Would you do this deal?

Question

What do you think of this deal?

This a new construction ground up development.

Location : Panama City, FL

Info : 5 lots, SFR on each lot.

Cost : Cost to build is $200k per house (Builder owns the land and is looking for construction financing partner)

Return : Return would be 10% in 7 months once the house is sold

Risks : Build shouldn't** but could take longer than 7 months. Builder is able to get all trusses and material now with no wait so that will make the timeline be somewhat on track. (Nothing is perfect in construction)

Pros : New construction for residential homes in this area has taken a steep decline. Once these homes get put on the market there will not be much competition in terms of new construction. The builder owns the land. Investor could finance one build or all 5 at once, possible return of $100,000 in 7 months. These lots are ready to build on.

Build : The homes will be 3bd/2ba or 4bd/3ba all around 2000 sqft.

Interested to see what everyone thinks.

Eliott Elias · Answer

How is "new construction has taken a steep decline" a pro? You have more to loose than the builder. Include this in your cons: what the market will look like in 7 months.

Peyton Saluto · Answer

Hey John I would love to talk to you about new construction one day. We have a lot on the West End of the beach that we are going to develop this year

John Bryant · Answer

I would also question those numbers on cost to build. We build extensively in the Bay county area. Cheapest we ever got anything built is right at 120 sqft. That was a couple years ago now we are around 150 sqft now. Your GC is saying 100 sqft?. sounds to good.? or he's gong off old numbers?

Jonathan R McLaughlin · Answer

not my area of expertise. Projected return feels light for the risk. I wonder what others think?

1% interest also feels low when you can make 4.75% on a 6 month treasury note. What are the other terms of the partnership? What happens if things go south? Do you have a lein on the land?

Napoleon DeCiutiis · Answer

As a prior PM for a local construction company here, I can say that we are about 4-5 years behind on construction in Panama City.  I am seeing new builds not even hit the MLS and are going for cash.  @Eliott- I think what Peyton was saying is that the "PRO" is that not many people are building (It's been hard to find workers) so this is a good opportunity that he and his dad have, as they actually have a full crew. (I know both P and his Dad). This year I am building 4 homes at a 6-8 week turnaround because I have a full construction crew working for me.  There are very few of us in Bay County who can say that.

Callaway Pate · Answer

I've seen a couple of articles around BP about new construction reaching a surplus soon but I don't know what it's looking like in Panama City. If you have rentals as an option to weather any potential downturns then it may be advisable to proceed with construction. It could complicate things if housing is oversaturated in 7 months and now all that capital is tied up and can't be used to purchase discounted deals. My idea would be to build and rent enough houses to cover the carrying costs of the land and keep the rest of cash on hand. You obviously have the best read on the situation, so I'm sure you'll make the right call.

Best of luck!

Peyton Millirons · Answer

Yes rentals are definitely an option! The builder will also pay 1% interest until the home is sold.

Thank you Sarah

Sarah Beilke · Answer

Hello @Peyton Millirons on paper you are looking good but my big worry with the project would be the time for completion.  I am a broker in Florida and while I don't know your particular market what we are seeing in my area on the east coast is that builders are starting to sit on inventory and taking doing some pretty major price cuts.  I would take a good look at the current new home inventory that is on the market and see how you stack up compared to them.  This market is changing very quickly and for anyone to try and accurately predict where we will be in 7 months is almost impossible.  If you got into a situation where you could not sell them for what you were anticipating at the end of the 7 months, could you turn them into long-term rentals as a backup plan?

Would you do this deal?

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