Diary of a New Construction Project

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Back in March 2013, BiggerPockets and J Scott collaborated to release two books -- The Book on Flipping Houses and The Book on Estimating Rehab Costs (check them out here if you haven't already). As part of the book package, J was planning to do a detailed case study of one of his renovations (even more detailed than he does for most of his projects on his blog). We decided that instead of doing a case study only for those who purchased the books, he'd instead do one publicly here on BiggerPockets.

In this thread, J is going to provide a practically day-by-day diary of his first new construction project, from acquisition through sale -- including pictures, spreadsheets, invoices, bids, etc.

We hope you find this valuable! I know that I'm planning on following it closely so I can pick up a thing or two.

1/5/14 Update: The project is complete . . . read on!

2/19/14 Update: We've taken all the content of this thread and converted it into a free ebook for everyone who may be interested. Get your copy here: Diary of a New Construction Project Ebook

INTRODUCTION

I'm currently working on my first new construction project in downtown Atlanta (with a partner). While we both have a lot of residential rehab experience under our belts (over 100 projects between us), we have absolutely no new construction experience. The purpose of this thread is to chronicle in as much detail as I can, the process of acquiring an existing house, tearing it down, designing a new house, getting permits, construction of the new residence and finally the staging/listing/sale of the house.

My hope is that this thread will end up being part case study, part diary and (if I don't screw up too badly), part textbook. I plan to provide links to everything that might be useful throughout the process -- pictures, videos, budgets, schedules, plans/drawings, contractor bids, invoices, etc. And if there's anything I don't provide that you want to see, just let me know.

As of this writing, I'm currently about 4 months into this project, but we haven't even started to build yet (you'll see why as we move through the thread). I'm planning to start at the beginning (I've been keeping copious notes), and over the next couple months, I'll try to post updates at least several days per week, and hopefully catch up to real time by the end of the project.

Lastly, I hope this thread will be interactive. There are a lot of BP contributors with new construction experience (@Rich Weese , @Karen Margrave, @Aaron McGinnis and many others). I hope they'll jump in and provide insight, and I hope others with less experience will ask questions and help us all learn from one another. And again, if there's anything you want me to provide in this thread that I'm not already providing, feel free to ask!

DAY 1: BEFORE PICTURES & DESIGN IDEAS

I met with my partner at the property today for the first time (we closed on the purchase yesterday). The lot is just under .25 acres -- 50' wide x 200' deep and is a couple turns off a main road and just about 100 yards from a major highway.

We'll be knocking it down, so it doesn't really matter, but here are some BEFORE pictures of the existing house:

We've determined that we will demo the structure, keep the existing cinder block foundation, floor system and crawl space, and then build an additional foundation on the back to expand the footprint. The new house will be something like a Cape Cod style, with a full first floor and a smaller second floor. Total square footage will be about 2000 square feet.

We have no idea what our building costs will be, though we've heard everything from $60-120 per square foot for this area.

In my next post, I'll lay out a preliminary analysis and budget...

Originally posted by J Scott:
We have no idea what our building costs will be, though we've heard everything from $60-120 per square foot for this area.

In my next post, I'll lay out a preliminary analysis and budget...

J Scott: Is this why they call it a spec build? JK.

Very curious to see your preliminary analysis. I'm about 50/50 on a new construction opportunity we have under contract. We have build costs quoted at no more than $58/sq ft. Acquisition $68k, ARV $299k for 2,000 sq ft. Only wrench in the scenario is building to proper elevation (AE flood zone since it is water front). We have survey and elevation but still trying to sort out a few unknowns. I just can't pull the trigger!

You, on the other hand, seem to be gambling a lot more with that $60-120 quote rehab quote you're working with.

I'm sure you'll clear it all up with your analysis.

Glenn

Fun thread. Other than the tear down process, we'll have to compare any differences with the diary on a new home I did less than a year ago in UT. What a difference is coming for the people in that neighborhood! As Glen stated, a very wide spread on potential square footage cost. Do you have a projected sales price or per sq ft sales price? Good luck and I'll look forward to the input. Rich

Hey @Glenn Espinosa , @Rich Weese ,

The $60-120/sf range is just what other builders and architects throw out for their numbers and on their specific projects. We have a pretty good idea of the range we're looking at, and it's considerably smaller than that.

We expect to be in the $65-85/sf range, but who knows what surprises we'll run into (or just flat out things we haven't considered) that could drive those prices up.

Tomorrow's post will discuss the budget estimate and the initial analysis...

Looking forward to following J Scott. I am doing my first new house as well but it is a modular and is on order as I write this. Thanks for sharing.

