Private Money Investment to build spec homes

Investor · Lumberton, TX · Member since 2016 · 19 posts · 3 votes

I'm a home builder and have been approached multiple times from investors wanting to front the money for me to build additional spec homes. My question is what type of terms are these done on? What would be fair from a risk and reward standpoint? From what I've seen a 6-10% return for the investor would be fair. Is this correct? What type of contract would we write up for the deal? I would like to do it but not sure the steps forward. Any feedback/direction/sources would be appreciated. Thanks!

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

10y

@Rick Edgeworth are you talking about lending terms as in APR.. or are you talking about % of equity.

contruction loans are the most complicated and dangerous that a private investor can do. and its a reason that the majority of HML simply do not do them.

the question is other than building a house do you bring in any equity or are you looking for the investor to put up 100% of the money to buy the dirt and build the house. if that is the case.

then the investor should simply do it themselves and hire you as a fee builder.. this is better for you.

you have no debt obligation just a service contract.. you get paid regardless of what the house sells for etc etc.. this is what i do with my builders.. depending on the value of the end product.. build fee's for GC's in a semi volume play is 7 to 15k per house... pretty nice gig for the builders if we do volume.. No volume then its not that great.. and you would do better to bring equity and then borrow.

I have talked to some banks in TX and they will do construction loans on spec.. and for really good rates. you need 30% or more equity

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Account Closed
Contractor · Grand Rapids, MI · Member since 2015 · 8 posts · 2 votes
10y
That's sounds pretty good to me. Hard money I've found is 11+. Private around 9-10 I've been told but don't have actual experience.
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Rick Edgeworth
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Investor · Lumberton, TX · Member since 2016 · 19 posts · 3 votes
10y
Do you have experience on any contract term/examples for the partnership between myself and the perspective investor? I assume when you say hard money you mean cash from a individual investor? What is the difference between hard and private? Thanks!
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Jeremy Shellman
Developer and Investor · Star, ID · Member since 2016 · 23 posts · 24 votes
10y
If I were the investor I would want 10% or more. I would structure the relationship just like if you were borrowing from a traditional lender--a construction loan with a draw schedule with the investor protected by a recorded deed of trust. As the investor/lender I would want to see lien releases from all subcontractors with each draw request along with proof that the work was completed through requested draw. If I were in the area the proof would be easy as I could simply inspect the property, if not I would at least want a video showing the stage of construction matched the draw requests. The fact that should you run into a problem and be unable to sell the property and stop paying the interest due requires the lender/investor to foreclose is why the rate would need to be on the high end. Full disclosure I've been both a contractor and investor so understand both sides of this type of relationship. I would engage a real estate attorney to draft the loan agreement and deed of trust as a template that could be used in the future. It will add a layer of expense on this first deal but I believe would be a sound investment moving forward. I hope this helps.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Rick Edgeworth are you talking about lending terms as in APR.. or are you talking about % of equity.
contruction loans are the most complicated and dangerous that a private investor can do. and its a reason that the majority of HML simply do not do them.
the question is other than building a house do you bring in any equity or are you looking for the investor to put up 100% of the money to buy the dirt and build the house. if that is the case.
then the investor should simply do it themselves and hire you as a fee builder.. this is better for you.
you have no debt obligation just a service contract.. you get paid regardless of what the house sells for etc etc.. this is what i do with my builders.. depending on the value of the end product.. build fee's for GC's in a semi volume play is 7 to 15k per house... pretty nice gig for the builders if we do volume.. No volume then its not that great.. and you would do better to bring equity and then borrow.
I have talked to some banks in TX and they will do construction loans on spec.. and for really good rates. you need 30% or more equity
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Rick Edgeworth
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Investor · Lumberton, TX · Member since 2016 · 19 posts · 3 votes
10y
Thanks for the great information! This is totally new to me so please forgive my ignorance.
When I was talking of the X% I was assuming the local investor puts up for example 200K @ 8% and would get the 16k if the house sold in 4 months or 12. Sounds like if off base...
I was not thinking of structuring it as a construction loan from the bank because I would not want my interest paid to go too high if the house took some time to move.
Jay Hinrichs
To answer the question of what I'm bringing to the table in this particular situation I would be providing the lots to build on.
I do plan on going to the banks. I have in the past using line of credit but not for a construction loan for specs. I plan to but I assume they will only give me a limited amount of money even though my credit is solid. Lets say they give me money for two houses. 4-500k I need to put 4-8 on the ground so I'll need private HML.
LWhat would the expert do. Pretend you are me...You have 8 years experience building custom homes and specs with a solid reputation in the area for construction and design. You have the lots for the builds or you have the money to cover the lots and you obviously want the pot as sweet as it can be for you while wanting to make it profitable for your investor.
What is an idea or way you might try to construct the deal?
Jay Hinrichs
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Hunter Estess
Investor · New Orleans, LA · Member since 2015 · 43 posts · 2 votes
10y
I have done this with numerous investors multiple times. We typically give them 2% per draw and 10% on the outstanding loan until the house sells.
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