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By Barry on 6/6/2010


I must admit, I'm a little afraid to post this question since I know most people are still pessimistic about real estate investment right now. I am looking for honest opinions from O-B veterans, but hopefully insightful comments from those with a glass-half-full view of life or those with recent success stories. 

I'm desperately in need of a career change, and have had my heart set on building for years now. Just trying to patiently wait for the right timing. My question is, in today's economy, do you think it would be possible for a very dedicated young person to earn a modest living building and selling maybe one or two small homes a year using the principles outlined in the OBB? Or is this still best left to the big dogs with the deep pockets for a few more years?

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By Michael in Cave Creek, AZ on 6/14/2010


<link rel="File-List" href="file:///C:%5CDOCUME%7E1%5CMICHAE%7E1%5CLOCALS%7E1%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" LatentStyleCount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> <p class="MsoNormal">It is possible to earn a nice income from <span style=""></span>owner-building as an avocation. If building is your primary job, you are a developer or general contractor. Typical licensing laws allow a person to build one home per year for their personal use and enjoyment.<span style=""> </span>This is a great way to get started. </p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">To build you need access to capital. Banks currently are not making construction loans for new single-family residences being built by individuals or small/medium developers. <br></p><p class="MsoNormal"><br></p> <p class="MsoNormal">If you have cash, land and/or angel investors in your family, building a new home from scratch might be viable. Be sure to compare buy-versus-build costs in the community where you are considering your project. If you can buy a house cheaper than you can build it, your project is not economically viable until the numbers change. </p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">You should also be prepared for the possibility that your project will not sell. Your project is viable if you can rent it for 1% or more of the total capital cost per month.<span style=""> </span>Otherwise, consider a different project until you have found one that meets this criterion. The best way to meet this criterion is to build or rehabilitate a modest home in a safe but not fancy neighborhood. </p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">To get started, I would find a dilapidated and uninhabitable structure that can be rehabilitated at reasonable cost.<span style=""> </span>The structure might have fire damage, all of the windows missing, and perhaps no intact plumbing, electrical and heating systems. The candidate structure is virtually certain not to have a working kitchen, appliances and bathroom. The structure will be unlivable in as-is condition and a building permit will be needed to make significant major renovations. </p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">The goal is to find a structure for less than the cost of undeveloped land, but with greater value than undeveloped land, because the site is graded, the footing is intact, and the utilities between the street and the structure are intact.<span style=""> </span>Also because the structure is existing, there should be fewer impact fees and permit fess for a remodel than a new build.<span style=""> </span>There is a lot of competition for these buildings, but now is an ideal time to acquire structures like this from the foreclosing lenders.<span style=""> </span>You will likely have to bid well above the asking price. The ability to accurately estimate completion costs and remodel efficiently are key to success in this competitive game. </p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">The ideal structure will also be eligible for a 203K acquisition and construction loan. <span style="">&nbsp;</span></p> <p class="MsoNormal"><br></p><p class="MsoNormal">If you do a good job, everyone in the neighborhood will know about your project. Your neighbors will be happy that the eyesore on the block is being cleaned up. Be sure to introduce yourself and give the neighbors your number, in case they have concerns or see something that doesn’t look right.<span style=""> </span>This also gives you chance to correct any problems that might exist at the site (trash, starting too early, etc.) before the neighbors call the authorities. You have just recruited the best guards and watchmen in the neighborhood to protect your project form vandals and thieves.<span style=""> </span>When you are done, potential renters and buyers will be referred to you<span style=""> </span>by word of mouth in the neighborhood. <span style="">&nbsp;</span></p> <p class="MsoNormal"><o:p>&nbsp;</o:p></p> <p class="MsoNormal">Good luck with your endeavors and keep your day job until your investment properties are generating a consistent long-term income stream. </p>
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By Barry on 6/19/2010


Michael,
Thank you so much for the reply! It is very obvious from your post that you are well educated on the subject. Exactly the type of advice I was hoping for. 

I have some experience with rehab, but only minor cosmetic repair. Essentially "fix and flip", though I hate that expression. My goal is to take the next step and build new. Gradually acquire experience through owner-building my own homes and eventually become licensed. Are your recommendations to rehab a property instead of build new because your experience has proven to you that this type of project offers a better return on investment right now, or would you think building new would be more profitable but just out of my reach since lending has tightened up? Or is this just unique to each local market? I've noticed the local builders are building spec again here. Does this mean it's feasible to build for profit again, or are these builders just desperate and gambling?

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By Arne in Houston, TX on 8/3/2010


Actually, the big dogs are hurting the most right now, since many of them relied on volume and when you rely on volume, you have to build for the masses. Right now, decent mortgages are for people in the 720-plus credit-score range and that is the minority, not the masses. As far as bank credit for developers of single-family homes, it is rare, and if you are looking to buy dirt for future building, most banks won't touch the deal.


On to being a small builder. To deal with the banks, you have to approach the deal as if you are building a second/vacation home, NOT a home you are planning to sell without occupying.   

