All Forum Posts by: John Blackman

We always do #1.  Paint is cheap, time isn't.  Most of the work is in the paint prep anyways.  Once it's prepared, the painting itself (sprayer) goes very fast.

We get a soils test on everything we build.  Engineering can always work around it, but it's a matter of cost.  Deep piers and retaining walls are expensive, so stay away from sloped lots if you can.

Mechanics liens in Texas do not go in front of the bank liens.  That comes back to having a good builder.  I used to write checks directly to subs, but I can't scale myself, so I have to rely on GCs; otherwise I would spend all of my time on accounting and writing checks to subs.  Once you have reliable vendors I find that problem goes away.  You will generally have to go through 4-5 before finding a good one that is consistent, performs well for a good price, and doesn't lien your property.  

In general I find it's easier to pay an unfair lien than take it to court.  As hard as it feels to swallow that bullet, legal fees are going to outweigh the cost generally.  So pay them and never hire them again.

Sure, unknown unknowns are always a problem.

If your title search didn't find it, then you may have to go through E&O insurance to get the transaction undone. I have never had to do that fortunately. I've never had the city ask me to tear anything down either. I've always been able to get my permit. I have had delays with the city regarding flood plains that didn't exist when I bought the lot and caused it to be un-buildable until FEMA made the City of Austin remove their flood map restrictions because they didn't match national standards and FEMA actually pays the City of Austin over $2M a year for flood management infrastructure which they threatened to revoke unless the city adhered to FEMA. That kind of thing is entirely unpredictable though. If you worry about meteors like those, you would never build anything. So there is still risk in any deal.

If you can, get your land purchase contract to close with permits.  That reduces your risk the most, but is harder to get.

Easements should be recorded and if they are not your title insurance *should* cover them if they inhibit your build.

I don't know if an old oil tank is recorded with the county or not.  I haven't seen those in Austin as oil heaters don't tend to be popular here.

A historic review can also tag a property so that you cannot demo it.  So if you buy a lot with an old building, hope that nothing important happened there.  Although I do know of some developers that buy them on purpose to rehab them in cooperation with the city, but be prepared for a protracted review with the permitting authorities.

I'm sure there are other gotchas that I haven't experienced as well, so I can only share based on my experience.

Forgot to mention some basics.

1) Get a good builder's risk policy for 10% above your budget.

2) Get good engineering design, this will tell you what your foundation and framing spend will be.

3) Make sure the builder and subs are all properly insured and bonded!  An accident on your job can SINK you if they come after you and they don't have the proper insurance.  Get a liability policy too.

Sink is a powerful word.  When budgeting your project you should create multiple layers of protection financially.  The quick formula is 

(land + development cost + closing costs) * 1.20 = Target sales price

You should be able to come up with equity equal to or greater than 20% of the (land + development costs)

This means that if prices drop by 20% you will break even.  If they drop another 20% you will loose your equity but the bank will get paid.  This will keep your credit alive in a worst case scenario.  In such an event, your target price would have to be 40% lower than what you expected.

Do not assume the market will appreciate from when you buy the land to when you sell the property.  Assume prices will be flat.

1) Paying too much for the land

This can be mitigated a little by dialing back on the finish outs, but be careful you don't under build for your market.  Know what sells well where you are building, sqft matter, but finish outs do too.

2) Market down turn

This is hard to predict, but you should be able to absorb a 20% price hit and get out with your shirt on.

3) Builder runs off with a draw*

This should not happen if your builder fronts the first draw and you pay for everything in arrears.  Banks prefer this too, however builder's that are using their credit on your behalf can only do a few at a time and aren't likely to use their credit for you and thus will cost more.  It is more likely that you will have to risk some of your own equity and be reimbursed by the bank.  If you have enough equity in the project, a bank may advance funds but the land needs to be expensive enough that a bank feels secure doing this (75% LTC usually).

#3 is where I have been burned the most, and only a few times, but it does happen.  You have to go through bad builders to find the good ones.  Watch the numbers like a hawk.  There is truth in accounting, and you will find out real fast if something isn't right if you are counting receipts.  

Never give a builder more than one project at a time until they have proved themselves on one project end-to-end.  This takes a while to vet a builder, but the alternative can kill your business if you are stuck with a builder that has multiple projects and he is over spending all of them before you can rein him in.

So to close

1) Don't pay too much for the land!  Be patient.  Wait until you get a lot that meets the rules above.

2) Watch the books like a mamma watches her eggs.  The money is your first warning sign that something is going wrong.  You should set your budgets so the build works and so that you can reasonably beat each category by 5-10% under budget.  Don't get tempted by shinny upgrades.  Respect your budget, hit it.

Do this a few times and you'll figure out what works.  I learn something new from every project and so will you.

Good luck.

I try to be as emotionless as possible with deals. It doesn't always work but I do my best. In general run your numbers, set your price and don't break your rules. There will always be another deal, there won't always be another $96,000. You make your money when you buy, so when in doubt I pass. I've seen deals that I pass on do well when someone else bought them. So I think good for them, my safety margin is what it is. Don't violate it.

Yes, the first loan we did for a construction project was for a property owned by an LLC. The bank wanted to see the operating agreementt for the LLC that the property was held in so they knew who had control over the property and could make decisions regarding title.

The loan closing docs made me the personal guarantor for the loan. So even though the property was titled to my LLC, I was effectively personally on the hook for the loan. So at the end of the day it's still really all on you. That will not change until you develop a track record with the bank and can show significant assets that your business can use to secure loans.

Also be sure to ask the bank if huge loan will show up on your personal credit.  Some banks will report the loan to the big three credit agencies, some won't because the loan is collateralized by land or cash.  Needless to say I don't do construction loans with banks that put those loans on my personal credit.  Although you may have to do a few that way until you have the track record to get around it.

There are banks who will lend essentially to you (personal guarantee) even if the property is held in an LLC. The bank will want to see your formation docs to know that the LLC is essentially a pass through entity and held by who you say it is. You may have to interview many banks, but you will find some who will lend to you, especially local banks. @Bryan Hancock interviewed easily 100 different banks to find the ones we work with now.  

All of our projects are held in an LLC. For liability purposes, we never buy anything in our personal names. This also keeps the books separate.

A car is a depreciating asset, cash into a deal is an appreciating asset.  Choose.

You could always put a remote controlled drop down screen above the fireplace, recessed of course, and mount a projector arm and casing on the other side of the room.  I used to have an apartment where I did this over a wall of windows and it was amazing.  

When you want to watch TV, the screen comes down, the projector goes on, boom you have a super TV room.  When you're done, the screen rolls up, projector is off, there is no TV in the room at all!  The beautiful fireplace is left behind.