All Forum Posts by: Chris Adams

REI is not for everyone, its hard work and the learning curve is different for everyone. Many people will try and fail, but the ones that learn the correct ways to analyze properties, screen tenants, hire PM's and turn REI into a functioning business model will benefit from significant financial gains.

When people says its bad to invest in rentals/flips and the like they are often regurgitating poor information they received from someone else. Its much easier for someone to call REI a bad idea then it is for them to admit they couldn't possibly learn the business.

These same people have become so used to the 40 hr grind that they don't want to leave the "safety net" they think they have in a weekly paycheck.

If REI is what you want to do then listen closely to the skeptics and ask them for specific reasons to back up their opinions.

Ask us on BP a lot of questions and learn everything you can.

@Jeff Kehl Oddly enough I may be driving to South Georgia in the near future.

Thank you @Brandon Turner @Joshua Dorkin and @Karen Margrave 

@Jeff Kehl 

One way to measure demand is to work with a realtor that can search MLS for sold duplexes in your area. I also looked at 2 large builders that had similar projects going. And they where selling at a rapid pace. I had something they didn't have, wooded lots and since my subdivision was small, ( Theirs was 100+ lots) it was a very quiet serene location.

My deal is located on the outside edge of the Chicago Market. The city I am in is up and coming and currently in the top 5 cities for new construction building permits in the Chicagoland area. 

I can tell you my construction cost is around $87/sf without lot for my base unit. I didn't estimate cost, I went out and got hard bids from all subs. The reason I am profitable where the other builders weren't is because my land cost is much less than theirs, and I sharpened up my construction cost about 6k per unit. They made $8k per unit, I am over $20k per unit.

The housing market is much different now than it was in 2006-7. We have to give people nice homes, on a budget. Price is everything, can you drop the full brick on these buildings or is it a covenant?. I offer a nice base unit with a great floor plan and allow them to upgrade. Don't over build, and stick to tight but reasonable allowances. 

The housing market is a touch and feel market. If you don't have product up to show them its going to be hard to sell. We are selling a dream of a new home, just like a dream of a new car. People need to walk and feel the homes flow. They as consumers will imagine themselves living in the home. They will start placing their furniture, then they talk themselves into buying.

Now imagine how much harder it is to sell a vacant lot. In 15 years I have sold 3x's as many spec homes as presolds. If you can get the numbers right, I believe you will do much better selling specs than vacant lots. IF YOUR AREA IS READY to start buying.

I dont understand your question when you say 

"What is the premium for a new build versus existing older units in your area?"

@Matt Huneycutt @Mary B. 

I have to explain how this started before I can explain how I purchased the property.

As I mentioned last night the subdivision had caused 2 builders to default to the bank, the same bank who I purchased it from. The current owner had not paid the bank any interest in close to 18 months. But he was paying the property taxes and sewer bills, which is one of the reasons they didn't foreclose on him.

My initial involvement in this project was as a GC for the previous owner. He wanted to fire the current project manager (who was a partnering the deal) and hire me to try and save the project. So my first meeting with the bank was with 2 of the 3 partners, the banker and myself.

At this meeting I laid out a very detailed plan to save the partners from foreclosure. This was a 5 page business plan that included sworn statements a cash flow analysis and some sales projections based on a very minimal 8 addresses per year. 

The banker in turn laid out 3 scenarios to the partners. The 3rd scenario being me coming in as an investor. I told him flat out NO, this would never happen. I explained the margins on this deal where horrible. I then explained to the banker, that my initial advice to the partners was to walk away and lick their wounds. In a best case scenario they would recoup about $200k of the $250k they had lost. And they would never be able to show a profit. They where just to far upside down, they had paid pre crash pricing for the development and now they are selling at post crash pricing.

I pointed at the main partner who is a 70+ yo man with high moral values. I said to the banker this man is here because he wants to live up to his deal with the bank. I am here to advise him, and to explain to you how I can save this deal. But under no circumstances will I invest money in this project. I make triple the return buying and rehabbing foreclosures right now. If things went gray the partners would make $8k per address. This was 5% profit margin!

We ended up having 3-4 meetings and numerous conference calls with the bank. In one meeting the banker said, Chris give me a price you would pay. I answered $450k, but I won't buy it.

The result of these meetings was the bank gave the partners a construction loan to finish a unfinished building that was started. The plan was to use this building as a Sales Model, we would list it on the MLS for exposure but we didn't want to sell it. I started finishing the construction on this building and we got a full price offer as soon as drywall was installed.

I called the main partner and told him if he accepted the offer he would be done. It will take 3 months to get another building up, and we would loose the entire summer selling season. But he didn't really have a choice. His back was against the wall, he was out of cash and the bank wasn't going to give him loans to get the volume where it needed to be.

