WinGround-Up Residential Development (Spec Home Building)

A rock ledge under the driveway nearly ate the margin on my first build

The lot cost me 62,000 cash and the finished house closed at 452,000, eleven months from the first excavator to the closing table. I own a couple of small buildings and I'd never built anything from dirt, so I'm writing this the way I'd have wanted to read it a year ago.

The house: 1,780 square feet, three bed, two bath, one story, on a flat-ish infill lot in a neighborhood where everything else was built in the 1970s and sells fast.

What it cost me:

Lot: 62,000
Soft costs (plans, survey, engineering, permits, impact fee): 21,400
Site work: 33,800
Vertical construction: 244,000
Loan interest and fees: 18,900
Taxes, insurance, utilities during the build: 3,600
Total: 383,700

Sold at 452,000, paid 27,500 in commission and closing costs, so 424,500 net. Profit 40,800.

A few words in case you're new, because nobody defined these for me. A construction loan funds in draws, meaning the bank pays out in chunks as work gets completed and inspected, not all up front. A CO is the certificate of occupancy, the document from the county that says a person is legally allowed to live in the house. An allowance is a dollar figure the builder writes into the contract for something you haven't picked yet, like flooring, and if you pick something nicer you pay the difference.

The part that nearly killed it: site work was budgeted at 19,000 and came in at 33,800. There's a rock shelf about four feet down running under what became the driveway and the garage slab. Two weeks of hammering, and the bank wouldn't increase the loan for it, so that 14,800 came out of my pocket in a single week. If the shelf had run under the whole footprint instead of a third of it I'd have been writing a very different post.

Second scare: my framing crew vanished for 19 days for a bigger job across town. I had no contractual hold on them. I got them back by paying the balance of their framing draw two days after they finished instead of at the end of the month, which sounds small and was the only thing I had.

What I'd keep: I locked the lumber package price at permit issuance instead of at order, and I wrote a rule that no change over 500 dollars happens without me signing a piece of paper first. Both of those saved me real money. What I'd change is paying for test pits before closing on the lot. That's a few hundred dollars against 14,800.

Answer

1tonyv88SO4CPRO6

The number nobody in here has asked for is what the house rents for, and on a spec build that number is your floor.

You sold in 31 days, so it never mattered. But anchor's question about the six month version is the same question, and the answer is arithmetic. A 1,780 foot three bed two bath in a settled seventies neighborhood probably rents somewhere in the 2,300 to 2,500 range depending on the market. Against that, if you had to roll the construction loan into something permanent on roughly 300,000, plus taxes on a brand new assessment and insurance on a new build, you're likely in the high 2,000s a month. So renting it doesn't hold you, it bleeds you slowly while you keep looking for a buyer. That's survivable for a while, it isn't a plan.

What I'd do before breaking ground on the next one is price the rent first, then design to it. Real second bathroom instead of a bonus room, laundry on the main floor, finishes a tenant won't destroy in year one. It costs you very little at the plan stage and it turns the six month scenario from panic into a decision. Talk to two property managers in that specific pocket and get their rent number in writing before you buy the lot, because they'll tell you things about that neighborhood the sale comps won't.

You got the good outcome. I'd want the bad outcome to be boring next time.

30 replies

3wendy_park48CapitalPRO7

The rock is the story everyone will react to, but I want the loan docs. When the site work blew past budget, did your lender treat that as a budget shortfall and require you to deposit the difference into the loan account before releasing the next draw, or did they just let you pay the excavator direct and keep drawing? Those are very different documents and most construction loan agreements I've read have a "balancing" or "in balance" clause that says the lender can stop funding until the remaining budget covers the remaining work. If yours has one and they chose not to use it, you got a favor, not a right.

4kevin_lombardPG1BPRO5

The draw part is what's tripping me up after two reads. Does the bank hand you money and then you pay the framer, or does the bank pay the framer? And who decides the framing is actually done?

