All Forum Posts by: Asad Shaikh

@Tae C.

I would say our arangement might be unconventional due to our structure.  Our contractor fee is based solely on construction costs (cost of build plus 15%).  Our partners commision is based on sales price.  Our agreement basically splits the contractor fee 3 ways between myself, my partner in the building company and our company overhead.  The 5% my partner and I in the building company each recieve on the build is roughly equal to the commission earned by our additional partner in the builds on the final sales price, however if our partner has both sides of the listing one half goes back to the net. 

I am not quite sure I am interperting your question on net profit correctly, but our contractor fee, realtor commissions, building expenses, lending expenses and all other costs are deducted from gross sales price to get to our net profit which is then split three ways.  I would not want you to eat those costs out of your portion of profit, but that is just how we are set up.  The way I look at it is the project needs to be self sustaining.   Meaning if I was just an investor and finding and funding the deal, and contracting a builder and hiring an agent to sell, my project still creates a profit.  The only difference in our scenario is each partner is receiving payment for services they are rendering to the project, before profits are distributed.  

Hope this helped, be happy to answer any other questions related to this if I was unclear.

@Pavan SandhuThanks!

@Pavan Sandhu@Asad Shaikh

In your initial post, there are some cost items missing:

1. Development impact, school, park, and permit fees

2. Soft costs - arhcitect, strucutral, MEP engineers, soils engineering, survey and setting grade stakes. In our markets we have HERS rater costs and other new requirements like that.

In your follow on posts:

1. Simple design that looks great, straightforward framing, flat roof (sloped).

2. Can he build for $100 /ft with those cabinets, countertops and bath fixtures. The tub is beautiful. 

We are building in Los Angeles, a plain and simple rental product, at around 100 per foot. But we don't have any of the nice items, cabinets, high end tubs, etc. Just check that the builders had actually delivered recent past projects at that cost. 

3. Check the builders past LLC partnerships? Did they go well, are the people satisfied, would they do another deal with him again? Be very grounded in your assessment of him, his past historical deal performance, past build costs, etc. It's much lower cost to do that before you get LLC married, then after you in the deal.

For the rest of the post:

Reaction to the developer fee is that 20% is high. It is a small deal, so the % should be higher generally relative to the size of the deal, but not 20%. Think of it this way, what % would you have for profit on a GC contract 4-10% max. Like someone said, maybe 15% is OK. 

Who found the lot? If you did, you should get some value for that, that has value right, that took time right? Get paid for it.

Many time we build in an acquisition fee 1-3% , depends on the deal and if it can handle the additional cost of acq. fee. Sometimes you can represent the buyer (yourself and him) and get part of the listing brokers fees, but that's hit and miss. At this level, small lots, most listing brokers are hell bent on keeping all the commission. I regularly pay outside land finders 3% on the buyer's side to find me more or better land parcels.

Also, pay attention to time when you each get paid. A developer fee is usually paid right up front or drawn monthly. Your commission gets paid at the back end. What if the deal does not sell for enough and you have to reduce or eliminate your commission, he gets fee and you dont? No. Maybe have all fees paid as a priority or preferred return out of profits, that way if there is a cost reduction issue, and fees have to be reduced, you make them up as priority payment from profits, then do the splits afterwards.

You need to take into account imperfect execution scenarios, or market down turn scenarios. It's so easy to set everything up in the beginning, everyone's feeling good and the market is solid (honeymoon period), and so it's easy to give away too much profit, or allows too many fees to others, or except too much responsibility compared to the other partner.

@Asad Shaikh.  I would venture a guess that you would be on the hook for the construction loan.  I also think you are on the right track in finding a partner for your deal even if it means less on the back end.  I personally don't believe that a new construction project is a good first project to tackle without any previous building experience.  

In regards to the pricing of features that drive up the end cost, I will reference my personal experience and add what I can see from your renderings.  

Generally it will be more expensive to frame a modern house due to roof lines, bumpouts, and cantilivered spaces.  Roofing and siding material that are considered modern are more expensive than shingles and lap siding(most common in our area).  Speaking from experience and looking at your renderings you will have a larger budget for fixed glass windows and higher end doors, straying from stock sizes and common styles always cost more.  Interior finishes follow the same thought process, items needed to make the home not have a cookie cutter look in general will cost more.  

I like the design of your renderings, I wish you the best of luck with the project.

Here are a few pictures from a "mountain modern" spec house we are finishing up.  

@Mike Wood.  You are correct that we don't take a fee during construction and take our fee at closing.  When we build for ourselves locally we are the investor/builder and my wife is our realtor.  This partnership I am referencing is based over an hour away in a new location for us and while we could probably take down the projects as the investor/builder our partner is on the ground finding the land and managing all of the development aspects which takes a large portion of the project startup off our plate and allows us to focus on the build.  In regards to the money, we have a lot of things going on and having additional money available from another partner and the ability to have another person co-sign on construction loans has a fairly high value.

Our ultimate goal is to no longer have to build custom homes which is where our main source of income comes from at this point and transition solely to building for ourselves (spec and rentals).  I am a pretty firm believer that it is better to have 50% of a deal than 0% of no deal. 

I am pretty sure you could find builders who would be very interested in your outline of a partnership and to be honest I would be very happy to find someone who could fill that role as investor.  Being the investor/builder in our town of 1600 we have had to wear every hat involved in the process.  Moving to a actual metropolitan area will hopefully change the game so to speak for us and open other opportunities.

This is a great business model, FIG does a similar thing to help investors buy multi family housing with our builder and pay much lower than retail. The biggest difference is that the investor partner is also the end Buyer. Good luck!!

@Asad Shaikh - We did a similar deal with a builder charging 10% fee and the listing agent only charged 4.5% listing fee (Listing agent 1.5% and Buyer agent 3%). This way you are keeping project costs low with both bringing your expertise to the table for maximum ROI

Another thing we ran into was that some Builder line items costs also had some margin and they were making way more, apart from their fees. Its better to have an idea on construction costs per line item.

Are you going to compete with national builders in the area? As a local builder you need to provide excellent finish out in the price range so that buyer wants to go with u vs a nationally known builder.

I do agree that modern finishing costs more but there are some items like Stucco vs Brick vs Stone where the price difference are minimal.  Select appropriate features in the price range and you can still build in your budget

Keep us posted on how this goes. Good luck !!!

@Asad Shaikh

We have a very similar structure in place with our partner who is a real estate agent like you (we are the builders), however we are @15% for the build. We do have a LLC and partnership agreements in place for our projects and while @Mike Wood makes a very good point in regards to just hiring a builder and creating more profits for yourself there can be a high amount of value partnering in a deal like this.  Our partner had limited capital and no lending relationships and was hesitant to oversee a build project.  Our first project together has gone extremly well and we are now in the process of buying two additional parcels that will hopefully yield 7 more homes.  

In addition, to echo Mike's point about building modern, you will certainly have a higher per sq/ft build price and a smaller buyer pool.  There is a distinct reason that most modern style homes are contracted custom homes.