Can I make this deal work?

[Carl Schmitt]

Hi everyone,
I have a potential deal that has a few different pieces involved. I'm looking for input on how(if possible) to make this deal work. Here's the situation... My mother is an RE agent and has a client looking for a home and there really isn't anything on the market in a neighborhood they like with a layout they like. These clients have a pretty good DP, great credit and are pre-approved. Here's where it gets creative. There's a neighborhood in town they love, in their price range, but the only house for sale is a colonial, they want a ranch. There is,however, a piece of land for sale on the street. Long story short, they don't want to be involved with building a house. They would love to have a brand new house, though. If we were to buy the lot, put up the house, and sell it to them, the clients would love it.

Here's the numbers:
Land cost = 50k
Build cost = $100/foot to build (from contractor who built spec houses for my lawyer)
House will be 1450 square feet
Comps are in the mid 300's, client's stated if we could do it for 315k, they'd sign a check tomorrow.
My numbers between land and build cost leaves 100k in gross profit (not counting hold costs of course).
Our plan was to put the land under contract, get a contract with the builder, and a contract with the end buyer client for 315k with a significant down payment upon signing. We would cover earnest money on the land to lock it up. Then we want to find a private lender to cover the balance of the land and the build cost.
First, is all of this legal? If so, does this look like a deal that would be attractive to a private lender? How would you compensate the lender?

[Will Barnard]

Yes, this is legal. Second, if it is only worth $300k, how do you expect the house to appraise for $315k (unless your buyer is all cash)?
Does this look attractive for you? yes, To a lender? Perhaps, but depends on how much skin in the game you have.
Looks like a spread worth doing to me.

A few questions for determining to move forward would be time involved to get through the red tape in your area, how long from start to finish, any costs other than the dirt and $100 per sq. ft.
Type of financing the buyer will be using.

For a lender: Likely will not go beyond 70% of value, and if you plan to spec build, you may want to check out some local banks and see if you buy the dirt, perhaps they will do a construction loan and cut your lender costs in half. Banks will be cheaper than most private money.

[Carl Schmitt]

Thanks for the response Will.
The comps are roughly 350k so we're not too concerned with it appraising at 315k. As far as red tape, one partner in the deal is a real estate attorney who handles all my mothers closings and has spec built in the past. We're hoping that will cut down on the planning
time.

As far as other costs, were planning on holding costs of course. Idealy, these costs will be low because Our goal would be for the private lender to be a silent partner and accept a percentage of the profit as payment, rather than monthly interest payments.
For house designs, my coworker is an architect who ran a custom home building company for 10 years. He's willing to draw up designs for a fraction of normal cost.

The buyers will be using a VA loan. They are not doing 0 down, though. They don't want to get into construction loans and managing contractors. They'd prefer to just purchase the final product.

When you say 70% of value, how do you determine value on a piece of raw land with no home on it yet? Would you use the end sale amount as your ARV(for lack of a better term)? If the 70% is based on 315k, that puts us at 221k. 65% would be 205k. If I'm using the correct numbers, we would be all in at roughly 65%, with no skin in the game.

What are terms like on construction loans? How about the approval process? In the past, one partner would put up the money/financing, we would handle the leg work and split the profit. Our typical money partner is basically tapped out at the moment though because he has been buying everything he can get his hands on. Even his bank is starting to cut him off on new loans, both commercial and residential. This is why we were thinking private money.

Would having an accepted contract on the land, a contract with a builder, and a contract with the end buyer before any private funds transfer make this deal any more secure to a lender? If we covered the earnest money on the land and got a large DP from the end buyer before construction, would you consider that skin in the game? If we did 10% EM on the land, and 10% EM on the end buyer contract, there would be about 36k of the 200k needed before ground is broken. The investor would fund the remaining 164k. Even if the end buyer walked when the house was complete, a lender would have 164k loaned on a house that will sell to someone else for 315k. Seems like a no brainer to me, but I also don't have 165k to lend so what do I know. Thoughts?

Sorry for the long response, and thanks in advance.

[Will Barnard]

Carl, based in your explanations above, I don't see having any problem with a private lend willing to jump in on that. Again, the actual total time will be part of the determination, but your numbers do look great.
If you do place 10% down on the dirt and get a non refundable, and released EMD of 10% from end buyer based on $315k exit, I don't see a problem.

In fact, I could even be interested in such a deal.

Additional question, if this home will be worth $350k, it appears you are giving up $35k in spread to these buyers. While it is a benefit to have a buyer already in place, that is quite a price to pay for it.
Any chance getting them to $325k?

[Bill Gulley]

On your purchase of the land you'll need to have the owner subordinate the lot with only a 10% down and contract to sell. With just a contract to purcahse you can't encumer the property and likely won't get permits unless the land is in your name or the owner subordinates for the build. As to title, the owner is actually selling to you with a new house on it. This is a closing so depending on how you structure this, you might be buying at 300k and then immdiately selling at 315K and by doing so, cause appraisal problems due to the recent sale regardless of what comps might be. Not sure you were closing on the lot or just locking it up as you mentioned. :)

[Carl Schmitt]

Will,
I appreciate your input. I thought everything looked good, just wanted a second opinion before wasting anyone's time.
As far as coming up to 325k, I'm not 100% sure. I have never spoken to them as they are my moms client. All of the numbers are word of mouth from my mom and my lawyer speaking to the builder on the phone, nothing signed yet. I will gather more exact figures and if all still looks good, we will put the land under contract, get EM from the end buyer and find a lender. Thanks for the interest, I will shoot you a pm when we get to that point.

Now, worst case scenario, Just because I like to be conservative, if every number went the wrong direction.... If build cost goes to 125/ft, or resale is only 275k, when do you walk away and not do the deal? Either as a lender or if you were doing the deal yourself.

[Carl Schmitt]

Bill, I missed your response, sorry! But ideally, we lock up the property with 10% down, and once the end buyer has given their deposit, the lender's funds would purchase/close on the land, fund the construction, and once complete sell the house with the previously purchased land as a typical spec house. I guess the only difference is that we would have an end buyer under contract prior to completion for lender security reasons. Rather than using our own money as skin in the game, we would use the end buyer's non refundable deposit.

[Bill Gulley]

Great, then this is a standard "contract build", good luck :)

[Carl Schmitt]

I'm glad to hear you call it standard! I suppose the only thing out of the ordinary is how we want to fund it, and that we aren't builders by trade.