2mikeoconnell7SP2APRO6

Where did the plan set come from and what did it cost you inside that 21,400? I'm trying to work out whether the same plan on the next three lots is a real business or whether the lots are different enough that you redraw every time.

1paulgrant17PassivePRO5

Was the 3,600 of insurance during the build a normal landlord policy? I thought a house with no walls yet needed something different, and I've never understood what covers you if a framing crew leaves a stack of lumber out and it walks off overnight.

2brandonlee36Passive

Did anyone run a soils test before you closed on the lot, or did the county just not require one for a single family slab? I've had two buildings where the thing that broke the budget was below grade and nobody looked.

2bmoreno23AB1B

Honestly my question is one step earlier than everyone else's. How did you find a vacant lot at all? Every listing search I run gives me houses.

3marcus_hale41CG4A

40,800 on 383,700 of cost is 10.6 percent, which is thin for eleven months of full development risk. What I'd want before calling it repeatable is the cash number. How much of your own money was actually out and for how long, and what does the return look like on that instead of on total project cost? The two figures tell very different stories and people quote whichever one flatters them.

1carlos_nunezActive

The 19 days of no framers is the part I've lived. Paying the draw fast is a real lever and most people never think of it. Did the delay cost you anything beyond interest, like did you lose a subcontractor slot downstream because plumbing rough-in got pushed?

1devon_pierce Get yoursPRO5

What made you pick that lot over the others you looked at? I've got about 30 lots on a list and no way to rank them beyond price per square foot of dirt, which I suspect is a bad way to rank them.

1karen_whitfieldPG4APRO7

You bought and built in the same cycle, which is the fast version. I hold lots for years and pay taxes on them the whole time. Your 3,600 carry line stays small only because eleven months is short. Two years of sitting on that lot before you got plans approved and you'd be looking at a different bottom line, and I'd want to know how long entitlement actually took you from purchase to permit in hand.

1tashaford30PB2APRO7

Did you do this alongside a job? I'm trying to picture who takes the call when the excavator hits rock at 9am on a Tuesday.

2aliyah_bAU2APRO6

Following canton's question. I want the cash timeline, not the totals. 62k at closing on the lot, then what, and when? The thing that keeps stopping me is I can't tell whether the first deal needs 80k or 200k and everyone answers in percentages.

1omar_haddadActivePRO11

Your 500 dollar change order rule is the single best line in the post and I'd like to know if it held. On renovations the allowances are where the money leaks, because the client (in your case yourself) walks a tile showroom and comes back with a number 3x the allowance. Did you actually come in on your flooring and cabinet allowances, or did you eat overage there and just not break it out separately?

1joe_delgado5AP4CPRO6

40,800 for eleven months of holding all the risk is roughly what I make on two quick renovations in the same window with a third of the capital exposed. I'm not saying you did badly, I'm saying I don't yet see why I'd move over. What's the argument, that the margin scales when you run three houses at once?

1luis_carrera Get yours

I keep landing on the same worry, which is price per foot at sale. You got 452,000 on 1,780 feet, call it 254 a foot. If the market had given you 240 instead you'd have cleared about 15k and the rock alone would've wiped it out. How much cushion did you actually believe you had when you signed for the lot?

2megan_doyle15 Get yours

Do you always have to buy the lot in cash? That's the part that stopped me reading for a second.

1kevin_lombardPG1BPRO5

Nobody's answered my draw question yet so I've been reading around. I think it works like this: the bank holds the loan money, an inspector goes out and confirms the framing is up, then the bank releases that portion, and the builder gets paid after the work, not before. Which means somebody has to float the framer's cost for a few weeks. Cairn, is that somebody you, or the framer?

1samantha_ruizAU4APRO6

juniper, it's usually the sub floating it, which is exactly why they walk to the bigger job. That's the whole mechanic behind cairn's 19 days.

