If you are a spec builder, how did you go about getting your start? I have my eye on some land but will need financing for that as well as the construction. What do lenders or investors need from me? Any tips? I’ve built one complete house for a relative and have done framing for almost a couple years.
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A rich suck... I mean partner.
ANDYSZ2
WHY DO I HAVE TO EXPLAIN TO FRIENDS AND FAMILY THAT BEING A SOLE PROPRIETOR IS A REAL JOB?
REMODELER/PUNCHOUT SPECIALIST
It's very rare that you'll get a bank to give you money for the land AND the construction. Usually they want you to own the land free and clear, and then they'll give you a % of the construction costs- sometimes up to 90%.
There are hard money lenders out there (private) who will sometimes fund the land too, but they're going to be looking for a big piece of the pie on top of higher interest rates. Even with them it may be tough with only one house under your belt.
Good luck.
Bob
man my eyebrows jumped so high when i saw this thread, for a second there my chin was in my mouth!
that my friend is the 64 dollar question, and when you find the answer for it, i will gladly give you 64 dollars to tell me!
my personal opinion is that now is not the time, in most places its a buyers market, the wrong time to have a spec be done and for sale. if you can time it to buy low and have the spec done and for sale after market turns and it is a sellers market you will do well.
the lesson i learned from two specs in california is the money is expensive, and if it weren't for fees, interest, and time limits i would have made a lot more than excellent wages. if it werent for a rising market i may have lost my but, the good news for me is i was smart enough to pick a good time to learn some lessons!
so far the the best way i found to finance is to use equity, that is the cheapest. for a $75 dollar yearly fee and whatever is the going interest rate you can use equity in property for whatever you want, and you don't have to have liability insurance.(required in cali to the tune of over $10 K a year for construction loans to act as a general contractor and sub everything out, now why would i want to sue myself?)
the smart guys buy inexpensive rentals (cheap that nobody else wants) and keep them rented until property value goes up enough to use the equity to finance their specs, (please if you know a better way tell me) and then once you have that ball rolling you "move" every two years. you can sell a "principal residence" that was your "primary residence" for 2 of the last 5 years with zero capitol gains tax as long as you make less than 500 K for married couple or 250 K for single person. you can still have a "secondary" residence etc all the while, and you can do it every two years.
Absolutely correcto on that 2-year personal-home move thing. That, IMHO, is one of the best ways to get the ball rolling.
It works for ground-up new, or for fixeruppper old.
Zero taxes on the gains, and easier financing.
Works best when your spouse is both a good mechanic (easier hanging rock with two) and a descendent of a good plains indian family (picking up and moving is a no brainer.)
yes well unfortunately my wife is with out a doubt the worst apprentice i have ever had, i actually get the feeling that she does not want to be there helping me! can you imagine?
now the moving thing is not really so bad, as long as you stay in the same neighborhood. one of the reasons for relocating to place we did was the fact that there are several lots that are empty or with rebuildable houses on them within walking distance we can move five times, and never be more than a long walk away so we are covered for the next 10 years
k4,
All of the responses are good. If you can clear the hurdles one thing that really helps the banks in thier consideration is a feasibility study with a basic idea of info as follows:
What is the market situation in your area?
How much is the undeveloped lot or land versus developed value?
What is your projected sales cost?
What are cost for construction, financing, sales or real estate commision, etc.?
Can you show some comparables (new homes of the same size and cost that have recently sold)?
How long will it take to develope the land and build the house?
Can your company carry the home for a period of time before it sells?
Do you have a back-up plan to take over the mortgage or lease if it does not sell, and can you afford the note?
What is your marketing strategy?
Ect.
Everyone has given good advise so far and I am not a spec builder.
I just read a report this a.m. that projects the market to not be as bad next years as most had thought. Then again it's hard to trust those annalist.
