherwise they would just do nothing but customer homes and not risk the capital, they make additional profit, as so you should.
Residential building is on fire right now and building costs are rising. Heck, lumber costs are up 3x over the last year. That is adding $10-15k to a typical SFH, with no ease in sight.
Since you need alot of capital for a new construction project (~25-30% of total costs), most buyers can not do it. Thus the role of an investor or a homebuilder that builds on spec. Then a typically home buyer with 3-20% down can come in a buy it. I know in my market, I can do a infill new construction and make 20% profit on a SFH in the right areas. There are some areas around me that simply can not support new construction pricing, and the numbers dont work. You just have to be willing to tie up your capital for 6+ months on the project.
It might be helpful if you provide some numbers/data on your project for some of us to help and let you know if the costs are reasonable for your area.
Flipper/Rehabber · AZ · Member since 2020 · 5 posts · 5 votes
5y
@Johnny L.
Maybe an option is to find a GC to partner with since you plan to do this numerous times. There are many different scenarios, but one is the GC builds at their cost and then they receive a % when the home sells.
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.
U guys are lucky to have those out EAST we just dont have those on the WEst coast.
I see this totally different than a lot of responses.
There are investors in almost every city buying in fill lots, hiring builders for the construction and making a profit.
You are focusing on the wrong costs/expenses. It’s the cost of the land and the value of the home after it’s built that matters. The builder does not determine your profit.
You just haven’t found the right piece of land in the right area yet. If I was flipping a house and bought it at full market value, rehabbed it, then sold it, of course I would lose money. It didn’t have anything to do with what the contractors charged me, it had to do with me buying a house at full market value.
You need to find a piece of land that is undervalued, most likely off market. In an area where the comps would support a higher value of your build cost + lot. These deals are not sitting on the MLS waiting for a first timer to make a profit, they involve constant searching and looking over lots of deals.
Telling a contractor that you plan to do this in the future over and over, or “guaranteeing” him future work won’t help. Contractors, Lenders, wholesalers, Realtors all hear this over and over. What brings back clients is if you provide a quality service at a fair price.
There ya go this is the right answer.. I am on the hunt right now for a next year project 30 to 50 lots.. thats what i am telling the commercial brokers.. land values have to come down if they are going to get a buyer .. We have been able to raise price on our new builds to compensate .. so very lucky in this market but not all markets can do that.. B/C the appraisals will come in low.. Or the buyer cant bring the difference in to close.
AS for getting a GC on the cheap for a one time build or even two houses a year.. there simply is not enough revenue for them to do that.
Getting a fee built GC you need to have some volume 5 plus minimum is what I am thinking.. or you just are going to pay more. You may want to consider just subbing it out yourself if you think you have the skill set.. I got my GC licnese in OR was super simple just in case i need to step in I don't want to be caught .
Lender · Asheville, NC · Member since 2016 · 1k+ posts · 1k+ votes
5y
I don't know about where you are, but where we're at it's hard to find a single contractor who isn't booked out months in advance. You really have to know someone or know someone who knows someone. I'd start by working all the contacts you have to try to get a personal referral. Put it out there to your co-workers, friends from church or little league, around your neighborhood, on a your facebook page, etc, etc. As everyone you know if they can recommend someone and preferably put in a good word for you. It really is THAT competitive. Once you establish the relationship, then you can work on pricing and partnerships. And beware anyone who has tons of time on their schedule right now. Thoroughly vet them. There's probably a reason they're not booked out when everyone else is. Lastly, have you considered working with a pre-fab home manufacturer? I'm not talking about mobile homes or modular homes - just pre-fab. In our area we have a company called HiLine Homes. I haven't used them so I can't personally vouch for them and I have no affiliation whatsoever but I've been through some of their models and personally know people who have used them and been satisfied. They have several models you can choose from. Because they prefab them, you save money (we've compared their quotes to custom home builder quotes and they do come in slightly below.) But at least you know you're getting a predictable product as they tend to build the same models over and over and over again, which is how you save. They may not be available in your area, but chances are there are similar companies to choose from. Good luck - getting good contractors is a challenge for sure but once you get one, treat them like family because you're gonna' need them.
Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
5y
@Johnny L.
Ok so you are trying to build your “first” home. No local reputation as an investor. You are “getting ready” to put a piece of land under contract.
How do you expect them to treat you? If you approached me, and didn’t even own the piece of land, I wouldn’t give you an hour of my time, or quote out an entire build. Sorry, just saying.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
5y
Builders are all so busy right now, they aren't in a position to be offering many discounts.
I did a few specs here in CO back in the early 2000's.
If you don't mind sharing, I'd be curious to hear what you're looking at for land (price, general location)? And what you are budgeting for the build?
Like Joe pointed out, a developer generally refers to someone buying large pieces of land and bringing in utilities, getting entitlements, building roads, subdividing, etc., so someone just building on one lot in an existing development normally wouldn't be considered a developer (they'd be called a spec home builder, usually a realm occupied by established builders). Developers are making money through economies of scale, usually by building large numbers of tract homes as cheaply as possible, whereas the cost for a spec home is usually closer to that of a custom home. It's hard to make money at it unless you're the builder.
Doing a modular might make sense, as someone else mentioned (modulars aren't synonymous with cheap these days either though, but can be more cost-effective for a non-builder than a stick-framed home).
@Jay Hinrichs I'm in Oregon as well! What was GC license process in Oregon? Cost?
not to engage in thread creep.. but in Oregon there are two licenses if you intend to remodel or build from ground up a home that is for sale to the public or a building that is forsale to the public.
With a GC license you can pull your permits and build no problem cost is very cheap so cheap as to not even think about.. the test is super simple if you understand business terminology and a little bit about building.. So for me it was very easy I know what a mechanics lien is I know basic contract law etc just being in the business .. but if your a actual construction worker this would need to be learned so it could be a little tougher.. There is really nothing on the test on how to actually build anything ( which would be something i could not pass without a lot of study)
IF your an investor and your simply going to rehab and sell homes.. the entity that holds title to the home MUST have a developers license. Or a GC license or both. No test required for developers license its just a money grab and something to try to get at your insurance.. becasue you need a bond and insurance to get a developers license. this is the most violated license law in Oregon many simply think you can hire a GC and your good.. that is not the case.
So like on my project in Canby Oregon were I am building 90 homes Even though I am a GC and have a Developers license in my personal LLC .. the project is in its own LLC so that LLC also needs a developers license. I know crazy right.. but I have been fined twice on this so after 7k in fines I figured it out. LOL.
I see this totally different than a lot of responses.
There are investors in almost every city buying in fill lots, hiring builders for the construction and making a profit.
You are focusing on the wrong costs/expenses. It’s the cost of the land and the value of the home after it’s built that matters. The builder does not determine your profit.
You just haven’t found the right piece of land in the right area yet. If I was flipping a house and bought it at full market value, rehabbed it, then sold it, of course I would lose money. It didn’t have anything to do with what the contractors charged me, it had to do with me buying a house at full market value.
You need to find a piece of land that is undervalued, most likely off market. In an area where the comps would support a higher value of your build cost + lot. These deals are not sitting on the MLS waiting for a first timer to make a profit, they involve constant searching and looking over lots of deals.
Telling a contractor that you plan to do this in the future over and over, or “guaranteeing” him future work won’t help. Contractors, Lenders, wholesalers, Realtors all hear this over and over. What brings back clients is if you provide a quality service at a fair price.
I appreciate your response!
It makes sense what you're saying as land in the area I'm buying has gone up almost 40% in the last 8 months! However, the land is still only about 15% of the resale value.
Ill definitely have to put more effort into off-market pieces of land.
@Johnny L. you are not actually a developer. A developer buys raw land, obtains permits, sub divides land, runs utilities, sewer and roads. The developer then sells the lots to builders/contractors. Sometimes developers build in their own development and they are also builders/contractors in that situation.
