How to make a presale agreement?

[williell]

I have a friend who`s dad develops land, I want to make a deal with him and would like ideas. I have been scouring the internet for days, trying to learn how to structure a presale agreement, but I have came up short with nothing that is really helpful. Does anyone know how to do a presale agreement? I would like to gain control over a lot, find a builder who will agree to offer a number of different choices for homes on the property to be built, and then presell it. I would like to finance the construction using the deposit and successive payments made during different stages of construction, as described in a presale agreement, so that means that I also need to have a deposit protection contract. The idea is still really rough, I need to work it out more, but I know that it can be done.

 

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[williell]

I was thinking that the buyer would have to pay the deposit, and then so much depending on what stage of construction we are in. I do construction management, so I know how things should work and won't have contractors ripping me off. I'm going to try and convince my friends dad to finance it, and he can keep a portion of the equity gained on the property.

 

[williell]

When I say that they prepay, I mean that they do something like this, where they pay a deposit, and then more after certain stages of construction are completed.

 

[williell]

So I think that I want to form a partnership with the land developer, we need to agree to develop the property and split the equity gained 75/25 for me. So as partners we would then presale the lot as described above. I only got this idea today, so now I need to really think about how all the contracts will work together, and in what order I will need to do them.

 

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[fanocks2003]

I have a friend who`s dad develops land, I want to make a deal with him and would like ideas. I have been scouring the internet for days, trying to learn how to structure a presale agreement, but I have came up short with nothing that is really helpful. Does anyone know how to do a presale agreement? I would like to gain control over a lot, find a builder who will agree to offer a number of different choices for homes on the property to be built, and then presell it. I would like to finance the construction using the deposit, so that means that I also need to have a deposit protection contract. The idea is still really rough, I need to work it out more, but I know that it can be done.

Business lawyers specialised in the are you want to do business in is the best bet if you want real documents made. It cost a little, but it is often worth the cost. Also, you can use the same agreement as a template for future, similar deals as well (with some modification).

 

[hatterasguy]

IMHO here is what I would do, I have done a couple of these.

Firstly make sure whatever you build in this market will sell, pretty fast. Since your playing with bank money I'm guessing you cannot afford to sit on it for 6-12 months.

Now lets talk margin. How much land are we talking? How many houses? At what price? You need to figure out some numbers. For example we can build a basic raised ranch for $110k, a similer sized colonial is $130k, etc. In my area we shoot for at least a $100k profit per deal, or about 30%-35%++. I have no idea if property values in your area can support this.

Now lets say you get your friends dad to agree to sell you a lot for $100k, you know through carefull market research that you can get $325k for a raised ranch on this lot, and maybe $350k for a colonial. Their are a couple of ways for you to do this without any of your own money.

First option is to partner with your friends dad, he provides the lot, you find a buyer for say a $325k raised ranch, get it under contract, build it with you doing the work, and split the profits.

The second option is if you have money you buy into the lot, and get a loan for the construction.

The third option is your friends dad provides the lot (assuming its paid for in cash), and you go and get a hard money loan for the construction.

Now you need to do some research.
Are their any surprises on the lots? This will directly affect what you can afford to pay for them! If you need to pay $75k for a lot to get your margin, and its going to take $30k to run the sewer, well the lot is worth $40k to you. We just did a lot that cost us $25k to hook up the sewer to it, and trust me they can cost a hell of a lot more than that. I looked at one with my uncle over the summer that would have cost $100k. Is their ledge on the site? Blasting is insanly expensive! Renting a machine with a hammer on it isn't cheap either, the costs will build fast! How about water? What about the water table? On some sites you cannot do basements because the water table is 36in down!

Now if your trying to sell a custom home first you need to get the lot approved, that can cost a lot. We just did a little dinky lot and it cost over $3k. You have to pay to get a survey done, their are legal fee's, and the town has some fee's to. If its a big sub division you can have $10k into it easy before any real work starts. Or before you really know what you can build.

Who will do the site work? Its expensive! Are the lots level? Can they get equipment in? We have all the equipment and do it in house to save money. But equipment is pricey, a mid sized Volvo excavator is $200k, a dump truck is $80k, etc.

