Crowd Funded New Construction Diary

85 Replies

Thank you @J Scott for starting the new construction diary.  It's been our inspiration to do one of our own now.  In this thread we are going to track the progress of our first Crowd Funded new construction project in Austin, TX

1122 Linden

So let's play a little catch-up since we've already done quite a bit of work getting to where we are.

DEAL ANAYLSYS

So the main thing we're looking for here is a 20%+ gross margin on the total cost of the project from a financial point of view.  Trees, flood plains, and other due diligence items can impact costs and the size we can build, but we'll get to those later.  Exits for new construction in the area show an exit price of $235/sqft.  The lot size is 181' by 51' = 9231 sqft.  The 40% Floor to Area Ratio regulation allows 3692 buildable interior square feet.  Since the frontage is greater than 50' and the lot size is greater than 7000 sqft, the City of Austin will allows us to build a duplex.  So we can do roughly two sides at 1800 sqft each.  $235 * 1800 = target exit price of $423,000 per side.

Our project cost is $110/sqft = $110 * 3600 = $396,000 for both sides, $198,000 per side.

7% in closing costs is $59,200 which includes both sides.

There were no demo costs on this lot so we don't have to add anything there.

This makes our max land cost to reach a 20% gross margin $260,000.  We were able to purchase the lot for less than that price, so it's good to go assuming we don't have any gotchas in the due diligence.

DUE DILLIGENCE

These are the items we check for in doing a new construction project.  They may differ in your area, so keep in mind this is specific to Austin.  Some may be the same, and there may be others in your market that we don't deal with.

1. Flood Zone

We check the City of Austin GIS database on line to see if there is a flood zone on the property.  There are two zones to worry about.  The 100 year and the 25 year.  If there is any 25 year flood zone on a property, we'll likely pass unless it is very small and only at the edge of a property and the house can be well above it.  A 25 year flood zone will trigger flood insurance for sure and is a big warning light.  The 100 year flood zone is ok in some areas.  Higher end buyers may not be willing to buy something in a 100 year flood plain, but lower end home buyers may be fine with it.  If any part of the house is in the 100 year flood zone, we always build the finished floor elevation to be 1 foot above that elevation, so even in a 100 year flood event, the house will stay dry.  In such a case we will use a pier and beam design, as they can be cheaper to build tall versus a slab.

1122 Linden is not in any flood zone, 25 or 100 year.

2. Lot Size

Here, we are looking for how much space we have to build and how big of a house we can build. The rules for Austin for SF-3 zoning (most common residential zone) are that you can build 40% of the lot area as enclosed space. So it's pretty easy to figure out how big of a house we will be allowed to build. If the lot is over 7000 sqft and has 50' or more of frontage we can build a duplex which increases the value of a lot substantially assuming that duplex condos sell in that market. In Austin we don't sell a duplex as a single transaction. We make a small HOA and sell them off individually to retail buyers. This doesn't work in every market, but it does in East and South Austin.

1122 Linden is 9200 sqft, a very large lot that gives us lots of options.

3. Trees

The City of Austin has a tree code that prevents building too close to some types of trees.  Our architect will do this feasibility study to determine if trees can be removed or built around.  Some trees can be removed, others if large enough will make a certain amount of space around them unbuildable.  There are rules for building a slab foundation vs a pier and beam foundation near a tree as well.  You can build pier and beam closer to a protected tree than a slab because the impact to the root zone is not as significant.  A tree in the wrong place can make some lots entirely unbuildable.  So this is an important step.

1122 Linden has some trees, but they are mostly on the borders of the lot.  Given the large size of the lot we can work around them.

4. Survey

It's always nice to get a survey but we rarely get one from the seller, much less one that is a full tree and topo survey.  The tree survey is required for the aforementioned reason.  The topo survey is important for determining the exact elevation lines if a flood zone is in play as well as determining the slope in the lot.  The City of Austin also has what it calls McMansion rules that prevent you from building above a certain height.  However if you have even a slightly sloped lot, where the top of that virtual tent is can mean the difference from being able to build one story or two.  So if you get this wrong, even though you have 40% FAR you might not be able to build two stories to achieve it.  This is where a good architect comes in to ensure that a design can fit inside that virtual tent.