In your situation you are a speculator/reseller of new homes. You are buying one developed lot and hiring someone to build one house. There is very little financial advantage for someone to buy from you versus building their own custom home. Spec homes are not extremely profitable if you are not the builder or even the developer/builder.
You basically need to cut out the middle men if you want to make money. Cutting out the middle man means more work for you. Acting as the general contractor is the best way to make money selling new homes. As a contractor scheduling and budgeting are critical. If your project runs long or over budget, it can eat up all your profits.
You will find that subcontractors have established relationships with larger builders. That means your job will be lower priority and you may even pay a higher price. You can tell them you plan to do several a year, but today this is project number ONE. Like anything as you gain experience, it will give you credibility which will help when negotiating with sub contractors.
I am not saying you can't do this, but there is a learning curve. You may want to consider starting with rehab on existing homes and move in to full ground-up construction after you gain experience.
Thank you Joe!
Your second paragraph is what I was looking for and is a reiteration of what J. Scott had mentioned. Its what I figured but needed some confirmation on. Im the middle man and there is absolutely no need for a middle man as you said! Just because I am supplying financing means nothing in this market.
@Johnny L. I disagree with other than you can not make money buy building new homes for sale on an individual basis. I also agree with all that you will not get a discount, why would they, you can never give them to amount of volume needed for such a discount which would likely need to be 10+ houses a year.
Your market is likely just not supportive of new construction. Investors make money on new construction infill projects by being the capital needed for the project, and assembling the team. If the numbers dont work, then the area is wrong. Infill builders are not going to build to just make the money they would charge you, otherwise they would just do nothing but customer homes and not risk the capital, they make additional profit, as so you should.
Residential building is on fire right now and building costs are rising. Heck, lumber costs are up 3x over the last year. That is adding $10-15k to a typical SFH, with no ease in sight.
Since you need alot of capital for a new construction project (~25-30% of total costs), most buyers can not do it. Thus the role of an investor or a homebuilder that builds on spec. Then a typically home buyer with 3-20% down can come in a buy it. I know in my market, I can do a infill new construction and make 20% profit on a SFH in the right areas. There are some areas around me that simply can not support new construction pricing, and the numbers dont work. You just have to be willing to tie up your capital for 6+ months on the project.
It might be helpful if you provide some numbers/data on your project for some of us to help and let you know if the costs are reasonable for your area.
Thanks Mike!
Its amazing because I see so many homes being built as spec homes and custom homes in my area of course by builders. It seems as if they do not need an investor becasue they are selling like hot cakes! As soon as they can build them they are gone. Many times before theyre even complete.
The quotes ive been getting to build without the land are between $160-$206 a sq ft. Land is on average $35k per lot. And resale is around $200-$215 a sq ft. Am 1800 sq ft home with a 3 car garage will sell in a few days for $350k-$375k.
Maybe an option is to find a GC to partner with since you plan to do this numerous times. There are many different scenarios, but one is the GC builds at their cost and then they receive a % when the home sells.
I see this totally different than a lot of responses.
There are investors in almost every city buying in fill lots, hiring builders for the construction and making a profit.
You are focusing on the wrong costs/expenses. It’s the cost of the land and the value of the home after it’s built that matters. The builder does not determine your profit.
You just haven’t found the right piece of land in the right area yet. If I was flipping a house and bought it at full market value, rehabbed it, then sold it, of course I would lose money. It didn’t have anything to do with what the contractors charged me, it had to do with me buying a house at full market value.
You need to find a piece of land that is undervalued, most likely off market. In an area where the comps would support a higher value of your build cost + lot. These deals are not sitting on the MLS waiting for a first timer to make a profit, they involve constant searching and looking over lots of deals.
Telling a contractor that you plan to do this in the future over and over, or “guaranteeing” him future work won’t help. Contractors, Lenders, wholesalers, Realtors all hear this over and over. What brings back clients is if you provide a quality service at a fair price.
