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EXECUTION Let's Build a Spec House!

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Blair

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That's very interesting. Did you sell the units individually (townhouse/condo) or keep them for the rental income?
Sold individually, have two current projects that are build to keeps but rest are built and sold. (usually sold before construction starts)
 

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I thought that in a previous post, you indicated that you purchased Lot #2 in December 2015?
Sorry, the house number doesn't correspond to the lot number. In this case, "house #2" was built on "lot #3" in this thread. Whenever I see a land deal I buy it and develop when the time is right. This lot was purchased in January of 2016.

How much labor did you have to put in? Did you factor that in as a cost?
I put a decent amount of labor in on purpose (maybe 20 hours a week). I paid myself the same amount as it would have cost me. Those numbers are included in the "cost of construction". So technically I "made" more than just the profit. I mainly did this to educate myself and have already started limiting my time on current projects.

What areas do you plan to improve on to get your costs down? I am surprised your lot cost is so low.
Improvements:
1. I applied for a contractor license to save the $25k fee I am currently paying per job.
2. I overpaid a few subs which will save $10k
3. Better deal on materials will save $6k
4. I hired an employee to self perform some work saving around $9k
5. I priced house #2 too low. I lost an easy $20k+ there
6. I am going to try to sell the next one myself which could theoretically save $30k (but might not work).

Lot costs - Yes, I bought those lots at the perfect time. I won't have that advantage when I run out (2 left). I expect to pay about $60k for the next round of lots.
 
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What work did you hire an employee to do that would cost less than paying a subcontractor?
Interior trim and interior prep/painting.
 

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Interior trim and interior prep/painting.
How is an employee cheaper than a contractor? The hourly rate should be about the same, but with an employee, you're on the hook for FICA taxes as well... Plus, you should now carry liability and workers comp under your business to cover him, which is likely more expensive than if he was covered under his own policy as a subcontrator.

I always advise investors never to classify a worker as an employee when you can legally classify him as a contractor (per IRS rules). There are few upsides and several downsides (cost, liability, paperwork, overhead, etc)...
 

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10 months of build time. I build three at a time though.
Have you worked on getting build time shortened significantly? I've seen other member mention build times of half as long.

DISCLAIMER: I know nothing of building homes... just going off of what other people are saying?
 
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How is an employee cheaper than a contractor? The hourly rate should be about the same, but with an employee, you're on the hook for FICA taxes as well... Plus, you should now carry liability and workers comp under your business to cover him, which is likely more expensive than if he was covered under his own policy as a subcontrator.

I always advise investors never to classify a worker as an employee when you can legally classify him as a contractor (per IRS rules). There are few upsides and several downsides (cost, liability, paperwork, overhead, etc)...
With all due respect, your advice in this thread is nothing but negative. I find it hard to believe your "real estate coaching" will be successful if you continue to offer your cynicism with no constructive advice. I politely ask that you refrain from posting on this thread anymore.
 
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Have you worked on getting build time shortened significantly? I've seen other member mention build times of half as long.

DISCLAIMER: I know nothing of building homes... just going off of what other people are saying?
Thanks @Striver . I do need to shorten the build time. My houses are all on pilings so it takes a little longer but I would love to see 7-8 month builds. I will take your advice and see what I can do! Thanks again!
 

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With all due respect, your advice in this thread is nothing but negative. I find it hard to believe your "real estate coaching" will be successful if you continue to offer your cynicism with no constructive advice. I politely ask that you refrain from posting on this thread anymore.
I've spent this thread trying to point out the mistakes I see you making, so that you can hopefully avoid or mitigate them. These are the same mistakes that I, and pretty much every other experienced investor I know, have made in our careers as well.

In fact, reading back over this thread, you've thanked me several times for my comments, and even said:

"Ha! I don't take constructive criticism personally. Thanks for the input!"

I assumed you were being honest about that.

In this case, you made a claim that you can cut costs with an employee. I gave you feedback that that's not true in my experience, and asked for more information. If that's true, it's a learning opportunity for me and others here on this forum. If it's not true, it's a learning opportunity for you.

I figured that's the kind of constructive criticism (where one of us can learn) that you indicated you wanted. Instead, you don't really seem to want the feedback. And that's fine. I just wish you would have said it earlier, and I could have saved a bunch of time in this thread.

