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.
- 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.
- 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.
- 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