3 Tips for Building New Construction Homes

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As an investor, you may have been approached by a builder or general contractor over the years, who is interested in starting up a small building company and who needs some funding. Lately, quite a few contractors are having trouble getting the same type of financing they use to, so finding outside investment is critical. Perhaps, you may have an interest in building a home on your own, using your own contacts to save money. Either way, this market makes it very tough to be successful and profitable.

I recently checked in with a friend of mine who is a small builder and who has had some great success in this difficult housing market. He has been building 8 – 10 homes a year for 2nd time move up buyers in the Midwest for the past 10 years or so. I asked him to share a few pointers on how to compete as a small builder in this market filled with inventory, REOs, and vacant lots. Here are couple of his initial thoughts that came to mind.

  1. Find a great lot at a great price. This is probably the most difficult task and needs to be accomplished with a heck of a lot of caution and understanding of your market. The lot must be appealing AND at below market price. You can’t have one and not the other. For example, a lot at a huge discount that backs up to a road or even another house, may not cut it. A killer lot at too high a price point for the market is risky too. You need to do your homework, scour the MLS and other sources, and work your connections.

    When considering the neighborhood, you don’t want to be a pioneer and choose a community with 2 homes built and 100 vacant lots. Look for neighborhoods that are mostly sold out but which still have excellent sites left. If your considering a neighborhood that is now mostly custom homes, be aware that production builders may find the community appealing and buy up the lots – especially if bank owned. Lastly, know the consumer market segment you want to appeal to very well. If it’s the 2nd time move up buyer, for example, be sure the community has the appropriate amenities.

  2. The floor plan needs to be value engineered and geared to the targeted consumer. His main points here are to maximize usable square footage, manage energy costs, and keep it simple. He has taken a tip from the production builders and tries to keep differing gables, high roof pitches, and too many corners on the home to a minimum.

    He has found that his targeted consumers do not care for the dramatic two story vaulted ceilings or giant homes with useless rooms and square footage. His consumers seem to appreciate energy efficiency and the nice newer amenities that new homes provide versus perhaps high upkeep and excessive unused space that resales and REO’s may have.

  3. Trades are hungry. This comes as no surprise but trade pricing is extremely relevant, as many tradesmen are striving to keep their lights on. While you do have to be careful who you use and make sure they don’t go out of business during the building process, it’s important to get the best pricing possible.

Photo: Jug Jones

About Author

Mark is the broker at Indianapolis real estate boutique ICON Realty Partners, LLC. Mark consults national new home builders on large-scale land purchases and advises investors generating income through local rental properties.

4 Comments

  1. Something else to consider – size. I have seen many, dozens, or articles recently regarding the downsizing of homes.
    Reference Yahoo news – Trulia:
    The median American home size has dropped to 2,100 square feet — down from 2,300 at the peak of the housing boom in 2007 — according to a study by Trulia.com, a real estate website. Each year, Builder magazine designs a concept home to reflect the current state of the market. This year, the “Home for the New Economy” is just 1700 square feet.

    And in the Washington Post:
    Great rooms. McMansions. Jumbo mortgages. The American home – and everything associated with it – got supersized during the housing boom. Big was good. Bigger was better. Biggest was best of all. Not anymore. Now the B-word carries less cachet and more baggage.

    I market in fairly affluent suburban market which has held together pretty well over the recession, but we are still seeing this national trend.

  2. Good post, thankd.

    Pricing land is so important, both on the land purchase and the potential resale. Not enough developers put the time in to understand those dynamics. Nothing is more important in the development process. If the project is not economically feasible, not much else matters.

  3. I really like the emphasis on the purchase of the lot – that is really where you make or break your bottom line. A technique that has worked for me is to look at the prices (actual selling prices) of other homes in the neighborhood and then work backwards: Deduct the cost of construction (assuming you have a floor plan in mind) and it will leave you with the cost of your lot and your potential profit, which will help guide you as to what to pay for a lot.

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