This also creates another problem at the foundation.  To maximize your space you may be tempted to lower the elevation of your foundation.  On a super flat lot not in a flood zone, this is probably ok.  However if you have any slope to your lot there is going to be water drainage when it rains.  You must be very careful that you can still achieve 6 inches of exposed foundation  regardless of the slop of the lot to ensure proper drainage, otherwise you will end up with a leak and a wet house.  Ripping out carpet and hardwoods after the fact is a messy and expensive process.  So making sure your drainage plan is sufficient is paramount.  The topo survey will help you figure this out.

The 1122 Linden survey shows a very flat lot with all of the trees marked.  We may have to use some pier and beam near the trees, and slab elsewhere.

5. CC&Rs + Deed Restrictions + HOAs

Many of the lots we look at were platted in the 1930s, 40s, and 50s.  Some of the deed restrictions are actually on the plat!  So you have to look everywhere.  These restrictions may include items like only single family homes may be built in this neighborhood, or the servants quarters must be separate, or no people of color are allowed to live here (they are that old).  That type of restriction is obviously outdated and illegal.  The ones we care about are ones that restrict building size or type. 

If you don't pay attention to these, you can risk building your project and have someone complain half way through to the city.  This can lock your project up and potentially force you to tear it down.  If no one complains, and you get it done and sold, you got lucky.  I've seen some builders do this, but I would never risk the $400,000 to $650,000 required to build some of these projects on getting lucky.

For 1122 Linden, there were no restrictions on building type or size.

PRE STARTS

The key expenses you need to cover in addition to the land acquisition are as follows:

1. Architectural Design - We include this cost in our $110/sqft.  This is usually a fixed $/sqft for this service.

2. Engineering Design - We include this cost iin our $110/sqft as well.  This is also usually billed in $/sqft of design.  It is very important to use a good engineer with good insurance and a long track record.  Money spent on good engineering is better than money spent on a warranty in my opinion.  A good foundation and framing design will keep you from having a call back 9 years from now (Foundation warranties are usually 10 years) with a costly failure.  Don't skimp on foundation and framing.  Do it right, and use the engineer's insurance to offload your risk for a foundation failure.  Your reputation is on the line here too.

3. Soil analysis - This is required for the engineer to be able to build the right type of foundation.  East Austin has inconsistent soils, so this is particularly important where we build.

4. Permit fees - The City takes their cut

5. Utility hookup fees - If you are building a duplex where a single family house used to be, you are likely going to have to upgrade the water and waste water taps.  If it is single family, you may be able to simply re-use an old tap and save some money.

6. Builders Risk Insurance - This can usually be purchased in 24 hours if you have a good relationship with an insurance company, so I usually wait to buy this almost the day before construction starts or the day before we close a loan with a lender which will want to make sure they are an additionally insured on the policy.  I only buy insurance for my cost to build, not on the retail amount.

7. Demolition - If there is a pre-existing structure to demolish, you will need to pay for this as well.  Be sure to check with the title company and your lender that it is ok to demo any structure before a loan is issued.  The reason for this being that banks always want to be in first position on the property and a mechanics lien from a demo company would put them in second position if you don't pay the demo company.  Banks will usually be ok with this if you get a lien release along with the work and have a good relationship with them.  Before you demo, make sure to disconnect all of the utility lines!  A good demo company will do this for you, but as the owner, you may need to call the utility company to start the process.

1122 Linden has covered all of the above steps.  We have crowd funded the capital for the entire project so we do not have a bank for this project.  We have purchased the land, designed a building, had the foundation and framing engineering done, created a permit set, submitted it to the City of Austin and we expect our permit to be approved this week!

There is an old slab that needs to be removed which we plan on doing around the time we get our permit.

The rough schedule is as follows.  November and December are holiday months, so those are typically slow in the building business.

7/10 - Receive permit

8/15 - Complete Foundation

9/15 - Complete Framing

10/31 - Complete Mechanicals

12/15 - Complete Finish out

1/15 - Complete punch list, clean, photo, and list

Originally posted by @John Blackman:

... The lot size is 181' by 51' = 9231 sqft. The 40% Floor to Area Ratio regulation allows 3692 buildable interior square feet. ...

In my area there is a certain percentage of the parcel that must be water permeable. Within that limit, interior floor area can be gained by simply building up (so long as height restrictions if the zoning are in compliance). Sounds like your town does things a bit different. Care to elaborate on that a bit?

@Steve Babiak  Austin only allows so many sqft on a lot and has height restrictions on top of that.  They mandate a virtual tent shaped like a traditional house that your structure must fit within,  So buildings with a flat roof are still limited to the height than can fit inside that virtual tent.