In the area I live, it seem to be a real need for small low priced homes. The last decade has built nothing but large homes and McMansions. There is truly a need for affordable homes. The most difficult part will be finding the land to build. Zoning restrictions and road requirements and etc. can really change the bottom line for what you can sell a house.
If you can find the right combination your project will sell fast. The existing builders will more than likely be changing course in this direction creating competition.
Just my 2 cents and good luck!
Start up financing can be as difficult, or as easy as you make it.
It all starts with you, usually.
When you make the decision to build a spec, using some one eles's financing, it will happen. You will find a way to make it happen.
Naturally, you'll need to have a good plan, then present it to someone with enough cash, or borrowing power to finance the plan. If your plan makes financial sense, to you, and to your financier, then your spec building career will happen.
We did it using two different people as partners: the land owner, who owned the land free and clear and we basically secured the ability to build on it using a land contract. We financed the entire build process using cash from someone that was holding his cash in a passbook savings account.
We put up a spec using none of our own money, and we got paid to superintend it, as well as put up the frame and siding including some exterior porchwork. We also roofed it. We paid ourselves as subcontractors and will share in the profits, if there are any. Becuase the market is slow, I don't think there will be any profit. The entire spread will be eaten up by the carrying costs of the financier.
Was this a good deal for us? Yes. We didn't make any profit, but we got paid to do some subcontracting, as well as superintending on a small residential project. The landowner was in no hurry to sell and saw this as an opportunity to get his full price, without any marketing expenses. If the spec sold fast, everyone would have won. it would have been the classic win, win, win scenario.
The idea might sound farfetched, but we made it happen at NO RISK TO US!. The one key to our entry into the spec market was that we could not absorb any of the risk, because our current subcontracting market was shrinking and producing less cash flow. We couldn't risk an additional drain on our cash flow, so we designed our prospectus to reflect that reality.
Our first foray into the spec market would not be considered "successful", if you only look at the bottom line. Of course, I've been around long enough to see some other very significant benefits. Frank has learned that his market studies must reflect more than just price (he built in the mid 250k range, but the 300k specs are selling around our spec!). He learned how to successfully pitch an idea and get a project funded. He's learned that he has to look a financier in the eye and explain that the market is not co-operating.
Are the landowners or financiers upset? No. They are also realists and they had their concerns about the spec market before we started the project. They went into it with open eyes and we clearly outlined our concerns, but also showed the potential. They both "gambled" on the potential. It hasn't worked out so far, except that we managed to book that small amount of subcontract labor last spring. For us, that small bit of cashflow was enormously helpful and we'd do it again in a heartbeat.
Incidently, both the financier and the landowner will "iinvest" with us again. We have the go ahead to sell and move the money into another project. How is this possible? We sold ourselves and our professionalism first, and delivered on all counts. We lived up to our responsibilities and produced a nice house. The market let us down, but we didn't let our creditors down.
Yes, it is possible to get start up financing for a spec. That was my/our first spec in my career and it certainly won't be my last.
It all starts with a decision. Like Nike says; Just Do It.
blue
Blue, just do it works fine when your level of participation in a spec buildout is as your first one was. You were a subcontractor and PM participant, with a side deal for some participation in the profit, but apparently no exposure for loss.
Can't get much better than that.
But for someone going whole hog, all of the usual musts for due diligence apply, such as, and this list is not all-inclusive:
Location, location, location. The number one rule in real estate. And remember, this spec house venture has nothing to do with building. It is all about real estate.
The market. But of course. You need to know it inside and out. I don't know mine, but I have a feel for it, a little feel. Right now, in my market, only the very rich are buying, and what they want is prime on-the-water stuff, at megabucks. And no one does a megabucks spec on the lake in my market. Aside from that, a smattering of vacation homes, at the very bottom of the category, are doing OK. Nothing else. Nothing. You have to do the legwork, and understand your own.
