Diary of a New Construction Project

525 Replies

I don't know area or that neighborhood at all, but Landscape for $500 appears low. I just spent 7K on front and side yard of new spec in UT. Are you doing the labor or leaving it bare? I had to spend $500 JUST removing some trees and ivy at home in CA I spend summers in. I agree with others about counting your hours and your partners. Someone would have to do that work in future and want to be paid for it. On the savings side, my appliance package is stainless steel and under 2K. Shop around. Profit would be adjusted accordingly. BP members would think they could make same profit and then be surprised at the added costs to replace your hours and those of your GC. I'm sure you'll cover this in the future, but how is he paid?

It looks like you have plenty of buffer for error and it should be a nice roi. Good luck. First times are always fun and interesting. Rich

Rich -

You're absolutely right, and I underestimated a good bit for landscaping. I haven't even started looking into what needs to be done and how much it will cost, but I'm not sure what I was thinking when I put down that estimate. It's been added to my "To Do" list to start thinking about realistic estimates for this work.

Thanks for pointing that out!

As for appliances, we're generally right at $2000 for a full set, but our goal is to really make the kitchen a selling point. My partner owns a cabinet company, so we'll get higher-end cabinets and granite at a reasonable price, and then we plan to upgrade the appliances to create a "chef's kitchen." Hence the higher price.

Great thread!

I think your electrical, plumbing and certainly engineering will be higher than your estimates. Unless this has 2 HVAC's I think youre on the high side there.

Good luck!

Originally posted by Frank Gallinelli:

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."

Great point, Frank!

We're tracking all outgoing cash, and it should be interesting at the end of the project to see where our IRR comes in. We're finding that the bulk of the cash is going to go out right about the 50% mark in the project (when construction starts), so our numbers should be a little bit better than if I assumed one lump cash infusion at the beginning of the project.

Given that we're hoping to scale the new construction side of the business, we should be able to keep the cash working, thus making IRR a valid return metric (I know you know this, but a lot of people think IRR is a useful metric and then let their cash sit for long periods between projects, making IRR results meaningless).

At the end of the project, I'm planning to do some post-mortem analysis to determine what our results really looked like, taking into account what our cost of capital and leveraged returns would be in the future (when we scale and can't pay for everything with our own cash).

I'm considering this project to be a learning experience and an opportunity to collect data to analyze future opportunities...if we make a decent profit, that will be gravy, but it's not the main goal of this particular project.

Btw, let me take a minute to plug your awesome book! I picked it up last week and am working my way through it...

Originally posted by Kyle H:

I think your electrical, plumbing and certainly engineering will be higher than your estimates. Unless this has 2 HVAC's I think youre on the high side there.

Hey Kyle,

Most of our engineering will be done by our lumber supply company (they have in-house engineering), so I'm hoping we won't have too much additional expense.

We're starting to get our plumbing and electrical bids, and you're right, they're a bit higher than our estimates...I'll post more in the next couple weeks.

Originally posted by J Scott:

We're tracking all outgoing cash, and it should be interesting at the end of the project to see where our IRR comes in. We're finding that the bulk of the cash is going to go out right about the 50% mark in the project (when construction starts), so our numbers should be a little bit better than if I assumed one lump cash infusion at the beginning of the project.

Given that we're hoping to scale the new construction side of the business, we should be able to keep the cash working, thus making IRR a valid return metric (I know you know this, but a lot of people think IRR is a useful metric and then let their cash sit for long periods between projects, making IRR results meaningless).

Thanks for the book plug! Always appreciate hearing that someone found it useful.

Yes, to get a meaningful IRR you need to keep track of all the cash inflows and outflows. So if you have a development or construction loan with draws or if you infuse your own cash from time to time, then keeping track of amounts and timing should give you what you need. This is one of the situations where I think it's important to track cash movement on a monthly basis (annualizing is ok for long-term investment hold, but not so much for dev work). Just remember that your IRR calculation then is a monthly amount, and multiplying by 12 isn't quite right. I believe we wrote a user-defined function for our "On Schedule" dev analysis, but I think there is an XIRR function in Excel that will work.

