Denver, CO · Member since 2009 · 23 posts · 3 votes
Check out this example of a teardown in Denver. I'm trying to figure out what sort of profit this type of deal produces.
The deal: Purchase a property for $544K, tear it down and build a 5729 square foot property that has top of the line everything and sell it for $1,549,00 in 11 and half months.
What do you think? Did this investor make money? If so how much do you think they made?
I've attached the details below (I apologize for the screenshots but not allowed to put links on here).
Investor · Indianapolis In · Member since 2013 · 47 posts · 19 votes
9y
Looks like a great deal for the lender.
It's hard to figure out, when you have that much square footage the PSF price on the expensive stuff, foundation,site work, roof, mechanicals are much cheaper relative to a smaller home.
I would guess they were at $600k to scrape, permit and have plans. Financing costs of $75k potentially. Leaving 875k to build and profit. That leaves $151 PSF of cost. Maybe it could get done for $120 sf given the scale.
$170k in potential gross profit. If they financed at 75% of costs or ~$439 they may have earned a 40-50% return on their money. 11.5 months is a great turnaround for that size project.
A builder that self performs work could hit those numbers easily in my area. My experience in Denver is vacationing though.
Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
9y
@Scott R. Fahl so I attended a seminar where a developer shared their costs on a similar deal. If I remember right he made about $200k but I also think his land was a bit cheaper at $350k and his end sale price a bit cheaper as well at around $1.35M.
Denver, CO · Member since 2009 · 23 posts · 3 votes
9y
Thanks Bill and Matt.
These deals can be tuff to decipher.
I was surprised at the turn around time as well.
I've always looked at these deals as how much cash one makes in the end. In this case even if they built for 700k (which I think is low) we are talking 170K left. For simplicity let's just take out the real estate fees only which often times get discounted at that price level so let's say 5% = $77,450 and then split $97,550 with your partners and it seems like an awful lot to go through for 45-50K not to mention VERY little margin for error.
Of course I'm making some assumptions 1. that you paid a Realtor(s) commission (which I'd think you'd have to assume your going to at the beginning 2. that you have partners (which is often the case).
Investor · Indianapolis In · Member since 2013 · 47 posts · 19 votes
9y
Scott, I couldn't agree more, tough to understand their motives purely from a REI perspective. That's a lot of work and risk for that level of profit.
It starts to make more sense though when you consider a few things.
1. Figuring appraised value one year out is the most difficult part of this transaction. This is especially true in a neighborhood that's being redeveloped. They could have been hoping that appraised values were much higher one year in, or that this house could set a new bar for appraisals on future projects.
2. I see custom/luxury builders here with a staff of one or two that may do three projects a year. Low overhead, and they make enough to support their lifestyle and repeat the process next year.
3. It's a form of advertising for the builder, a flagship location and product that may lead to their projects.
4. Lack of other options, investments. They likely made more money on this than they would have placing their capital into rentals.
All speculation and just past observations from my market. Our sales prices are much lower but on a percentage basis the land acquisition and construction costs are similar.