Look, I make mistakes in this business all the time (I've written for 8 years about all my mistakes). I don't get defensive when I screw up (again, it happens all the time) -- instead, I learn and try to improve my business and processes. If pointing out things I see you doing can help either of us learn, I would think that's a good thing. I came into this business knowing nothing, and I posted on this forum to get feedback to improve my chances of success. I got a lot of tough love here from real estate people much more experienced than I was. And you know, they were right about a lot of things, and they helped me to build a successful business.

I assumed you were interested in getting feedback and learning as well. Sounds like I was wrong, and for that I apologize.

Good luck with the business...I won't comment any further in this thread...
 

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Striver

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Thanks @Striver . I do need to shorten the build time. My houses are all on pilings so it takes a little longer but I would love to see 7-8 month builds. I will take your advice and see what I can do! Thanks again!
Half the time time is twice the profit.
Third less time is 33% more profit.

Just saying!
 
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WJK

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I have a question -- where do you live now?

Rather than building spec houses, with all of the bear traps in the real estate market, I would consider another plan IF I was in your shoes...

With the current tax laws that allow one to pay NO taxes on a large amount of the profits from an owner occupied SFH (single family home) when sold -- why not find a situation where you can buy the right property well, live there during that prescribed holding period, max out the market value through sweat equity, and then sell -- all to do it all over again with the next house.

OR -- rehab or build one small-unit building (2 to 4 units). Rent out the extra units and live in one, while you rehab or build the next small-unit building -- that you move to when you get that first unit ready for occupancy. By living there, and the fact that it is under the commercial lending threshold, the project qualifies for regular owner financing. That will limit your financial exposure and give you help with the mortgage nut.

My mentor, Alice, taught me to start out live in my smallest property and rent out the rest of my properties so they can pay for themselves, and be a step up to more assets. I have learned over these last 41 years that Alice was right. She also taught me to do what I have to do, to get the properties ready to sell or rent. My path hasn't been flashy or sexy. Real estate is a game of LOTS of hard work (sweat equity), patience and good chess moves. I'm not too good to do any "dirty work". My Juris Doctor degree doesn't exempt me from picking up trash, pulling weeds, mowing lawns, washing & painting walls, cleaning toilets and anything else -- when it needs to be done. Getting dirty, by doing my part, is my badge of honor.

This is just my humble opinion of your plan. You may be really successful on OPM (others people's money), but this is my 6th business cycle since I started my real estate career, and I've seen a lot of people go deeply in debit, rise quickly and then crash in flames...
 

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With all due respect, your advice in this thread is nothing but negative. I find it hard to believe your "real estate coaching" will be successful if you continue to offer your cynicism with no constructive advice. I politely ask that you refrain from posting on this thread anymore.
What was negative about that? I thought it was very constructive.

His post was skeptical as what you're saying didn't gel with his previous experience. I think calling it cynical is a stretch though.


I'd also be curious to how you handled the taxes + insurance and how that played into the employee cost as well, and if it was actually cheaper after taking this into account.
 

WJK

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Thanks. I've been playing Monopoly with real money for about 40 years, as part of my real estate career. (And I have a whole list of licenses, degrees, credentials and experiences.) So, the guy didn't like my comments. Sorry about that. I was trying to tell him about reducing his risk factors. I take calculated risks all the time and I spend a lot of time upping my odds. His plan sounds to me like jumping off of a cliff.
 
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I have a question -- where do you live now?
Thanks for all the ideas @WJK ! I've owned my current single family house for 1.5 years now. The plan was to flip it at year #2. This will be my third flip to capitalize on the tax loophole. I planned on buying another single family but the multi-unit idea is intriguing. I have a piece of land zoned for multi-family that might work...now to convince the family!

His post was skeptical as what you're saying didn't gel with his previous experience. I think calling it cynical is a stretch though.
That's a fair observation. If you read the last five pages I've been told I'm "over my head", building sub-optimally, doing everything wrong...and it gets old. I spent the last 4 years getting rid of negative people in my life. I'd prefer not to have negativity creep in my forum-life as well.

I'll tag @JScott here and welcome him back (if he chooses) but the skepticism and/or negativity can't be in every post.