I think you'll end up pretty close to your estimated number, maybe a few bucks more.

Pricing is sort of a local thing, but if you were doing this in Florida these are the comments I would make.

1. Architect fees are too much. Hire a draftsman for the next one and then take the plans to an engineer.
2. Lumber package / framing seems a little low since homes aren't block in Atlanta, right?
3. Plumbing and electric look low, while HVAC looks high.
4. Exterior / Interior paint number seems high
5. Trim number seems high unless you're going all out? In my experience this is money very well spent.
6. No tractor work or grading required? As Rich pointed out the landscape number is way too low. On a 2,000 sf house i usually spend $5-6k including sod.
7. Construction cleans generally cost a few hundred bucks
8. Any builders risk insurance? It's fairly cheap and i've had to use it in two separate cases.
9. Any need for termite treatments before pouring the slab, etc?
10. Demo fee seems high. I'd hunt for someone to do it for around $6,500.
11. Does the city require you to provide a bathroom on site?
12. Maybe I missed it - but didn't see the garage door in your numbers?
13. At the $260k price point will buyers expect an alarm system?

Steve,

I'm not going to reply point for point because I don't want to ruin all the surprises, but you make some very good points! :-)

To add to Franks' comment about the time money is committed and not being used on anything for months to generate return is excellent. Also, consider the other end. Money on this spec is short term-ordinary income.... I know about this well. As I stated at the Summitt, my taxes were pretty under control. Then I decided to build specs and HOLY CRAP! My acct required 28K to send to IRS on 4-15 and when completed all the returns, asked for another 14K!! $42,000. I don't think I've paid that much in last TEN years combined. It takes a lot of the allure out of it. If I had used the funds immediately, and fulltime like Frank suggested, My return would've been more spread out and slower, but less to the tax man... Rich

p.s. I know. I ***** too much about taxes and ALWAYS will!

"this puts us at about $72 per square foot to build (if you subtract out the costs to knock down the existing structure)"

I wish we could build for $72 PSF. On a new build for a vacant lot I picked up we were getting quotes on the low end at $110 psf. Now, nobody wants to build at that, and want between $120-130 psf. If I could build for $72 psf, I would be a very wealthy man.

I'm curious to see all the photos, and see the differences between construction in Atlanta and Colorado.

Originally posted by Grant P.:

I wish we could build for $72 PSF. On a new build for a vacant lot I picked up we were getting quotes on the low end at $110 psf. Now, nobody wants to build at that, and want between $120-130 psf. If I could build for $72 psf, I would be a very wealthy man.

If you could build at $72/sf in your area, others could as well, and that lower construction cost would drive market values down. So, making money wouldn't be any easier than anywhere else.

I rehab in several cities these days, and the differences in costs (labor mostly, but also materials to a degree) is staggering. But it makes sense. In Denver compared to Atlanta, I'm guessing material prices are higher (we're on the coast), you likely have more strict building codes to deal with the harsher weather, and you most certainly have fewer undocumented immigrants and unlicensed contractors competing for business and driving labor costs down.


I'm curious to see all the photos, and see the differences between construction in Atlanta and Colorado.

I think you'll find that there aren't any huge differences. The few differences will be that we don't have many basements here, so that drives costs down; our climate is mild, so we don't have to do anything special to deal with deep frost-lines or ice sitting on roofs; etc.

I'm curious about a few things as I would also like to build someday. The houses around your house are older and smaller that what you're going to build.

Are there other new homes in the area?
Are there other houses in that neighborhood selling for $270K?
How were you able to buy a house for 30K in an area that will support $270K? Did you get a super deal or is this fairly common?

I'm trying to think of a neighborhood near me where I could buy a house or lot for $30K that would support a sale of $270K. I can't think of any in that ballpark. Your numbers sound great.

