How Does The Sale Of A Spec Work

domanicapital

I'm currently building a home that I was going to move into, but now I've decided to sell it off as a spec home. I'm just wondering what the best way is to do this. I have a construction loan, and I'm using a contractor friend for cost + 10%. We've only made our initial draw so far for site prep, and we're doing the footings and foundation right now. Say I list it now, and find a buyer sometime during framing and they want to close on the property so they can pick flooring, colors, etc. When will I get my money? I assume they would get a new construction loan that would pay off my loan balance, the contractor's outstanding receipts, and the cost I paid for land, impact fees, permits, plans etc? (Do I need to show receipts for all of this in order to get the money up front when they close).... Then when do I actually see the profit.. when they take occupancy? And how does it work with the contractor.. do we just use our original cost breakdown, mark it up to current mkt values, and then I get the profit on top of that when the home is done? The contractor is totally fine continuing his cost + 10% arrangement with a new buyer, but lumber costs and site work has been more than we expected so far.
Thanks

A+Carpenter

Find someone to buy it. Contact agent and Get-R-Done BOOM SOLD

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A+Carpenter

WHEN YOU CLOSE

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jmic

Dom,
Don't know where you're from or if you've ever built spec. homes before but any home I've ever built or the way they do it around here is, you can enter into contract to sell the house and usually the 10% down payment is held in escrow till you have a certificate of occupancy and ready to turn the completed home over to the new owner. Sounds like all of a sudden you want to bail and use someone elses monies.

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___"Remember You Never Get A Second Chance To Make A First Impression"______________________
Joe

joasis

The little spec house I am currently finishing was sold after the framing was up. The owner sold direct to the buyer with no commission. I believe who took a 20% down and and balance when they get the keys. Since the price was under 80K, I don't believe their lender was looking for a cert before closing.

JPV123

If you sell it b4 it's done then you are working for the buyer. Color changes, flooring changes. Can we move this wall? No those are'nt the cabinets I wanted. I want this room blue, that room red, the kitchen yellow ... along with a mile long punch list . If you finish the house then you can sell it "as is" with alot less headache. Go with all nuetral colors, throw some granite in the kitchen and you will get done a lot quicker. Then if they want changes after they close you can charge them for it .

rhbhammer

the advice from jpv123 sounds good. list the house now and just build what you were going to build unless you want to get into custom, in which case you will have more headaches

domanicapital

I've got a couple more lots that I'd like to build spec homes on. I want to sell them once the walls are up (I don't mind if customer chooses colors, flooring.. lets just not move any walls...).
So say I get a spec construction loan from the bank, and I'm not the GC but am using a GC for a flat fee.. I'm just doing it as an investment. Is it still best to wait until its done to close. Or can we just close as soon as a buyer is found and they assume a new construction (-to-permanent) loan?

I still dont see how I get my final profit though.. since our original agreement with the contractor was cost plus 10%, but now we have a buyer who is buying it for what it cost me to build, plus $50k of profit for me. The GC is making draws all along for materials, subs, and his profit.. but when do i get my 50k? when the home is done. I can't go to the buyers bank and request a draw for my profit (i.e. money over actual cost that I'm selling it for, can I?)

thanks

Zatol

You need to complete the house with your current construction loan...

The buyer will give you a percentage down as earnest money..

You will receive your money after you complete the house and the new owner takes possession.

Do you know exactly how much the house will cost you to build? What is the asking price for the house? How does it compare to similar houses per sf? Are you willing to pay the buyer's realtor?

Your friend is getting 10% above cost and you want an additional 50k.. I hope that it works out for you, but I don't think the numbers work.

We are fortunate to sell our spec houses at 15% above construction costs and the realtors get about 5% of that..

Zatol

Glasshousebltr

Ditto Zat.

He did say it's worked out to be a little more so far, Hold on to your hat Dom, cause it's going up baby.

Cost plus on a spec? Somebody's going to be hanging cause it looks like your preliminary numbers don't jive.

Bob

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Bob

joasis

After I read this again, I see what you were getting at. With cost + 10%, do you know the final numbers? I build for an investor (no bank involved) for X amount a sq/ft. That includes my contracting fee and one crew to completion on the spec home we are building. I have bids on the framing package, completion materials, plumber and elec, ect. If I have my crew scheduled for another job, a sub I bring in (like the taping and bedding) is out of my budget. The point I am getting to is I know the costs to build the home to occupancy, within a few percent, less changes. The guy I build for knows the home will cost $65 a ft to build, he sells for $80. If we miss by a buck or two on anything, he is well covered. If the house doesn't sell in a period of time, he can reduce price and still make out. If he sells early, as in the current one, he adds one to the schedule.

If you build, you should have a good grasp of the actualy costs to completion, not 90%, not just dry in, but all the way. I watched a guy go bust on a budget because he didn't account for the "little things" in the last 10% of a home.

I also avoid custom homes like a plague, but when we do specs, and it sells early, I am still working for the builder, and he tells the customer before any money comes down, color and carpet and tile they can change, ect., but major changes are cost plus, and after I explain what it will cost, most are happy to leave it as built.

Final note: Our market is not a high end, DFW type area. We can and do build and sell new homes for $60 to $70 and up a sq/ft. Of course, no crowns, no granite, no solid interior doors, ect, slab built home.

chrisherk

BINGO! I just went through this. Finish it 100% or tell them there are no choices. If you let someone pick a product or color before they own it, and if they back out at the last min, or most P&s contracts may have contingencies on the sale of their previous house and it doesnt sell, you will be stuck with their wierd colors or products. then it may hurt your sale. Thankfully my first buyer picked a nice counter and siding, before she got nasty and i told them to screw. I think a lot of new home buyers think the builder is trying to screw them over, before they even meet you, kind of like how tennants think their lanlord is trying to screw them over all the time
chris

domanicapital

thanks for the posts.. very helpful.

To clarify the project a little, I bought a lot for 45k last year. The market in this small area went absolutely crazy and now no lots are available for under 150k. Homes in general did the same in the neighborhood. I got a contractor to do the job for cost + 10% -- that's how most people I talked to work around here when you own your own lot and you want a custom home. We started the project and ran into water problems on the lot, and ended up needed to put in $20k worth of helical piers to support the foundation. The site was tricky, and we went way over budget on excavation, etc. So my cost breakdown at this point is a little unclear. I know I need to get with the contractor and probably figure it out all over again, but the agreement is cost plus, so it is me who eats the extra costs, and therefore I expect (the contractor is totally fine with th is) to keep the profits if I decide to sell instead of move in.

It sounds like I should finish the home under my own construction loan and then sell. BUT, the reason I want to consider other options is because I have a lot of money tied up in the house (paid cash for the lot, impact fees, etc.), and would like to get that money without waiting for the house to be completed in 5 months.

As far as spec homes in general goes, I have had builders offer me either a cost plus 10% arrangement (then I keep the profits above what it costs to build plus their 10%), or split the profits 50/50 (with no 10% contractor overhead/profit). But either way they want me to buy the lot and get the construction loan.

How do you guys do it?

chrisherk

How much work is done at the moment?

domanicapital

still working on the footings/foundation right now. it just keeps snowing.