I'd also be curious to how you handled the taxes + insurance and how that played into the employee cost as well, and if it was actually cheaper after taking this into account.
So there are a few things at play here. I am building more now so I needed a part time project manager/ part time laborer. I found a person that is very good at both. I will transition him out of labor as we grow. At the same time, we have a huge shortage of painters and trim carpenters in my area. IF you can find one, they are twice as expensive as 2 years ago. So with all the taxes, insurance etc. I'm saving close to $9k per job.

His plan sounds to me like jumping off of a cliff.
I think I did a good job mitigating risk. The market research, the skill-sets, back up plans etc. What scares you?
 

WJK

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I think I did a good job mitigating risk. The market research, the skill-sets, back up plans etc. What scares you?[/QUOTE]

The first thing that scares me is the OPM (other people's money). By bring in investors, you loose control of the project. It's like inviting a 600 lb gorilla to the party and expecting him to behavior while you serve the cake. I've seen too many project go south while the investors walk away with the project and the borrower is let sitting on the curb with cake smeared all over his face. It's a total control issue...

My second concern is IF your plans are within your personal skill set. Real estate deals and projects are a series of road blocks, and people in power saying no -- usually on a daily, or more, often basis. It's a learning curve that has to be honored. If you haven't been there and done this before, the odds are against you. I like to limit my exposure by starting small when taking new directions, and then dove-tailing on skills that I already have. I try to find things similar to my past successes and put a new twist on them.

And those two concerns are just for starters. There are several major ruts and stumbling blocks in the road you are planning to take. But, what I know after 40+ years...
 

WJK

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Thanks for all the ideas @WJK ! I've owned my current single family house for 1.5 years now. The plan was to flip it at year #2. This will be my third flip to capitalize on the tax loophole. I planned on buying another single family but the multi-unit idea is intriguing. I have a piece of land zoned for multi-family that might work...now to convince the family!
You're smart to use that tax loop hole to your advantage. Hopefully, with each flip, you are getting rid of your mortgage nut. By now, or soon, you should be mortgage free. And that gives you leverage to step up to better performing investments.

Check with your accountant as far as that SFR (single family residential) tax loop hole concerning the multi-unit idea -- proportional parts of the profits, upon selling, are treated differently since you will own income units with the associated depreciation. (But, that depreciation from the rentals can really change your Federal tax picture.) I would stick with 2 to 4 units, due to the mortgage market -- it will keep you out of the commercial lending market, especially when you are ready to sell. The residential lending market is much broader and forgiving.

I mentored a young man for a few years, who did the small unit plan a few times. He's retired in Florida playing with his kids and doing the small unit plan again there.

Good luck!
 

Johnny Le

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Thank you for continually updating this progress thread! I look forward to see how far you can go!
 
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Updates please!!! :)
As requested, ha!

I was given the opportunity to speak at the Summit this year about the spec home business. I ran through the creation of the business (and many other not so great companies I started) and I think the group liked it. I really enjoyed showing what it took to get this business "right". Funny thing is, I think I learned more and left more inspired than anyone!

When I got back I pushed hard to get another house on the market. It was close already but needed a final push. We listed it Saturday and it sold in 12 hours! Talk about catering to a raving MARKET :)

I sent an e-mail out to my current investors and a few potential investors telling them I am ramping up production dramatically this year (thanks to the renewed energy from the Summit). If all goes well, I will have a total of 7 houses under construction in a few months.

Another interesting thing I find is that once you start stirring the MARKET good, other opportunities start springing up. I have almost daily requests for me to build houses/additions/etc. I haven't taken any due to the possibility of it breaking the TIME commandment....but it's there if I want it. I also get calls from sellers that know I buy land. That is nice because it takes some legwork out of the process for me....which also leads to better deals.

I passed my contractor exams so I've added a good bit of CONTROL back to the company. It will add a little to the bottom line also.

I'm still looking for the right multi-family situation to come around. The thought process is that it really doesn't take that much more effort to build 3 units than it does for 1. The profit however would be a good bit greater.

So, I'm really happy with this business right now. I have lots of time to do whatever I want. So far I have just ramped up my family and philanthropy time. I'll have to find something selfish to pursue at some point, ha!

As always ask anything you like!
 

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Johnny Le

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I'm glad you're going harder than before! 7 houses going at one time?! Quite inspiring!!

I'm in the process of working towards my contractors license as well. Funny you mentioned the multi-family space, as that's my plan for my first project. Currently planning and shooting to break ground in June/July of this year!

Keep on rocking!
 

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Absolutely fascinating thread. Congrats on the quality and success you're enjoying!