He looked at me and said, Chris just buy the place. I can't do this any longer and I want to be done. So we sold the address, I made the partners $8,734.00 on the unit after my GC fee. 

Now the really hard part begins. I have to convince my wife that we need to take on $1MM in debt after surviving the economic crash with our credit scores in tact. This wasn't easy!

My next post will explain the bank negotiations in detail.

***WHY I AM DOCUMENTING THIS ***

Before you read this post I want to explain why I am documenting this deal. 

I am where I am today because of the selflessness of a few people that had taken time out of their lives to help teach me a lot about real estate, business and life. And they did not expect to gain anything for themselves in return.

in 2009 the economic crash hit my home building company hard. I stopped building and had to liquidate 3 spec homes and 20 acres of land I was about to develop. I found whatever work I could to survive. I got a job delivering RV's across the country, and I was literally sleeping in my truck, driving 12,000 miles a month to survive financially. 

Finally my wife and I started to buy and rehab properties, turning them into rentals. And thru the help of the people I mentioned above I slowly got my life back, and now I am back doing what I love.

My goal is to do this for others. Everyday I wake up, I bounce out of bed and run to a job I love. If I never gain another dollar, but get to keep my career that I love so much I will live a blessed life. If this post helps 1 person reach a dream of their own I will have succeeded in paying it forward.

In June 2014 I just purchased all of the remaining vacant lots (22) inside of a completed duplex subdivision. By completed I mean roads, and infrastructure are all installed and taken over by the city.

2 different companies have gone belly up to the bank since 2006 trying to complete this project. I blame most of the failure on the economic crash, and the rest on mismanagement.

Having built around 100 new construction homes in 20ish mile radius of this location in the past 15 years I knew the area well. Most of my due diligence was spent on getting a grip on the construction prices ( I stopped building new construction in 2010) . Researching sales comps, and looking hard at my competition.

After that I spent hours upon hours creating spreadsheets, construction budgets, and a cash flow analysis of a best and worst case sales scenario. Then I started talking to some of my mentors/peers who's opinion I trust. 

The negotiation with the bank was quite interesting and if interested I will post info on that when I have more time. But here is the result of the negotiations and the final deal I signed.

Amount owed to bank $690k  

Price I paid $468.7k

Terms - Prime floating - currently 3.25%, 2 year deal with 2-1 year renewals of the same

The loan is I/O and debt reduction is straight-line taken down at the commencement of a construction loan.

The bank is to finance 1 spec home at a time during the duration of the loan. Terms of construction loan are prime +1 I/O. Construction loan value to be 100% (yes i said 100% ) of cost, or 80% of value, which ever is less. The CL will be in the $300k range.

I have secured another CL thru my main bank for the 80% of cost, interest only at 5%.

And for all of this I put $0 money down.

$468.7k for the land

$300k for Construction loan A

$300K for Construction loan B

$1,068.7k in loans all secured by my signature, my wifes signature, and tons of loan docs.

From here forward I am going to try to document this project as much as I can while working 70 hours a week. Ask as much as you want and I will do my best to answer.

I will try to get some pictures up soon of the 2 building I have going up right now. 

Goals without execution are just dreams. Execution without a plan is just suicide. 

Chicken and the egg

After taking a few years off from new construction ( our market just died during the crash) Im back up and doing well. One of the many things that seems to have changes is how Builders risk policies are being handled.

I recently set up my BR policy and found out they are billing me for a total of my estimated construction for the year. WHAT ? Needless to say I kind of blew a gasket. I am used to doing a monthly report where I list my projects under construction and then calculate my premium.

My agent says they no longer do it this way. Have you folks found this to be true? 

In order for someone to give you specific information on this scenario beyond what has already been posted we would need to know all of the details of your portfolio and how it is currently structured. 

Terms of all current loans, including loan balances and property values.

Total cost of ownership on each property along with rental income, then break all of this down into a spreadsheet showing DSCR for each property and the total for the portfolio.

Combine this information with a global DSCR and thats what the bank is looking at.

My guess is that your age has less to do with this situation than you think. Look hard at the numbers that come from analyzing your portfolio. 

Its also possible that the bank itself is trying to position its portfolio in a different direction than your goals. Once you get your numbers together start strengthening the portfolio and shopping new banks.

As for demand, with the short time I have been in here they are selling right after drywall. Most buyers don't want to wait to build from scratch, so I am loosing a few buyers by not having enough product up.

But as you said I don't want to be carrying 3 buildings if it slows a bit, and winter is just weeks away.