NEW. Own lot, have builder ID'd. Spec to build. How to structure?

Question

Hello, I'm new to this site and see alot of good info!  My wife and I came into a little money about 10 years ago. Bought a few lots in a lake area of Texas.  We also had a second home there. Sold that and some lots. Have 3 left. Not been successful with realtors for last 5 yrs. Partially because I got caught up in the good economy and paid a little too much.  Have come to an agreement with my original (2nd home) builder to build a spec home one of the three left.   He's been a builder for years in the area.  Built alot of spec homes in past. Has agreed in idea but have not contracted a deal yet.  He is not interested in funding the build, as he's used to the investor doing the whole draw thing and won't likely be putting him on my existing LLC.  I'm okay with it, but need solid ideas/options on how to do a profit split or cost + ?%.  I worry about the true  'costs' as he's been doing this a long time and I'm a neophyte. I don't think he'll take advantage, but money is money and I need some ideas of the best way to structure.  Appreciate any help!  Mark

Jay Hinrichs · Answer

@Brandon Raeburn  never seen performance bond on off or a few spec homes.. not sure many builders could actually get these.. I get them for cities when I am building a subdivision.

they can be pretty hard for most builders to get unless they are very successful and have good financials which can be a challenge

how we handle these is we hire the GC for a flat fee 10 to 15k per house... pay them at draw time a pro rata share with the major share due at CO ....

We pay all the sub contractor bills direct to make sure they get paid.... subs not paying suppliers etc is a pretty real risk. so got to be careful there

Brandon Raeburn · Answer

Hey Mark, congrats on the new build. First, the true cost issue can (should) be solved by having multiple quotes by other builders and general contractors. Second, you can use a website called Homewyse dot com to see what true cost are in your local market (ie; materials, labor, etc). Also a book produced by the DEWALT tool company called Construction Estimating will give you the basic to feel confident at the pricing table.

After picking the best price quote  for the project you'll have a number of different ways to structure the draw schedule.  Set completion marks that need to be met in order to receive further draws (ie: completion of foundation draw 1, framing draw 2, ruff plumbing draw 3 etc). Or find estimated time scale for finish project and divide into even monthly payments. A draw schedule of five to seven payments is common for a new house.

Lastly, you can require the builder to have both a bid bond and performance bond before being awarded the contract. The bonds will require the builders insurance company guarantee repayment of  project funds if he fails to meet contract terms (ie: complete the project).

Hope this helps, and I wish you and your wife the best of luck.

Jay Hinrichs · Answer

95% of GCs in our market would never qualify for those high of bonds must be a special product you have there.

our subs don't get paid but once a month and nothing up front if they cant carry the job they wont be doing any new construction.

their  invoice in by the 25th paid on the 10th.  if they don't get the invoice in by the 24th they wait 60 days..

so its regional  for sure.  also one thing our contractors have going for them  materialman or contractor lien is a super lien it jumps the bank.. so not many contractors don't get paid.

Brandon Raeburn · Answer

In NYC, you need $25k in your bank account, $5 million insurance policy, and atleast a $2 mil bond to work on a home (if its worth $2mil or less, commercial requires the cost of the property)  to recieve a GC license. I generally use the bid bonds for gov't contracts however many home owners throughout the city and Long Island will ask for bond paperwork. Also we generally wont start work unless we have 50% (up to $10k) and 30% ($11K and over) of the contract. If its a  $5k or less job you'll need to pay in full before I take a tool off my truck.

Jay Hinrichs · Answer

you have to have a small bond to get your GC license but a project bond is quite a bit more involved.. and I usually get them for the public improvments the city requires them.. these are 500 to 1 mil dollar bonds and not really easy to get

Brandon Raeburn · Answer

Wow Jay, you guys are pretty lucky over there in Oregon. Even the little guys need to get the bonds to (legally) do work over here. Though we only need 20%.

Jay Hinrichs · Answer

ps we do it this way since we own the lots and we are getting the vertical loans etc etc.. just a fee builder is what we look

for .. and it might not be practical if your only building a few homes we build 20 to 30 at a shot so our GC is making 200 to 400k a year working for us.. I could do it cheaper but he takes all the liability and warranty claims within his fees.

Mike Reynolds · Answer

This deal seems like a no brainer for him. He has nothing but his labor in it and you have all the money and land? That is unless he has his own crew and pays them out of his pocket. Dont sell your position short because you have never done this. I have been a builder all my life also and if someone approached me with a deal like you offer I would jump on it everyday.

Unless he pays his own people out of pocket you should take the bigger share. If he wants money to pay for that out of pocket with the draws be very careful not to overextend.

NEW. Own lot, have builder ID'd. Spec to build. How to structure?

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