The FAR is strict as well.  Even if you maximize the shape under the tent, you can't go over 40% of the lot size for interior finished space.  There are some exemptions which can allow you to get in attics but when you start using them, the city pays extra attention to your permit, read more processing time and triggering comitte reviews.

Got it. So do you have restrictions on water permeable surface area?  If not, imagine somebody deciding to pave a significant percentage of the parcel to park vehicles, boats, etc. 

Yes there is a impervious coverage restriction as well which is also 40% for the building and 45% if you include driveways, car ports, decks etc.

What's the psf exit difference on a duplex vs a single family in your area? If you did a sfr would you be able to get more that $235/SF?

Also is the $110/psf cost from foundation up it are there site work costs included there as well?

@John Blackman  since this is the thread for the "crowdfunded" deal, can you tell us 

  • How much of your cash did you have into the deal before putting it out to fund?
  • Did you have all of your permit approvals completed before listing on site? 
  • Will you be sharing the details of crowdfunding from start through funding? 

Your company is the one out front on the crowdfunding of new development, and I know I have been contacted recently by a slew of others in areas with tight markets looking at new construction, and interested in crowdfunding, and other creative ways to finance. Thanks John, I think you far surpassed Bryans goal for posts! 

Good questions @Karen Margrave . Wanted to get the deal basics out first.

Also would be good to know which platform you used and why. Their fees.

How much and what info went into your package on the crowdfunding site. Comps, construction bids, personal financials, ect.

Regarding impervious coverage questions above we do really strange things like "stripe" the driveways, get the CO, and THEN fill in the rest of the driveway to maximize interior footage.  You have to do crazy things in the COA to get the footage you want with the magical tent items and such.  

Originally posted by @Derek Carroll:

Also is the $110/psf cost from foundation up it are there site work costs included there as well?

 $100psf includes EVERYTHING else:

-Architect costs

-Interest carry

-Fencing

-Etc.

Everything save the cost of the dirt and buy-side broker fees if there are any.  

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How much of your cash did you have into the deal before putting it out to fund?

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We structured this deal so our development team put up $10k in the project in total and we raised preferred equity for the whole deal. Going forward we’ll tranche debt and equity to limit preferred equity costs and utilize the money when it is needed for the project.

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Did you have all of your permit approvals completed before listing on site?

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No

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Will you be sharing the details of crowdfunding from start through funding?

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I am happy to share more, but asking specific questions would be helpful since there could be 10 other separate threads on this topic alone.

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Also would be good to know which platform you used and why. Their fees.

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I contacted pretty much every platform out there over the last 6 months and iFunding fits the best for us for a number of reasons. First, they do development deals. This alone excluded most of the others. Second, they know what they’re doing. This excludes MANY of the others too. Third, they can raise money. Fourth, the fees are in line with the value delivered. People are often very fee-centric without asking what value the portal provides.

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How much and what info went into your package on the crowdfunding site. Comps, construction bids, personal financials, ect.

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The packages took about 1-2 weeks to put together and this is really because we keep very good records via Dropbox. Most of the information they needed was in our Dropbox. We spend a lot of effort and time on the pro forma and deal structure and a lot of the other material is pretty easy to serve up by sharing our standard Dropbox folder with the portal. 

@Derek Carroll  The exits are about the same for a duplex condo vs. a single family house in 78702.  The real factor in $/sqft is how close you are to the city center.  There are duplex condos with higher $/sqft exits than single family homes because they are 0.5 miles closer to downtown.  Finish outs and size of the house matter as well.

@Bryan Hancock  of course did a great job with the other questions.

@John Blackman I look forward to this thread! Could you tell us how you acquired this property? Direct mail, MLS, etc?

@Bryan Hancock  , @John Blackman  

 Thanks for sharing some of your experience with iFunding. It's good to know they do construction deals. You said you raised 90% in preferred equity through the site. I was wondering for MF investments if a structure like this would work with them: 65% bank financing, 25% crowdfunded (equity) and 10% operator equity. Their site says they prefer their operating partners put up 10%-20% cash equity. Can that equity come in from a separate fund raising effort from other accredited investors? It looks like they stay away from debt of what I've seen as crowd-based HMLs. Thoughts appreciated.

@John Blackman  or @Bryan Hancock  once funded, what is the loan term? Do they allow you to set up draws to work with your specific situation, or do they have set draws? 

Bryan said to ask specifics. Please feel free to cut and paste:

What is the process? 

Buy the land (or is it financed in the deal)? 

Preliminary design and rendersings for package or completed plans with all architectural, engineering, etc., soils tests, and ? 