Cairn, the question I'd ask is what breaks when you run two. My ceiling right now is that I'm the only one who can answer the 9am phone call, and I don't think a second house makes that twice as hard, I think it makes it four times.

1jessreyes12AU1APRO8

The one I would've been too embarrassed to ask in person: at the end, when your buyer's lender sends an appraiser and the appraiser says 431 instead of 452, what happens? Does the buyer just walk, do you cut the price, or is there something in a new construction contract that handles it?

1derekj19SB1B

31 days on market on a brand new house in a 1970s neighborhood is interesting to me. Did the newness help or did it price you above what buyers in that pocket were mentally willing to pay? I'd love to know what the agent said the competing inventory looked like.

1jordan_ellis2ActivePRO6

My question is about the moment before. What was the number you wrote down before you bought the lot that told you to go, and what number would've told you to walk? Not the finished analysis, the go/no-go.

1gregpowell66AG4BPRO8

Rock shelf at four feet in a neighborhood that's been built out since the seventies means somebody already knew. The houses on either side of you have foundations, and the guys who dug them are probably still working within 20 miles. A conversation with a local excavator before closing is free and I'd bet he'd have told you in about ten seconds.

Other thing, 244,000 vertical on 1,780 feet is 137 a foot, which reads like a builder-grade finish package with no surprises in it. If you spec up to please a buyer at the top of the neighborhood, that number moves fast and material pricing has been drifting up a few percent a year, so I'd carry an escalation line on the next one rather than assuming 137 holds.

1aaron_fitz10 Get yoursPRO6

flint's point is the one I'm chewing on. The renovation version puts less money at risk for a shorter time. What ground-up seems to buy you is that you're not inheriting somebody else's bad framing... which cairn traded for somebody else's bad geology, apparently.

2ehernandez74PO2BPRO5

I want the bad version. Suppose it hadn't sold in 31 days and instead it sat for six months. What happens to your construction loan when it matures with the house finished and unsold, and were you told in advance what the extension would cost?

-1dmitri_v6CapitalPRO6

Two document questions. Did you collect lien waivers from every sub at each draw, or only from the general? And was the house held in an entity separate from your rentals? I'm not telling you what to do there, that's a conversation with your own attorney and it varies by state, but a mechanic's lien filed after closing is the failure mode I'd want papered against before I started.

3paulgrant17PassivePRO5

Reading up on my own question, I think the thing I was groping for is a builder's risk policy, which covers the structure while it's under construction and typically ends at the CO. Then you need something else for the gap between CO and closing when it's a finished empty house. Cairn, did you have a gap there, and did anyone tell you about it or did you find out?

1hannah_west29 Get yours

I ran your numbers and I think the 40,800 is real but it's doing more work than it should.

You didn't charge yourself anything for the 62,000 sitting in that lot from purchase to closing. If you charge it even 10 percent for the fourteen months it was tied up, that's about 7,200 off. You also didn't put a number on your own hours. You said you were on site or on the phone most weeks, so call it 300 hours. At 50 an hour that's 15,000. Now the profit is closer to 18,600 and the deal is a job that paid a modest bonus.

That's not an argument against having done it. It's an argument that the margin doesn't survive one more bad surprise, and the rock was the one you got. So the question I'd want answered is where the second 15,000 of cushion comes from on the next house. Cheaper dirt, a plan you've already built once so the soft costs drop, or a sale price you're more confident in?

1ryanmck27SC2C

27,500 of selling costs on 452,000 is about 6 percent all in. Did you consider listing it yourself, and did your lender or anything in the loan docs have an opinion about who sold it?

4mikeoconnell7SP2APRO6

trellis just reframed the whole thread for me. Designing to the rent floor is the thing I can actually sell as a service to small builders, because most of them are designing to the comp and have no plan B at all.

Cairn, still waiting on the plan set cost if you get a minute. If reusing one set across three lots knocks 8k off soft costs each time, that's a fifth of ledger's missing cushion right there.