J Scott Sounds like a great adventure for you! I look forward to watching the process. Do you have your plans drawn yet? Any renderings? As far as the costs, that's quite a range, and of course it will depend on how much work you do yourselves, finish work, etc., and I think your numbers will probably end up being closer to what it actually will be, unless of course there's some big unforeseen problem.

Also, don't forget to see if you get any credit on permit fees since there was a house on the property already. (sewer, water, etc.) we did on a lot we purchased where a house burned down.

Who is drawing your design? Is it required to use architects in your area, or can you use a draftsperson? That can save considerably.

Good luck! Hope everything goes exactly as you need it to. If you have any questions, post them!

Hey @Karen Margrave -

We do have our plans drawn and submitted at this point (we had to use an architect). We're actually waiting for permits right now, but I don't want to give away too much of the upcoming story, and as I go through the day-by-day updates, I'll touch on all that! :)

This is great J!! So appreciate you sharing the time with us!

It will be fun for me as well. My last new construction build was in 1996! Although the process changes little, the costs sure have!

Are you the GC or are you hiring a builder?

Originally posted by @Randy F. :

Are you the GC or are you hiring a builder?

Hey Randy,

My partner is a licensed General Contractor in Georgia (he's a rehabber and got his license strictly for his rehabbing business). So, we'll be able to pull all the permits under his license, and we'll hire and manage the subs ourselves.

@jscott, looking forward to following this thread. Are you keeping track of how many hours you are putting into this project? Perhaps into two segments, pre groundbreaking/planning phase and a post groundbreaking phase.?.

Is the $65-85 per sq ft that you expect to pay for the construction itself on top of the price paid for the lot and demo of the house, or does that factor those costs in?

Also, since you are keeping some of the original foundation, will you be able to list the year built as 2013, or will you need to list the original date of the foundation and say that it was rebuilt in 2013?

Originally posted by Ryan Richard:
@jscott, looking forward to following this thread. Are you keeping track of how many hours you are putting into this project? Perhaps into two segments, pre groundbreaking/planning phase and a post groundbreaking phase.?.

Ryan -

I haven't been tracking my hours on this project, though I probably should.

Part of the reason I haven't been tracking is that I'm actually making a point to spend more hours than necessary working on this one. Both my partner and I have full-time project managers that we could off-load work to, but we're both big fans of efficiency and optimizing our business, and by handling every detail ourselves for the first project or two, we'll be able to create processes and efficiencies in future projects.

This is what I did with my rehabbing business. For the first several projects, I spent a LOT of time dealing with the day-to-day details. I then spent the next several projects creating processes around those details. Since those first 8-10 rehabs, I pretty much never have to be on-site anymore for our rehabs, as we have the processes in place to allow others to handle everything.

I'm hoping to do the same thing here. I may be involved heavily in the first several new builds, but the goal is to eventually be able to extract myself from the day-to-day parts of the business.

Originally posted by Rob K:
Is the $65-85 per sq ft that you expect to pay for the construction itself on top of the price paid for the lot and demo of the house, or does that factor those costs in?

Rob -

The $65-85/sf is just the construction costs for the new structure.

That said, I expect demo of the existing structure to be about $10,000, and we plan to build a 2000 sf house, so the demo would add about $5/sf to the overall cost, which may still keep it in the $65-80/sf range.

The lot cost is separate...I'll discuss that in tomorrow's update...


Also, since you are keeping some of the original foundation, will you be able to list the year built as 2013, or will you need to list the original date of the foundation and say that it was rebuilt in 2013?

That's an excellent question, and while I think I know the answer, I'm not positive! The City of Atlanta (the building municipality) is considering this new construction from a permit standpoint, so I *assume* that we can list the property as new construction, but that's certainly worth verifying.

Originally posted by J Scott:
The City of Atlanta (the building municipality) is considering this new construction from a permit standpoint, so I *assume* that we can list the property as new construction, but that's certainly worth verifying.

The reason I ask is because in my area, the year built is when the foundation went in. If someone puts the basement in in November 2012, starts framing in January 2013, and completes the house in May 2013, the year built is 2012. I've seen where a house will be rebuilt like yours and the city will list the year built as 1950's, but the listing will list the current year (to attract new construction buyers) and make some sort of disclaimer.

I think you will be fine calling it a 2013 house, but you might need some sort of CYA addendum signed by the buyer.

J,

When you say you had to use an architect, was that by choice or did the City require it? I ask, because I am doing a complete remodel with an addition of a second story in City and I did not have to use an architect. (I used a licensed engineer, but was told specifically by an agent at the permit office that I did not need to. Which could mean anything really. I have gotten a lot of conflicting information depending on who you talk to/what department you ask at the City.)

