Residential Land Development: Construction and Marketing Stages

To recap Residential Land Development Part 3 we discussed researching zoning, designing your home, and financing the property.

In this article we will discuss construction and marketing, the final two stages in any development project. These are the action steps in the development process. They’re also two segments that involve the least research, because if you’ve done your homework correctly up to this point, all your data will be double checked and confirmed.

Construction

Once your financing has been approved you’ll meet with a bank manager to discuss the construction draw schedule. If the bank is big enough they will assign a construction loan manager. This person will be different than your loan officer and might even have construction experience. If you’re using a small, local bank it’ likely the loan officer who handled your deal will probably be your account manager as well. In some cases having one person do both functions is a good thing, as you’ll have developed a good relationship with them over the course of the loan underwriting process. Having that relationship may allow the loan officer to ease up on construction draw restrictions like hold backs and advances.

Generally, construction loan money is doled out in draws that match the stages of your construction. Most construction projects follow a pretty tight schedule and your architect or contractor will have to provide that schedule for your meeting with the bank draw manager. Standard construction procedure would be to start with horizontal development like roads, curbs, utilities, grading, etc. Like an erector set, you gradually build vertically, working on things like foundations and basements, then sub floors, floors, frames, walls, roofs, etc.

The draw manager will release funds as each stage of construction is finished. Most banks will wait to fund your draws until after the materials have actually been installed, while others will pay when suppliers drop off the product on site. This is an important point to note. Inexperienced builders without supplier credit may have to put down significant deposits just to get material to their site. In most cases, your construction lender will not provide advances to suppliers unless the bank has a very good relationship with that supplier. In these cases it helps to have a working line of credit or credit cards with a high enough balance to cover those advance costs until the loan draw kicks in. In some cases, your construction lender will advance you contingency funds to cover these costs. They might also allow you to obtain a small personal or business loan separate from the construction loan that will cover these costs. When applying for a construction loan, make sure to find out how your bank will cover these issues and whether or not those additional loan options will be available to you.

Another thing to note in regard to construction loans is the “Hold back”. Many construction lenders hold back 10% of the construction loan until the entire project has reached completion. They do this to make sure that contractors and suppliers don’t run off to another job before they finish the work they promised. Unfortunately this has been known to happen with some unscrupulous contractors and subcontractors and the banks developed the hold back provision to protect their investment. Be aware of it, and work it into your construction cash flow projections.

Most reputable contractors are aware of the ways construction lenders make payments and generally accept funds up to a few weeks after all work has been performed. You may need to place a few well timed calls to your construction draw manager to get that final release though. Make sure to stay on top of invoicing and billing. If you wait to long to pay your contractors they may file a mechanics lien, which can affect the marketability of your home.

Marketing

Many books have been written on the science of marketing property. I believe you can boil them all down to one universal truth: The only way to guarantee your property sells is to price it below the competition. Think about it; if you had the option of buying a red Ferrari from Dealer A at $250,000 or the same red Ferrari from Dealer B at $200,000, all things like service, features, and taxes being equal, which one are you going to buy? You’ll go with the cheaper one from Dealer B. Everyone would. The same rule applies to buying homes. All things being equal, the cheaper home will always win, and don’t let anyone tell you otherwise. It’s human nature.

Here’s the caveat: not all homes are created equal. This is why there are thousands of agents and brokers out there to help you market the unique qualities of your home. When working on development projects I recommend the owner/investor/developer get the help of a qualified, licensed broker or agent at the very beginning of the project. They will help determine the likely sales price of the property well before it is built. They can also re-run the numbers during construction and update you as to any changes in the market. This can help you plan along the way. If the market is dropping significantly and there is a chance your profit will be diminished come sales time you might want to get rid of those high end finishes and go for the cheaper ones, preserving your equity and hopefully your back end profit.

If you’ve done your research correctly you know the features and amenities your end buyer will want for that particular neighborhood. This will allow you and your broker to start marketing the property very early in the process. During hot markets, you may even be able to generate a pre-sale, where a buyer agrees to purchase the property from you even before it is built. Some sales brokerage firms have the ability to create great marketing material even before you have pictures for them to market. They are able to generate buzz about your project and bring buyers who can envision the home before it’s finished. A pre-sale is good for the buyer too, because you may be able to tailor certain items in the home to their needs.

If pre-sales are not an option you’ll sell your home the old-fashioned way; by putting it on the MLS or hanging a sign out front. With the technological advances of the day, you should also explore the many real estate listing sites not associated with any MLS, online video tours, and photo blogs. You should also consider setting up a website just for your home, which can be optimized for the web and also generate traffic to your listing information. The idea is to generate foot traffic to your home, and any way you can do that will get you one step closer to a sale.

Working with Agents and Brokers

There are some things you should ask when interviewing agents and brokers who might be coming on board to take over your marketing efforts.

Sales Record – Ask about their record over the last few months. While working with the top producer from 1983-1992 may tell you something about that agent in general, you want to know how they are marketing property right now, as that will be more relevant to your property. You don’t necessarily need to go with an agent who has 20 years under their belt, but know that if you choose a newbie your property might sit on the market longer.

Ability to Market – Some agents work for very large firms and have long arms when it comes to their ability to reach your target market. The big national chains also cover some of the costs of the agent when it comes to marketing and that gives them an advantage over the independent agent who might not be able to afford new fliers every week. Make sure you ask about all the different marketing methods your broker will employ to sell your home. These can include, but are not limited to the following:

Listing in newspaper (yes, people still read the newspaper)
Online listings
MLS
Color flyers and brochures at the property, online, and throughout the neighborhood surrounding the property
Postcards mailed to other owners and renters surrounding your property
Multiple public open houses and broker open houses
New listing postcards and mailings to local agents

To sell a green home that a client developed in an area that was known to frequent several species of interesting birds we invited the Audubon society to hold their local meetings at the house. This allowed for increased traffic and good word-of-mouth.

Marketing is about being creative and differentiating your home from the competition. Anything you can do to accomplish that goal will help you sell your property quicker than the others. The faster you sell, the faster you can move on to your next project and do it all over again.

If you are faced with a situation where you cannot sell the property or it is taking much longer than expected you need to re-run your numbers. Maintenance costs and construction loan payments can get very expensive. Your agent should be able to tell you if you need to drop your list price to affect a sale. Sometimes lowering your profit margin may be the only way to get rid of the property. This method beats holding onto it for too long and watching your profit get erased completely. I’ve seen too many developers try to do it all themselves, sticking to some made up number in their head, only to find when they do sell the property they did so at a loss. You should be meeting with your agent or broker every week to check the latest showings, review offers or comments from interested parties. If you go a month without a visitor its time to change your marketing methods. If you go a month with a phone call from your agent its time to get a new agent.

You may have noticed we did not cover any maintenance related topics like property management or land lording. Technically, these are not topics related to the development of residential property, unless of course you are developing specifically to hold the property and rent it. If that is the case, you’ll be less concerned with marketing a sale immediately after the completion of construction and more concerned with renters. Those who have tried to sell their homes but have failed to find a buyer will likely be in the same position.

Start your search with a good property management firm or local rental association. They usually have rental lists or websites that capture leads from prospective tenants. These services usually charge a monthly fee in addition to a placement fee when you sign a contract with a renter they help you find. These services are worth their fees if they can find you a renter quickly. This will help save you on holding and vacancy costs that can start eroding your potential profit.

That’s it for the residential land development series. I wish you good luck in all your development endeavors, and I hope you found this information helpful.

Should you want to review previous articles you can find them here:

Photo Credit: Brock Builders

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.