All Forum Posts by: John Blackman

Check with your accountant to make sure claiming it makes sense for your taxes.  For some fun late night reading:

http://www.irs.gov/publications/p527/ch02.html#en_US_2013_publink1000219026

@Derek Carroll 

We have done both where we have it under contract and where we have already purchased the land.  For iFunding we need to put our equity in at closing of the raise.  It many cases we have already spent that $10k in prestart expenses which count as equity.

This is a pier and beam foundation which serves a couple of purposes. 

1) It can be placed closer to a tree without impacting the critical root zone

2) You can elevate the Finished Floor Elevation for less because you're dealing with less concrete.  This is also great for getting out of a flood plain

3) It can be adjusted over time so if the soils sink, you can shim the piers.

Before the foundation is done, the surveyor will have marked the lot and done a form survey that makes sure the concrete guy puts everything in the right place.  A really fast concrete vendor can do a foundation like this in a week.

Once all of the piers are on, the subfloor is built on top.  Even though this is lumber, I count it as part of the foundation budget as this is the platform you are going to build on top of.

Texas has termites, so every foundation needs to be treated for them.  You may not need to do this depending on where you build.

It's also important to dig and pour your posts on the same day.  If you don't, you can leave a big 6 - 8' pit in the ground that is a hazard.  Someone can fall into it and hurt themselves, so make sure you don't leave any holes behind.  If you dig it, pour it!

UPDATE:

So we go out to pull the old driveway and slab from 50 years ago on this lot and there is still an active gas line on it!  Even though there is no service, you still need to have the lines pulled.  This was a bit of a surprise to me because I wasn't expecting there to be an active line on a lot that hasn't had a structure for decades.

This is a big deal though.  You want to make sure all of the utilities are pulled and you get an OK from your local utility before doing any demo work, even pulling up a driveway.  Ripping open a gas line can be life threatening.

I have one but it is specific to Texas and sites specific civil case law.  See if you can get one from a developer in Colorado.  There's got to be someone on here from Colorado with a good form.

Small world, so you are the Charlotte NC deal on iFunding.  Nice to meet you @Kenneth Bell 

We are going through a subdivide in Austin right now.  We're on the tail end of it, but it has been a bear.  It's taken us almost a year to get through it, most of that time was being stuck in the city's historic review process.  Now we are learning how to do asbestos remediation which is a complete racket out here.  It won't affect the profitability of the project, but it's going to hit us time wise.

Did you have to do any demo, or were the lots fundamentally clear?  From the pics it looks pretty clear.

What kind of soils do you have there?  Are you doing soils sampling for your foundation design?

Would love to track your progress.  I love new build stories!

The bank will usually take about 30 days to process your loan.  Most of that time is waiting on their appraiser.  I've had some bank appraisers use comps in a separate zip code 12 miles away across a large body of water, so you may run into appraisers who don't know what they are doing, especially if they are new.  Assuming your loan is approved, you'll need to set up a closing and sign your life away, well your debt guarantee at least.

Once the bank loan is closed, the first thing I do is double check that the builder's risk insurance is paid and has the bank on as a additionally insured.  You will have completed a construction contract by now as well.  The next part is the first draw which is a tricky one.

For the 1106 Berger project our land was pretty inexpensive.  We paid $28,000 for the land but our loan was $140,000, so the loan to cost started at 83% which is too high.  So we needed to bring some more cash to the table to put some more equity on the ground.  We added $32,000 in cash to the project to do the pre-starts and foundation.  This put our loan to cost at 70%, a number the bank was comfortable with.

So we were able to start the foundation with our own cash.  However you need to make sure you get the loan complete before you spend your own money.  Again, we're making sure the bank keeps first position here.  So once we have the loan, we can spend our own money.  Sounds a little weird, but that's the way it is.

Here are the pictures of the tool shed and demo of the driveway.  There were no utilities to the shed, so that means we saved a few weeks waiting on the utility companies to pull the lines and secure them.  Normally you want to get an all clear from all of your utilities before starting a demo.

With the ground cleared, we can start on the foundation. So far we have not made our first bank draw.

$/sqft to build is kind of like a rainbow.  You're never quite sure where the end is.  My numbers below include architect fees, utility taps, engineering, permitting, surveys, and GC fees which are sometimes omitted from a builder's $/sqft number.  These are all in Austin, TX.

$110/sqft - New, basic finish out, mix of carpet, simple hardwoods, level 1 granite

$120/sqft - Nicer fixtures, stained concrete, nicer hardwoods, more complex roof designs and decks

These are all spec prices.  Customs are up to the buyer, the sky is the limit there.

I would just make a new LLC and re-deed the properties you are going to keep to the new entity. Makes it much easier for tax time too.

The architect presents a rough design that you approve after feedback from the builder and your sales expert.  Once the architectural designs are complete we send it to the engineer so they can create a foundation and framing design.  These are both required to submit for your permit (in Austin TX at least)

To prepare for doing the foundation, all of the following need to be considered.

1. Grade the lot - A flat lot is a good lot.  Having a slope introduces lots of risk, all manageable though.  You may have to step the foundation and create retaining walls.  Make sure you have a plan for drainage to get rain water to the storm drains.  You may need mira drains around the foundation.  In the case of this project we did not need any of those.  The lot was flat, so drainage wasn't much of an issue.