Does Ifunding require actual appraisals or ?

Submit all the necessary paperwork to Ifunding for approval 

Then they put on the site and you wait to see if it will fund? 

Do you have a backup plan in case it doesn't fund? 

What percentage of those funding your deals come to ifunding through your social media presence, and what percentage comes through theirs? 

As a rule of thumb we do a one year construction loan when using a local bank.  They usually charge a point and some fees up front, then we make payments on the balance drawn.

Draws are tricky, because banks want to pay for completed work only.  But if you are bringing a lot of equity to the table in terms of the land cost, you may be able to get the bank to pay some funds up front as long as you keep your loan to cost ratio underneath the bank's requirements (usually 70% to 80%).

If your dirt is cheap, you will need to bring the first draw to the table so that the bank is only paying for completed work.

Typically we do around 8 draws.  This keeps the cash exposure to a minimum and keeps the GC from having too much cash on his hands.  They usually break out something like this:

1 - Foundation

2 - Framing materials and labor (largest draw)

3 - Windows and doors

4 - Mechanical start

5 - Mechanicals complete, insulation, drywall start

6 - Insulation complete, cabinets and trim start

7 - Cabinets complete, trim complete, start fixtures and flooring, start landscaping

8 - Final draw, GC retainer, all done.

Buy the land (or is it financed in the deal)?

We always buy the land in cash.  You have to in our market.  No seller will go with a financing contingency.  This also provides equity for the bank.

Preliminary design and rendersings for package or completed plans with all architectural, engineering, etc., soils tests, and ?

This is raised along with the capital for the land.  We have to pay for all of these to get the loan.  A bank wants to see a complete set of plans.

Does Ifunding require actual appraisals or ?

No, they require all of your due diligence and comparables.  Your track record weighs heavily here as well.

Then they put on the site and you wait to see if it will fund?

It is not a magical pot of investors.  If you show up to any portal with no network of investors you are not likely to fund your project.  You need to bring your own folks too so that you get a running start out of the gate when your project is listed.  The crow funding portals fill the gap, introduce you to new investors, and are great at helping you grow your brand.  I would try to get a soft commitment of half your raise before listing on a portal.

Do you have a backup plan in case it doesn't fund?

Of course.  If it doesn't fund, then we go to a traditional small bank for financing or simply use our own capital.

What percentage of those funding your deals come to ifunding through your social media presence, and what percentage comes through theirs?

This is hard to say.  I would guess 50/50, maybe a little more from Bryan's network.  That may change over time as we deliver returns to our investors.

@Bryan Hancock   i see that you had most of the materials required for the package already. but what did they ask for?

Comps?

Personal financial statements?

Minimum development experience?

Did you have to put in proof of construction costs with proof of bid?

Did they require information on the GC (experience/financials?)

@Paul Lopez   did the banks ever have a problem that a majority of the equity was raised and not directly from the borrower? Did they require information on the other equity providers?

@John Blackman @Joshua Dorkin i see that my question above (which you answered again) could have been avoided if i fully read your full post, which for some reason didnt load for me.  Josh, when i'm in the iphone app i cant read the full posts when someone does a long post like this.  for some reason my display cuts it off halfway and i couldnt even tell.  

John, Bryan,

When did you actually time your $10k in expenses?  Was it upfront before any of the preferred equity? Also, did you purchase the land prior to starting or did you just have it under option?

@Derek Carroll  I was asking about iFunding's requirements, not from a specific deal. If the bank has 65% then the expectation is the remaining 35% equity from the borrower. 

Originally posted by @Gautam Venkatesan:

@John Blackman I look forward to this thread! Could you tell us how you acquired this property? Direct mail, MLS, etc?

 We found it through a local broker that we work with on many deals.  

Originally posted by @Paul Lopez:

@Bryan Hancock , @John Blackman  

 Thanks for sharing some of your experience with iFunding. It's good to know they do construction deals. You said you raised 90% in preferred equity through the site. I was wondering for MF investments if a structure like this would work with them: 65% bank financing, 25% crowdfunded (equity) and 10% operator equity. Their site says they prefer their operating partners put up 10%-20% cash equity. Can that equity come in from a separate fund raising effort from other accredited investors? It looks like they stay away from debt of what I've seen as crowd-based HMLs. Thoughts appreciated.

 I can't comment about your exact deal because I don't work for iFunding, but the capital stack looks sane so I think they'd consider it.  A lot would probably depend on your track record and whether or not they think the deal will sell with that stack.  It would also depend on how likely you are to raise the equity or debt needed from the site given what your'e willing to pay for the money.  