Originally posted by Rob K:
I'm curious about a few things as I would also like to build someday. The houses around your house are older and smaller that what you're going to build.

Are there other new homes in the area?

Are there other houses in that neighborhood selling for $270K?

Yes, this is a big area for investors to come in, knock down houses and build new construction.

In fact, @Aaron McGinnis posted a few weeks back about two new construction projects he did -- both are within a few hundred yards of our project.

Aaron's projects sold in the mid-200's, and his were a good bit smaller than what we plan to build. Between his comps and a couple others, I think $260-280K is the right ARV.


How were you able to buy a house for 30K in an area that will support $270K? Did you get a super deal or is this fairly common?

Not common at all, but they're out there. My partner found the seller -- he owned the house free and clear, it was falling down and he wanted to get what he could out of it. Had the seller listed the property for sale, he likely would have gotten twice what we paid.

I believe Aaron did the same thing with the two houses he picked up across the street. Bought one from a private seller that wasn't listed, then knocked on the door of the other and said, "Wanna sell too?!?!?"

Re: The price of the lot; I can confirm that lots can be found with those ratios in the area, although it is getting tougher. I bought a tear down literally in between J's house and Aaron's house for 13k that I ended up selling to another investor. I think he ended up getting 240k for new construction ~1400-1500 sq. ft. It was in a slightly dodgy area, and he originally was asking 275k so it sat on the market a little while.

Re: architecture fees; I too think 4k is high but that is in line with what Aaron has posted that he spends iirc. Did the architect walk it through the permit process for you? Again, I think Aaron said that is what he does, but he says it takes about 45 days. I did a remodel with addition (including ground disturbance, thus full site plan and tree plan, but no demolition permit) and my total process was 30 days and 5 trips from the time I submitted my completed permit application. Supposedly the process takes 14 days (10 business), and I have been told permit expediters around here can get it done in that time frame, but I have yet to meet anyone who can vouch for this.

Originally posted by Gabe Larkin:

Re: architecture fees; I too think 4k is high but that is in line with what Aaron has posted that he spends iirc. Did the architect walk it through the permit process for you?

I'm presenting the information in day-by-day format, starting on Day 1...the breakdown I've provided above is just my initial estimates. This is before I ever found my architect or figured out who would submit for permits...

Stay tuned! :)

Oh yea, what is your time frame once you break ground on the foundation?

I can offer you two hard learned pieces of advice when dealing the City of Atlanta inspectors.

1.) Call in your inspection request no later than 3 p.m. for the next business day.

2.) If you can build a relationship with the inspector, try and get him to give you an idea of when he will be coming so you can have someone on site to address any issues immediately, if possible, so you can avoid failing an inspection. The problem is the City will not give you a time range whatsoever when the inspector will come; so you either must have a person there the entire day, or you risk failing an inspection which can easily be four days to a week for re-inspection. The problem is the results are not reported to the automated system until the inspector calls them in, which seems to be mostly at the end of the day; thus, no new inspection can be called in for by 3 pm. Further, it usually takes a least a day or two to get your sub back over there considering you do not know the result until after 5 pm. Then you have to verify the work was done correctly (before 3 pm!) before calling it in, or you risk starting the cycle all over again. It can be a monumental time waster and extremely frustrating.

My local licensed trades all had good relationships with the inspector and would contact him and meet him during the inspection so they address any minor issues. They passed first time, no sweat. Huge time saver.

Originally posted by Gabe Larkin:
Oh yea, what is your time frame once you break ground on the foundation?

We're expecting 8-10 weeks. Once dry-in is complete, we can finish in about 5-6 weeks based on past experience with major rehabs, so that leaves about 3-5 weeks for the unknowns -- foundation, framing, inspections, etc.


I can offer you two hard learned pieces of advice when dealing the City of Atlanta inspectors.

Much appreciated!