The design. It's gotta be right for what you have chosen as location and market. From siting, to final trim details, to colors and surfaces, everything has to be tuned tightly. Be careful here. Don't cut the wrong corners that will result in lost sales opportunities.
The numbers. Most of all, the numbers. You gotta run out the whole frigging scenario, and do it best case, worst case, and everywhere in between. If it just doesn't add up, just don't do it.
Gene,
I have to agree with Blue a little. The media blitz on the bubble is over rated. If everyone takes the attitude that things have come to an end; well that will happen.
Please don't get me wrong, your post is very educational and on track. Everyone need to keep moving forward as well as the new guy. Competition makes the world go around.
I could give you a very jaded answer, but i'm not in the mood for a rant.
Short answer, get out the credit cards, pawn the first born, refi your house, anything you can do to get it done. I'm starting my 6th rebuild (i dont do specs yet), Me and my business have excellent credit, and i've had my license for 5 years.
I cant get a banker to cross the street to kick me!
Its frustrating. I did find a mortgage broker to help get me into the houses but the rates are insulting.
Bottom line from me, good luck.
cant get a banker to cross the street to kick me!
Its frustrating. I did find a mortgage broker to help get me into the houses but the rates are insulting
Mark, if someone's score (and down payment) won't satisfy the bankers, then they should have avoided them altogether and worked with someone elses's credit. There are literally thousands of people in every metro area that would love you to have their payments taken over.
We are programmed from a very young age to think only of banks as the source of money. Banks are great if both sides of the equation (borrower and loaner) fit the "standard" model. In your case, it sounds like you don't fit that model and would have benefitted from "alternative" sources of financing.
I'm playing that game right now and have vowed never to put my name on a personal recourse loan again. I might not achieve that goal, but it's amazing how close you can come with so little effort.
blue
If you're talking about private investors, i've never had any experience with them. Having said that, for some reason i've never tried to go that route.
I always seem to manage to get things done but its starting to get discouarging, with everything I have going for me I still cant seem to get too far. I'm not stopping though, gotta keep going till I dont need a loan anymore, Then it will be easy right?:>)
I've handled these things from the accounting side and always at the end of the day it took collateral (somebody's) or an incredibly strong co-signer to make a deal happen.
Rich Uncle?
Lottery?
_______________________________________________________________
my tagline fell down, and can't get up
I started spec. building with very little of my own money and no equity to speak of. The banks and credit unions I have worked with were more interested in looking at whether the project made sense than anticipating coming after me if things went wrong. They lent me 75% of what they calculated was the sale price of the finished house. Since the construction costs were much less than this, there was already enough money to buy the land with the first draw. After construction started I was always rushing to get to the next draw, but very rarely had to pay trades with my own money. I have also worked with private investors on the same basis - the only difference being a higher interest rate. I now have a bit of equity to put into projects, but still borrow the same amount - keeping my money for if things go wrong and so I don't have to rush the work to get to the next draw.
Hope this helps. Spec building can be nerve wracking, but having no clients is a huge relief.
Edited 12/28/2006 1:22 am ET by fingersandtoes
i work at the depot and we have this program http://contractorservices.homedepot.com/Services/Loan.aspx
i don't know any details really just that we offer it.
Wow, great tip! I know of Indymac Bank, but didn't know they partnered with HD. I'll have to stop by today and get some details. Thx
i took a quick look, and it looks like a good program for builders looking to act as their own contractor, one of the difficulties i faced in the past was acting as my own contractor, banks i talked to wanted me to hire a contractor.
looked through the FAQ and of course what i think is probably the most frequently asked question wasn't on the list, ie: how much does it cost? this was a situation i have run into before as well in that it seems with every lending institution i deal with they want me to explain all of the smallest details of what, when, how, etc. but i have to go home and decipher and calculate to figure out the bottom line of what the financing will cost me....in other words i HAVE to be upfront and open, but they remain hidden, obscure, and deceptive with much fine print.
i would be curious to see if someone has run the numbers for a build with home despots spec program to see just what it costs to finance with them, if not i may look into it. that might make a good article in fine homebuilding, a how to and comparison of loans for spec. we may as well try to use the internet and this forum to our advantage and share info about shopping for financing to get the best price.
i looked a little more into it and you can use the money anywhere but the catch is 5% cash back on home depot purchases. the best place to go for this info is the pro desk but even then they probally won't know alot but ask to talk to the regional pro manager.