You get a construction loan, build the home and hopefully sell the home by the time you complete it. If you haven't sold the home by completion, you will have to close on a conventional mortgage and carry the mortgage and expenses while you continue to try and sell the property. When you sell your second home, then you can start working on the next project. 

To do this financially, 

First, you have to have the cash to be able to put a real down payment down. I would be looking at 30% down so a 70 LTV max on the appraised value. 

Second, you better have strong credit going into this with high scores (750-800 plus) and keep them high by keeping your other debt low and paid on time.

Third, the bank will want to see you have the documentable income to carry the payments on the construction loan and on the mortgage with strong ratios, not slim ones. Remember that your ratio will be based on your current home and the one you are building; so if you are paying $1,500 per month in mortgage, taxes and insurance on your current home and you make $10,000 per month from your day job, you only have about $1,500 per month to carry the second property in a perm mortgage because $3,000 ($1,500 + $1,500) would be a 30% debt-to-income ratio on housing. 

Many people view being a builder as the skills it takes to build a home; skills like carpentry, electrical and plumbing. In reality, that is not being a builder, that is being a tradesperson. Being a builder is about finance, servicing debt, managing supply, and project planning and management. Many a successful builder could not cut a roof rafter properly if their life depended on it. As well, many a top tradesperson who can do beautiful work themselves has failed miserably in being a builder, because they lack financial and management skills. In today's market, it takes a very savvy business person to be successful. When the market was hot, there was a lot of room for marginally-skilled people to do well. Those days are over and may not return for another 10 years, if ever. 

I know one builder who always had a day job and being a builder was a second job. That paycheck every two weeks gave him a lot of freedom even when things were hot. Today, he is only building homes for people who have construction-to-perm financing and staying clear of building spec homes, but he is still in business. In contrast, I knew of another builder who was asking buyers to construction-finance his spec homes when the market was hot. Right now, I don't even think he is even in business. 

If you do this, be smart and bank the profits you make on a home sales to build up cash reserves to strengthen your financial position even more. I would probably start with building your own home to work through the process and get your feet wet. Might even be a good plan to build your own home, move in and put it on the market to sell as you work on your next home.

As background, I was in banking management, so I am looking at this from a banking perspective.

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By Rob in Downers Grove, IL on 8/4/2010


I could not agree with you more, Arne. Having just finished my first house this month, I can say that I learned so many things along the way that will save me money the next time I do this. It is a balancing act; you need to execute on the business side of things to do this successfully. I was constantly thinking about finance during my project. 


If you happen to own your land outright or have a decent LTV and great credit, you will find a local bank to give you money. I sold my existing home and moved into a rental before I started. I didn't want to get stuck with two homes in this economy. 

This is a great time to build, because everyone is looking for work and you can get some great deals on material and labor. Plus you can get away with scheduling errors when people are more available. 

I would think that building a house for someone else would add another element of complexity.

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By Barry on 8/4/2010


Arne,

Thank you for taking the time to contribute your experience. I also come from a banking background, having worked in both residential and commercial lending. I grew up working in the trades, and got my formal education in finance. I have always been very financially disciplined, or "cheap" as my friends would say. I am hoping I might be able to leverage this combination in a way that will allow me to be successful where some recently have not. Your advice makes a lot of sense to me.

I had also planned to follow Rob's model and sell my current home before building. This would effectively leave me without any debt. Basically, I want a financial profile that my lender can't say no to, in order to offset the fact that I'm intending to manage the entire project myself without much involvement from a licensed contractor and very little project-management experience of my own.

Thanks again! The support has been great!  I am very much looking forward to getting this project going now.

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By Arne in Houston, TX on 8/5/2010


Barry,


I wish you the best in your project. 

One tool you should take a bit of time to learn to use is a project-management software application. If you're a Windows person, Microsoft Project... if you are an Apple OSX person, the Merlin Project Management program is a good way to go. Merlin can be downloaded for free and you can build projects with up to 40 activities and save them without buying the license for $149.   

Another item that I think is good to use is a business-accounting package. QuickBooks Pro, Peachtree, etc. Even as an individual, put yourself in a business mindset and keep electronic financial records. 

Finally, when it comes to technology, get a good scanner and take every piece of paper and scan them into .pdf files.  

I would agree that selling a current home and getting an apartment during the build can be the way to go, especially if you are in a solid equity position and don't want to fathom carrying two mortgages if your first home hasn't sold on time. Eventually, if you are going to build homes for sale, you are going to want to put roots down and treat the next project as your second home until it is sold.

Rob,

I think one of the biggest challenges in building a home for another person is if you are building a custom "one off" home for them and they are involved from day one of the project. Having to handle change orders, price adjustments, and meet their need for attention during the project. It is very tough for people to have a vision of the final product and how it will come together with all their line-item selections.

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By Roger in Beverly Hills, CA on 3/4/2019


This is a great time to build, because everyone is looking for work and you can get some great deals on material and labor. Plus you can get away with scheduling errors when people are more available. 

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