We are about to do our first debt raise with them.  The founder's background is in equity raises, but they recently brought on Richard Zahm to help with debt and other types of financing too.  I am not sure what you mean by a separate fund raising effort from other accredited investors.  I am not sure what the "other" means in this context.  

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…once funded, what is the loan term? Do they allow you to set up draws to work with your specific situation, or do they have set draws?

//End Quote

There isn’t a loan term. We were raising equity. If you do a debt raise you could define your loan term along with specifics relating to extensions, etc. Draw details would be included in details for the raise. Provided investors agree to the structure you propose you can set the draws up any way you want. I am sure iFunding or whatever portal you use will tend to want to minimize draws to minimize overhead and paperwork if possible.

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What is the process?

//End Quote

Send them a deal and talk through the process. It is pretty straightforward and I will let the iFunding folks on BP talk you through their process. Most of the portals do a pretty decent job of screening from what I have seen, but their processes are all different.

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Buy the land (or is it financed in the deal)?

//End Quote

For this deal we bought the land with cash we raised equity for. You could “finance” some or all of the investment with equity or debt provided it makes sense and you can sell your investors on it.

//Quote

Preliminary design and rendersings for package or completed plans with all architectural, engineering, etc., soils tests, and ?

//End Quote

We did a lot of this work while we raised the money for this project. In fact, the deal fully subscribed in about a day when we put the renderings up near the end of the raise. Pretty pictures are important ;-)

//Quote

Does Ifunding require actual appraisals or ?

//End Quote

No. They require things to be rational. Appraisers are pretty worthless IMO and I am sure many of my east Austin developers would agree with me.

//Quote

Submit all the necessary paperwork to Ifunding for approval

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For this deal….yes. It is difficult to know if you’re talking about crowdfunding in abstract or this deal specifically. If you run a deal through a given portal they’ll need to sign off on it though.

//Quote

Then they put on the site and you wait to see if it will fund?

//End Quote

You could. A better approach is for the developer to help sell it to their list, etc. In general people thinking that they can post a deal and the money will wash all over them are mistaken. It should be a group effort and the developer should procure investors as well as the portal.

//Quote

Do you have a backup plan in case it doesn't fund?

//End Quote

Yes, but you wouldn’t have to if you don’t mind losing your earnest money or credibility if the deal doesn’t fund. A lot depends on your deal scenario. If you owned the land outright you would have tons of other options to finance it if it didn’t crowdfund.

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What percentage of those funding your deals come to ifunding through your social media presence, and what percentage comes through theirs?

//End Quote

I would venture to guess we raised 70 percent of the capital for this deal ourselves, but iFunding raised the rest and all of the capital is needed to fund the deal. They also helped to herd the cats, get Form D filed, etc. This sounds simple, but it is A TON of work. Well worth it. 

//Quote

…I see that you had most of the materials required for the package already. but what did they ask for?

//End Quote

A ton of stuff. I don’t have the list handy, but it was all logical stuff.

//Quote

Comps?....Yes

Personal financial statements?....No. This is an equity raise

Minimum development experience?....Yes….this is implicit in who they agree to crowdfund deals for

Did you have to put in proof of construction costs with proof of bid?....No. They only work with people that know what they’re doing based on their background checks and diligence

Did they require information on the GC (experience/financials?)…..Yes

//End Quote

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When did you actually time your $10k in expenses? Was it upfront before any of the preferred equity? Also, did you purchase the land prior to starting or did you just have it under option?

//End Quote

We put the $10k in on this deal when we started the raise. We just had the land under contract and were outside of our option period past a lot of the critical feasibility work. I wouldn’t have brought the deal to crowdfund and wasted everyone’s time if the feasibility wasn’t checked out. We could have purchased the land on our own if the deal wasn’t successful, but we raised equity on this one for the land purchase. We’re not doing that any more given how long we have to wait out the city permitting process. Going forward we’ll crowdfund debt for the vertical construction and use a small regional bank to finance the deal if we are unsuccessful with the debt raise. 

 One final question, one of you mentioned that the first deal was equity financing, and the next you will be using debt financing, can you explain the differences and why you are choosing debt for the next project?  More control, less cost, or ? 

I know I have asked a large number of questions, but as a moderator, I see members asking these questions too, and think this is a great thread to help others see your deal, along with the thought processes, etc. of active developers, investors. 

@John Blackman  

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