You need contractors, lots of them, who will you use? Are you experianced enough to tell if they are screwing you or not? Trust me some are good, most will try to screw you.

Building a custom house involves a ton of hand holding, IMHO if you can do it build a spec house do it. However can you hold a very nervious buyers hand and make them confident in your knowledge? This is where an experianced partner comes in!

Not trying to rain on your parade, but their is a lot of work to this! Developers need to do a lot of work, and invest a bit before they see any paychecks. IMHO the best thing you can do is find an experianced partner and get them to do a deal with you.

 

[williell]

IMHO here is what I would do, I have done a couple of these.

Firstly make sure whatever you build in this market will sell, pretty fast. Since your playing with bank money I'm guessing you cannot afford to sit on it for 6-12 months.

Now lets talk margin. How much land are we talking? How many houses? At what price? You need to figure out some numbers. For example we can build a basic raised ranch for $110k, a similer sized colonial is $130k, etc. In my area we shoot for at least a $100k profit per deal, or about 30%-35%++. I have no idea if property values in your area can support this.

Now lets say you get your friends dad to agree to sell you a lot for $100k, you know through carefull market research that you can get $325k for a raised ranch on this lot, and maybe $350k for a colonial. Their are a couple of ways for you to do this without any of your own money.

First option is to partner with your friends dad, he provides the lot, you find a buyer for say a $325k raised ranch, get it under contract, build it with you doing the work, and split the profits.

The second option is if you have money you buy into the lot, and get a loan for the construction.

The third option is your friends dad provides the lot (assuming its paid for in cash), and you go and get a hard money loan for the construction.

Now you need to do some research.
Are their any surprises on the lots? This will directly affect what you can afford to pay for them! If you need to pay $75k for a lot to get your margin, and its going to take $30k to run the sewer, well the lot is worth $40k to you. We just did a lot that cost us $25k to hook up the sewer to it, and trust me they can cost a hell of a lot more than that. I looked at one with my uncle over the summer that would have cost $100k. Is their ledge on the site? Blasting is insanly expensive! Renting a machine with a hammer on it isn't cheap either, the costs will build fast! How about water? What about the water table? On some sites you cannot do basements because the water table is 36in down!

Now if your trying to sell a custom home first you need to get the lot approved, that can cost a lot. We just did a little dinky lot and it cost over $3k. You have to pay to get a survey done, their are legal fee's, and the town has some fee's to. If its a big sub division you can have $10k into it easy before any real work starts. Or before you really know what you can build.

Who will do the site work? Its expensive! Are the lots level? Can they get equipment in? We have all the equipment and do it in house to save money. But equipment is pricey, a mid sized Volvo excavator is $200k, a dump truck is $80k, etc.

You need contractors, lots of them, who will you use? Are you experianced enough to tell if they are screwing you or not? Trust me some are good, most will try to screw you.

Building a custom house involves a ton of hand holding, IMHO if you can do it build a spec house do it. However can you hold a very nervious buyers hand and make them confident in your knowledge? This is where an experianced partner comes in!

Not trying to rain on your parade, but their is a lot of work to this! Developers need to do a lot of work, and invest a bit before they see any paychecks. IMHO the best thing you can do is find an experianced partner and get them to do a deal with you.

Thanks for the input, Its good to know people who I can bounce ideas off of and get a reality check from. I will consult a real estate attorney in February. I want to minimize the risks by doing everything in stages, I will start with one property, and then as negotiated in the contract, be able to develop another, until twenty lots have houses constructed on them. I will conduct a thorough market analysis before I decide what I will try to presale on the lots, all of the lots have the land developed. My best guess is that I can build a house for under 100K and sell it for 300K. I know a good contractor, I know who all of the good trades people are, and I can find cheap materials from a sawmill that I have worked for. I have lived in this community for most of my life, knowing everyone in this business around the West Kootenays seems to help.

 

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[TaxGuy]

hatteras- first off, rep+

Your approach to real-estate is a major source of motivation for me!

And with that, I have a few questions:

Firstly make sure whatever you build in this market will sell, pretty fast. Since your playing with bank money I'm guessing you cannot afford to sit on it for 6-12 months.