There ya go this is the right answer.. I am on the hunt right now for a next year project 30 to 50 lots.. thats what i am telling the commercial brokers.. land values have to come down if they are going to get a buyer .. We have been able to raise price on our new builds to compensate .. so very lucky in this market but not all markets can do that.. B/C the appraisals will come in low.. Or the buyer cant bring the difference in to close.
AS for getting a GC on the cheap for a one time build or even two houses a year.. there simply is not enough revenue for them to do that.
Getting a fee built GC you need to have some volume 5 plus minimum is what I am thinking.. or you just are going to pay more. You may want to consider just subbing it out yourself if you think you have the skill set.. I got my GC licnese in OR was super simple just in case i need to step in I don't want to be caught .
Thanks Jay!
Land has gone up in the area by nearly 40% in the last 6-8 months! So that is definitely playing into the situation.
Im definitely looking into trying to get my GC license after reading through this thread. Of course, it will be more work but seems like an option that may be worth it to get started at least.
Builders are all so busy right now, they aren't in a position to be offering many discounts.
I did a few specs here in CO back in the early 2000's.
If you don't mind sharing, I'd be curious to hear what you're looking at for land (price, general location)? And what you are budgeting for the build?
Like Joe pointed out, a developer generally refers to someone buying large pieces of land and bringing in utilities, getting entitlements, building roads, subdividing, etc., so someone just building on one lot in an existing development normally wouldn't be considered a developer (they'd be called a spec home builder, usually a realm occupied by established builders). Developers are making money through economies of scale, usually by building large numbers of tract homes as cheaply as possible, whereas the cost for a spec home is usually closer to that of a custom home. It's hard to make money at it unless you're the builder.
Doing a modular might make sense, as someone else mentioned (modulars aren't synonymous with cheap these days either though, but can be more cost-effective for a non-builder than a stick-framed home).
Hey Steve!
Yeah youre right! They are packed with business now!
Land price is averaging $35k. The bids I've been getting back are between $155-$206 per sq ft and resale is $200-$215! An 1800 sqft home will sell for $350k-$375k within a few days
Its looking like to build infill I need to either get the land at a discount or be the actual builder which will of course require a GC license.
Im definitely looking at the modular route as well! Its something I never really put thought into.
Ok so you are trying to build your “first” home. No local reputation as an investor. You are “getting ready” to put a piece of land under contract.
How do you expect them to treat you? If you approached me, and didn’t even own the piece of land, I wouldn’t give you an hour of my time, or quote out an entire build. Sorry, just saying.
Sorry Matt didnt mean to confuse you! If you read my initial post this is what I said and was asking:
"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."
My title was just to get you to want to read the thread.
My question was more asking where does an investor fit in because I read many threads on here stating that they're able to turn a profit using a GC for spec builds!
Real Estate Agent · Haverford, PA · Member since 2020 · 9 posts · 5 votes
5y
@Johnny L. Did you only buy enough land for one home? Usually developers are building out several homes, maybe not all at once, but they have a plan to build several homes over a period of time. They also usually have more than one design. Therefore they would get bids on x number design A and y number of design B, etc.
Of course near me, most developers are their own GC's.
There's a realtor in Alabama with a You Tube channel who is developing some land for some investors. He found a GC and they are building two spec houses, the GC is has some skin in it as he's fronting some of the costs on the builds, but getting a share of the profits. The investors are covering part as well. At least that's the way I remember what they said their deal was.
Contractor · Grand Marais, MN · Member since 2016 · 249 posts · 417 votes
5y
You need to add value somehow. Gcs, including myself, have more work than we can handle. Get the land for less. That means something that needs to be rezoned, subdivided, or is otherwise quirky somehow that will still sell. The margins are just too tight to make much on a spec. Easier ways to make money on re. Last spring I finished a ground up duplex, and have a partner. We bought a undesirable commercial lot, rezoned it to residential, and we can put 10 units on the lot. Creativity and work. Supplying the money likely isn't enough. There is money everywhere.