As a real estate agent, I have a basic question for you GR, which I hope you can shed some light on. It's basic for you, but it isn't for me.

I always wanted to work with builders. It seems some builders have their properties listed by one particular agent. As a builder, what would it take from me, an agent, to get you fired up and have me be your exclusive listing agent?

Another question - I would be open to having an office in the builders office, which is their model home usually. My role would be to assist the builder's customers that need to sell their existing homes but don't know who to work with.

I can visualize both of these roles being combined into a discounted package of some sort to the builder. It could certainly be a win win for everyone.

Here is what I bring to the table. Full time appraiser for 18 years. Agent for 9 years. I live and breathe real estate. My knowledge level is close to a 10. My sales ability is maybe 8 or higher (10 in some areas). My partner is my wife. I'm a no BS, very detail and fact orientated, kind of guy. Approaching 60 - which means I'm not mistaken for a hunky movie star jock type of guy...

Any insight to these ideas would be greatly appreciated. I live in the Denver, CO area, which is a hot market, and the builders here are, for the most part, very quality and high end orientated.
 
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I always wanted to work with builders. It seems some builders have their properties listed by one particular agent. As a builder, what would it take from me, an agent, to get you fired up and have me be your exclusive listing agent?
I'm pretty easy. If a realtor brings me a buyer, they get the next listing. Maybe go in with that "deal" and see where the relationship goes. I would recommend smaller builders too. The large ones try their best to sell them in-house.

I form most of my relationships outside of work. Philanthropies, church functions, parties etc. The more I "do" the more contacts I make and things fall in my lap.
 

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I'm pretty easy. If a realtor brings me a buyer, they get the next listing. Maybe go in with that "deal" and see where the relationship goes. I would recommend smaller builders too. The large ones try their best to sell them in-house.

I form most of my relationships outside of work. Philanthropies, church functions, parties etc. The more I "do" the more contacts I make and things fall in my lap.
Thanks for the great answers.

Yes, the big builders go to great lengths to keep everything in house. Their own sales teams that are top notch - but very limited in what they do. They only know their products.

Do you think having me in the office to help the buyers needing to sell their own homes would be an added bonus in *your* market appeal? Or do most buyers have that wrapped up by the time they talk to you?
 
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Thanks for the great answers.

Yes, the big builders go to great lengths to keep everything in house. Their own sales teams that are top notch - but very limited in what they do. They only know their products.

Do you think having me in the office to help the buyers needing to sell their own homes would be an added bonus in *your* market appeal? Or do most buyers have that wrapped up by the time they talk to you?
I think you would have to test this to get an accurate answer. Maybe find a builder that will let you try it on one. If it works, I see a nice business model that you could wrap around this. Good luck!
 

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When I got back I pushed hard to get another house on the market. It was close already but needed a final push. We listed it Saturday and it sold in 12 hours! Talk about catering to a raving MARKET :)
Congratulations!!!! Your presentation was awesome, and it was great getting to know you and the "Get Right" story as well. Loved your approach of analyzing the market first - what a concept, yeah? lol You've worked so hard - well done!! And so many other good things coming from this. I'm very happy for you.
 

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I must say this progress thread has me really pumped about getting into this real estate deeper. I have a couple questions for you sir.

What/where would you advise I can learn more about how to go about this particular build model?

I have already bought my plots, app. 10, and am looking to build on these lots as well.

I have a friend that is an architect. Another is a master carpenter. What other skilled person might I need to find in my network?

Are your lots/plats ideally the same size lots to minimize the amount of redesign/scale?

Thank you for this great progress thread and being very active and detailed throughout the whole adventure.
 
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I learned something yesterday. My view of my spec home business might not be what someone else's view of my business is.

I pitched a new investor last week that wants to work with me. I sent him a deal to build some spec homes. Well...I talked with him yesterday and he seamed underwhelmed. After a little prodding I asked him what he expected/wanted to see versus what I presented. He politely told me I didn't ask for enough! He said "Go back and rework this. You aren't thinking big enough. What are we going to take nationwide?". Wow.

I haven't even fully digested this conversation yet, but it seams interesting that people view things (like scale) very differently. My plan never had a nationwide component...not even my big hairy goal thought anywhere near that size.

Who knows where this deal will take me, if anywhere. But as a reminder - don't be afraid to think big, really big.
 

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