2. Remove any previous structures, foundations, removable trees and driveways.

This lot had an old tool shed with no utilities and a very old driveway.  Driveways are usually concrete and cost just as much or more to dispose of the old concrete as to actually bust it up.  Knocking down the shed was a simple task with the same back-hoe that pulled up the concrete.

If you have an existing structure, make sure you disconnect the services and have the utility pull the lines back away from the house.  Even if you disconnect the service, if the lines aren't pulled back they can still cause a gas leak or electrical line discharge.

BUDGET

Time spent preparing your budget is time well spent. You make all of your money on the spread, and the budget is that plan. Work here will save you time and money which means it will increase your IRR. After you have done a few, they will take less work, but at first spend a good amount of time preparing and understanding your budget. You can use $/sqft generalities, but every project will have places that will cost more and less. Areas that cause price swings tend to be:

1. Foundation design - soils, slope, flood status and trees all influence this.  Flat dry lots are the least expensive.  Drainage and extra concrete to deal with a slope add cost.

2. Framing - This is generally an easy one to be consistent on.  Exterior siding, special windows and roof types can be big cost influencers.

3. Mechanicals - The core set of AC, Electrical, and plumbing are pretty easy to predict.  Big cost movers are fixtures, number of bathrooms, and number of can lights.  HVAC is usually related strictly to size.  If you have a two story unit you can spend more on a two zone HVAC system.

4. Insulation/Sheetrock - These are pretty standard rates and shouldn't fluctuate much.  They are based on size of the house.  Spray foam insulation costs a little bit more but is far more efficient.  We us it in most of our homes.

5. Interior Finishes - The sky is the limit here.  This is where you price out your home based on the area.  You can make nice looking inexpensive homes with builder grade carpet, flooring, and countertops.  You can also cut into your margins by buying things you think are nice, but you don't need for the market you are selling in.  Don't price yourself out of the market or build the nicest house in the neighborhood.

6. Fencing and Decks - These can get expensive depending on how high you make them and what material you use.  Stained treated pine looks great and costs less than cedar.  Vertical fences are fine in most places, but horizontal ones look really sharp but are more expensive.  They do have a big curb appeal though.

7. Landscaping - This is usually pretty fixed.  However in hot climates like Texas I would recommend going with what they call xeri-scaping or no-scape designs that are mostly rock and cactus.  Once you put that grass down, it starts dying.  It's very hard to keep alive while you are showing your new home.  It has to be cut and becomes a maintenance headache.  A nice pretty rock garden it maintenance free.  Be careful about your market here.  This doesn't work everywhere.

8. Contingency - Plan for 5% to 10% of your budget in contingency for surprises.  Worst case you will have a little left over.  More likely there will be some surprise that this will cover.

I know you're probably thinking, what does each area cost?  Well the prices I have are just for my area, so they are not reliable for all markets.  I can't link a budget in the post, so you'll have to ask me directly and I'll send you my budget. 

For each line item, use a cost code as well so you can track how much you are spending from project to project and make the book keeper's life a little easier.

BANK

If you are using a construction lender which is likely, make sure you get permission from the bank that it is ok to do grading and demolition before the loan is originated.  Most banks will allow this assuming you can provide lien releases.  They want to stay in first position.  They will also want to see the full design plans and budget for what you are going to build.  Their appraisers will generate a price for the finished property to determine if your loan is well under that price for the bank's tastes.

INSURANCE

You will need to purchase builder's risk insurance before closing on the loan.  The bank will need to be listed as additionally insured.  I only buy enough insurance to replace my building costs, not the retail amount.  This insurance just pays for material lost to vandalism, fire, some natural disaster.  Check your policy.

You can submit the plans and budget to the bank while the permit is going through the city or your legislative equivalent.  Some banks may want to see an approved permit first, some may not.  Ideally you can time the bank underwriting process to be complete at the same time the permit is ready.  This is a tricky game, and rarely do they happen at the same time.  You'll want to get the permit first if you get to choose, otherwise you will be paying for a note without a permit in hand, wasting money.  Small local bank underwriting usually takes about 30 days to complete.  Once you develop a good relationship with a bank and have performed several successful loans, that time may go down.

CONSTRUCTION CONTRACT

The bank will also need a construction contract between you and the builder unless you are the builder.  That contract should do two primary things

1) Establish a price and schedule for the project

2) Set liability on the builder for insurable items.  This ensures that the builder uses contractors and subs that carry insurance.  These laws vary greatly by state, so make sure you protect yourself from an injured worker scenario.  Each sub contractor should carry the insurance to cover these types of accidents, and your construction contract puts the liability on the GC to ensure that he hires contractors with the insurance required by your state's laws.  Secondarily, you should carry a general liability policy for your company or yourself.  These are generally not very expensive and cover you in a worst case scenario.

The construction contract covers a lot more than that, but those are the two key components I am most concerned with.  I am not a lawyer and am not giving legal advice.  Please consult your attorney to determine an appropriate construction contract for your business. 

ENTITY DOCUMENTATION

You will also need formation documentation for your entity.  If you have a partnership, the controlling partner will need to be clearly laid out in your corporate docs so the bank knows who they will be dealing with and who has what power.

Now that you've assembled all of that, your bank file should be ready for processing.  Good luck at the loan committee review!