I do have question: when you resell, do you expect the PSF to be the same as the neighborhood or will it be much more expensive than the neighborhood ? what's the value add that you bring to this property or neighborhood ?
Investor · Menifee, CA. · Member since 2021 · 48 posts · 29 votes
5y
As a contractor who has built alot of spec homes and has made good money at them my question is why not buy the land and get with a custom home builder that will "build to suit"? He does the advertising for the property and you get paid when the project is completed or structure a draw system where the builder pays you a portion at every draw etc...
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
5y
@Johnny L. What follows is coming from me as a GC/Builder with many years in development.
First advice, STOP calling yourself a developer! I guarantee it's making bad rapport right off the bat. If your talking to builders the way you are here, chanting "I'm a developer, developer, developer..... because I want to pay a GC to build 1 home". They are laughing at you inside, and outside the moment that phone hangs up.
A developer, develops, it's that simple. Your a client, your looking to build 1 home, that's NOT developing, not even close. Are you getting zoning approved? Installing roads, water & sewer laterals, negotiating utility easements, doing soil corrections, navigating environmental impact studies???? These are the things a DEVELOPER does, your just some guy asking a GC to build a home, that's a client. How you use that home we, GC/Builders across the world, couldn't care less. Sell it, burn it to the ground, run a hostel or brothel, it means exactly 0 to us.
Next problem, you trying to coax them with promises of all the work you will bringing, yet your only asking for 1 single property to be built, immediately the BS meter hits the ceiling for them and you just put yourself in the dog house, seriously. Do you know how many calls per week we get like that? We get conditioned that those blow-hards are waste of time. Now, not saying your full of it, I am telling you that's how you making yourself look. You'd be better off keeping it to the facts of "hey, I'm looking for the right builder to build my home, I got big hopes and dreams but for now it's just this 1 home".
Lastly, you gotta get real. GC/Builders are King Sh#t of Tu#d mountain right now, they don't need you or your work, they don't need anyone's really, they rule the day, fact. If your even just a somewhat ok builder your scheduled out at least a year in advance and turning down 19 projects for every 1 that you accept. Exactly how is it in their interest to take your build? That's the brutal truth of it that you need to answer, how is it in their best interest? Because your going to bring them a bunch more work, yeah your bringing sand to a beach, congratulations. No, you gotta make it work for them, it's that simple.
Your best option is to partner with a builder, give them a slice of that profit pie, as much as 49%. Fact is builders don't have endless ability to scale, labor is hard enough to get and retain to stay at size more or less scale up even 10%, yeah, good luck at that. And also, everyone IS trying to scale up, it's not that nobody wants to it's that the bodies simply are not there. So each builder is working on a calendar that has a certain capacity of builds, they are saying WHAT builds do I give a slot for, because each slot has 20 different projects begging to be it. Your best smartest move is to suck-up your pride and go kiss the ring, present the offer to be there 51% partner, put up all the capital so they will build the properties. On the upside there gonna not just build but will care about that build because it matters to them AND if you negotiate well you can get it done at net 0 so the 49% wont actually be a full 49% because your only paying cost or cost + overhead, no builder profit on build.
But seriously, do yourself a favor and please stop calling yourself a developer, it's nauseating. Developers work there arse off and take huge risk all to create a site from 0 that builders can than build upon, they don't do individual properties, they build SITES, neighborhoods, communities, cities.
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!
Saying you're an investor isn't some secret code word where people just go "ohhh I didn't know. Here is the new super special investor code word price." Nobody cares that you think you'll be doing more of these.
The contractors are treating you as what you are, some dude who wants to build a house. You are no different than any other Joe Schmo off the street.
ha ha ... and remember, the contractor has kids that they have to feed to. They still need to go to McDonalds or Habit Burger at least, so why they shall giving special treatment to us :)