K,
I've had a plan on my desk for some time. I've examined all the ways a spec can be financed. I've learned a few things and remain puzzled by a few.
To begin with, Yes a bank will finance a Spec. they'll even finance your first spec. That comes with a few qualifications. They'll even do it if you owe on the land.
Before my younger daughter was born and all the drama that ensued shortly thereafter, I owned a house and a piece of land for a spec.
After a few months of looking I found a small bank in a farm town about 25 minutes from me. They had four branches and did all their business face to face and with lots of handshakes. They manually underwrite everything.
So long as you qualify to carry the debt load and are willing to sign personally, they will gladly loan you the money(my loan was arranged abot two weeks before my daughter was born, but that's another story).
The problem most often encountered is that people are mortgaged to the limit on their own house and have no room to do this.
The second biggest problem is that any financing will eat into your cut. Remember, each loan payment takes away from the bottom line. And, since what you can build is limited by what you can carry debt wise, the loan costs could end up being a pretty big percentage of your overhead.
Beware "Private financing" of specs right now. Things are slowing now and for smome reason lots of private capital guys see this as a prime opportunity top screw their tradesman partner. If I had a nickle for every guy I know who got burned after 1987 by his " Silent Partner" money man, I wouldn't need to build a spec house.
Also, round these parts anyway, The Private capital guys all want 50%.
Find a small bank and start making nice with them.
Great tip Robert. We just sold our house a couple months ago and netted about $35k, which I have in the bank right now. We're expecting our first child in July. I know a general contractor that may be willing to act as a consultant for the bank's security, so I'm looking into that. I'm planning on walking into banks and asking what they'd need...I hadn't thought of the smaller local guys, but maybe I'll start there. Thx!
the only thing you need is more than enough collateral!!
Think of the Banker or lender as a so called Legit PAWN shop. They either want you to sign personally for loan especially if you own real property homes cars etc or they want to see a balance statement with alot of cash prob 3-4 times what you want to spec a house for or an alternate money stream ( a wife with a 60-100thou job , oh yea and they dont like a bad credit score. That is simply it
First step as I see it is to get some land. Look for owner financing. If you have a lot and some equity in it you can roll that into a construction loan and pay off the owner finance with a first draw. But you have to have it together. That construction interest will be starting right away.
Do the numbers as other people here have said. Remember to include the cost of the money, what the interest payments will be during the course of the project will be and make sure you know of any city/county assesments headed your way.
Get an appraisal first and talk to a realtor that you trust. If you can't build it for less than appraised value I would walk away.
Consider just moving into the thing for two years like other posts are recommending. That is a great thing and how I got started. Even better, owner finance a piece of property with a monthly payment you can afford and then buy a fixer upper entry level house and clean it up.
There are a lot of ways around the bank. But you can't pay your subs or your own helpers with a Home Depot card. You do need to have some cash around. That's the reason I advocate a fixer upper. Stay away from structural, except for maybe a new deck and new windows, maybe. Pace yourself and don't pay for any labor. Home Depot seems to have a standing 6 month no interest, no payment plan that you can turn on toward the end of the remodel for new appliances, carpets, etc.
Remember that selling your primary residence of at least 2 years ( I think it is actually 2 out of 5) means you pay no taxes on that profit. It's a great deal.
When you get through that first spec I would recommend still just moving in. Chances are people will watch you put that together and you will generate as much work as the profit might be from a first house.
Keep buying land no matter what.