DAY 3: ROUGH SKETCHES

We're in the process of interviewing drafters and architects to draw up our plans and handle the permitting process. We have a couple reasonable candidates and will be meeting them at the site over the next couple days to discuss their process and fees.

In the meantime, we wanted to have a basic idea of what we planned to build. Because the lot is narrow and long (50' x 200'), the typical off-the-shelf plans won't work (we want to do custom anyway), so my partner and I have been discussing ideas and he's been putting some sketches on paper.

Here is what we plan to start with when we find our architect (click to enlarge):

We've been debating whether the second floor (the drawing on the left) should be the full size as the first floor, or whether we should gable the roof to limit the size (as in the drawing) to keep the square footage to our planned 2000 sf.

Making the second floor the same size as the first will add some framing, sheetrock, paint and finishing cost, but will likely also add about 700 sf to the footprint. I'm thinking the additional value for the extra square footage should more than make up for the extra cost, but this will be something we'll need to analyze when we're getting our bids (and I'm sure the architect will have some input).

Looks like a nice enough backyard, I would want to get to it without everyone marching through the master, maybe you have a side door planned but I did not see it. Will there be a garage? I like how you have the mechanicals like plumbing for the second floor lined up with the downstairs bath and Laundry room, the shower is the only thing on the sketch that is on its own island.

I might also suggest to add a second deck to the upstairs back bedroom? Can not really tell if there is a view from there so might not be worth it. Where I live everything is about outdoor spaces, outdoor living etc, its all the rage right now, not sure if its the same in your area though, so take my suggestions with a grain of salt.

Looking forward to following your progress, thanks for doing this, its very cool of you and your partner to share your time and experience.

Originally posted by Rick Bradd:
Looks like a nice enough backyard, I would want to get to it without everyone marching through the master, maybe you have a side door planned but I did not see it.

That's a big drawback to the long, narrow lot...we're trying to figure out how to get deck access from some other part of the house, but we may not be successful.

And there's no plans for a garage on this one. In this area, the fact that it has a driveway is pretty good...very few houses have garages.

Lastly, your point about the second-story deck is a great one...we're trying to decide if that will be worth the cost or not, but leaning towards yes...

J Scott, Swap the laundry and stairs location, then push stairs, laundry and bath over against exterior wall. That will open up the center and allow you to put a hallway all the way to the backyard. You will also need to swap the master bath and the deck and the entrance to master suite would be off of center hallway.

I agree to go ahead and make it a full 2nd story. It will add cost as you mentioned, drywall, studs, insulation, exterior siding. But that will allow you to move 2nd floor bath over to exterior wall to keep it in line with 1st floor plumbing.

Originally posted by Rich Weese:
To add to Franks' comment about the time money is committed and not being used on anything for months to generate return is excellent. Also, consider the other end. Money on this spec is short term-ordinary income.... I know about this well. As I stated at the Summitt, my taxes were pretty under control. Then I decided to build specs and HOLY CRAP! My acct required 28K to send to IRS on 4-15 and when completed all the returns, asked for another 14K!! $42,000. I don't think I've paid that much in last TEN years combined. It takes a lot of the allure out of it. If I had used the funds immediately, and fulltime like Frank suggested, My return would've been more spread out and slower, but less to the tax man... Rich

p.s. I know. I ***** too much about taxes and ALWAYS will!

Just wait until our friends in D.C. eliminate the capital gains rate entirely, so all profit will be taxed as ordinary income. Coming to a Congressional subcommitte near you.

Originally posted by Rob K:
I like the floor plan. Hard to tell from the sketch if there's a fireplace. Will buyers in that price range expect one?

No fireplace in the current floor plan, but this has been a big topic of discussion. We'll likely install a direct vent unit in the living room. It's not a must-have feature down here in Atlanta, but it's always nice to have and definitely adds some value.

Originally posted by J Scott:
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! :)

J and Joshua,

I love it. What a timely thread as some people are starting to get into new construction. J, did you use an existing design to save some cost, or is it a custom designed house?

Thx.

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