Also, when you say you are planning on more new builds are you planning more builds ITP? While the houses are selling fast in good sub markets and for a good margin, lots are hard to come by and dealing with the City of Atlanta is kind of a chore. That has been my conclusion anyway, curious to hear your thoughts.

Originally posted by Gabe Larkin:

When you say you had to use an architect, was that by choice or did the City require it?

I don't believe the city requires that the plans be drawn by an architect, though I don't know for certain. The framing and floor components do need to be signed off by an engineer.


Also, when you say you are planning on more new builds are you planning more builds ITP?

My partner has several more lots ITP that I may partner with him on, so there's a reasonable chance we'll be doing more.

DAY 2: FIRST-PASS ANALYSIS & BUDGET

While we still don't know for certain how much this project will cost, prior to purchasing it, we of course did some preliminary analysis of the deal and put together a preliminary budget based on the information and experience we already have.

The existing property/lot was purchased for $30,000 (we put $3000 down in earnest money and paid another $27,831 at closing). Since we're paying cash for everything, our holding costs should be relatively low (about $5000 for property taxes, $600 for insurance and $600 for utilities) and our selling costs should be pretty low as well ($600 to move our staging furniture in and out, 3% of the sales price for buyer-agent commission, and about 3% of the sales price in closing costs). We are initially estimating our rehab budget to be around $155,000 (see below). Finally, we're expecting that our sales price will be somewhere in the $250,000 to $270,000 range (let's say $260,000 for now).

Given that information, here is what our initial financial analysis looks like:

Now, you're probably wondering where that $155,000 budget came from? Here is the original budget we put together for this project (note that where there is just a labor price, that includes materials as well, just not broken out):

(You can click to expand)

I'm sure we're a little low in some areas, a little high in others and probably missed some stuff as well. Given that we're expecting to build a 2000 square foot house, this puts us at about $72 per square foot to build (if you subtract out the costs to knock down the existing structure). This is right around where we were expecting to be given the information we've gotten from others who are building in our area, so perhaps we're not too far off.

I guess we'll see soon enough... :-)

J Scott, $15,000 for your lumber package and labor seems very low to me. Will be interested to see where that number ends up.

Edit: I see that your exterior doors and windows are itemized separately. That would take your dry-in costs to more what I would expect. Do you know what you are getting for framing labor? $3.50-$4.00 a sq ft is what I think is about the lowest in my area.

@J Scott and @Joshua Dorkin -- Congrats on a great idea, providing this insider look at a real developer case. Case studies are an excellent way to learn and a very effective tool for bridging the gap between theory and practice. (Not just saying that to be polite -- and don't say what you're thinking, Josh. I rely on "invented" cases as a primary teaching tool for my grad students.) And J - as a numbers guy, I appreciate the detail and clarity or your exhibits.

Let me add just a sidebar thought about the calculation of profitability: Most investment decisions involve a choice. Unless you're blessed with unlimited cash, time and energy, you typically have to say, "I can do this deal today or I can do that one, but not both." Making that choice raises the issue of opportunity cost, sometimes referred to in development projects as "imputed interest."

In the development option, you typically commit cash on Day 1, but don't begin to earn any return until some future date. Your alternative might have been to invest your cash elsewhere where you begin to earn a return immediately. For the sake of argument and easy math, say Plan B is a rental property that earns a 10% / year return on your 30k. Bottom line is that your choice to go with the development project requires that you accept a 0% while you're developing, when you could have had a 10% return instead. Hence, the development project "costs" you an extra $3,000 per year to pursue because your cash is essentially dormant.

In this example, the opportunity cost is fairly small, but in many projects the up-front cost and length of time can represent a significant amount of lost return.

Originally posted by Ryan Richard:
J Scott, $15,000 for your lumber package and labor seems very low to me. Will be interested to see where that number ends up.

Edit: I see that your exterior doors and windows are itemized separately. That would take your dry-in costs to more what I would expect. Do you know what you are getting for framing labor? $3.50-$4.00 a sq ft is what I think is about the lowest in my area.

Hey Ryan,

Framing has been a huge learning curve for me. While labor in Atlanta is among the lowest in the country (new construction framing is $2.50-3.50 per square foot), I didn't realize that included all dry-in (doors and windows as well). So, while my framing number was too low (I underestimated material costs), you're right that my adding back in the window and door labor evens things out. It also helps that I mistakenly called out subfloor and roof decking separately. Add it all up, and my framing number is likely pretty close to what it should be.

In other words, I got very lucky!!! :)

I've learned a lot since this original budget was written a couple months ago...and that was a big part of it. I'll have a lot more to say about that as I post my framing bids...

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