Do you mean 6-12 months from inception to completion? Or 6-12 months from the time the house is completed til it is officially sold?

And with that in mind, how long did it take for your first property from the day you got into an agreement with your uncle to day the house was completed and then from there how long did it take to sell?

Finally- how did you come to the numbers for equity share if he put the money towards it?

I'm asking b/c I feel it's relevant to this thread and I know I would like to approach my uncle or a friend of mine who has several SFR's himself, with a similar proposition, but I need to know what value I have to bring to the table to make it worth their while to put their cash into it and so I can get something out when it's all said and done.

 

[hatterasguy]

Thanks for the input, Its good to know people who I can bounce ideas off of and get a reality check from. I will consult a real estate attorney in February. I want to minimize the risks by doing everything in stages, I will start with one property, and then as negotiated in the contract, be able to develop another, until twenty lots have houses constructed on them. I will conduct a thorough market analysis before I decide what I will try to presale on the lots, all of the lots have the land developed. My best guess is that I can build a house for under 100K and sell it for 300K. I know a good contractor, I know who all of the good trades people are, and I can find cheap materials from a sawmill that I have worked for. I have lived in this community for most of my life, knowing everyone in this business around the West Kootenays seems to help.

Sounds like you have a good start, now work out some details. If their is at least $100k of meat in the deal than thats a nice margin, you should have no trouble finding investors/partners.

You have the right idea doing them one at a time. IMHO in this market, don't build more than you can afford to sit on.

 

[hatterasguy]

hatteras- first off, rep+

Your approach to real-estate is a major source of motivation for me!

And with that, I have a few questions:



Do you mean 6-12 months from inception to completion? Or 6-12 months from the time the house is completed til it is officially sold?

And with that in mind, how long did it take for your first property from the day you got into an agreement with your uncle to day the house was completed and then from there how long did it take to sell?

Finally- how did you come to the numbers for equity share if he put the money towards it?

I'm asking b/c I feel it's relevant to this thread and I know I would like to approach my uncle or a friend of mine who has several SFR's himself, with a similar proposition, but I need to know what value I have to bring to the table to make it worth their while to put their cash into it and so I can get something out when it's all said and done.

I ment you need to be able to afford to sit on a completed house for up to a year. Maybe even more. Don't build more than you can afford to sit on in this market. Worst case rent and try to sell it again in the future.

Building a house is fast, we figure 90 days from breaking ground to the occupancy permit, maybe less if we rush. One my uncle is doing now is going to be damn near 60 days, and its a big custom build. But thats nuts you have to have your ducks in a row to do something like that.

My first deal still hasn't sold yet. In late May of 2008 I contacted the owners and they agreed to sell. By July/August we had a contract on it, and a closing date for the end of September. This property was in a complicated probate so thats why the dates are so spread out. We closed it in early October, right as the stock market was crashing. So insted of starting it my partner who went through the 80's went into full recession mode and started hording cash. We decided to get the used house sold first before building on the lot. The used house sold fast, on the market in late October closed last week. But now its winter and you don't build in the winter in New England unless you are forced to. So were going to wait to April to start it. Luckly we have some people very interested and I may have the new house presold. That would be nice.

You can rush it sometimes, but from finding the lot to closing on the new house your looking at a year, maybe longer in this market. Unless a lot of ducks fall into a row it takes time. Thats why you need to have a lot of stuff going. However building lots are pretty much money in the bank, and if you buy them for cash have almost no holding costs. It's nice to hold some in your back pocket, land is usualy a good investment if bought properly.

As for how we share the profits its simple really. He brings half the money, I bring the other half. We split the profits 50/50. My half of the money is expensive so I'm losing a big chunk of my 50%, and I'm going to have to live with that until I have some cash saved up to get cheaper money. Doing these things without any of your own money is expensive! I also bring the deals to the table, and they are profitable deals that fit in his business model. When I present a deal to him I know if we can put it together he will want to do it, and I have already determined that the people want to sell for a price that will work.

He is helping me out so I work under his business to avoid having to find my own attorney, insurance, license etc, etc. For starting out its a good arrangment, like an apprentinceship really. Developing real estate is a tough, complicated, and expensive business. But if you enjoy the work and challange, I think its quite enjoyable.

 

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