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First time spec home

6012 Views 25 Replies 7 Participants Last post by  sunnyholme
I'm in Louisiana where it is legal to build one home a year without being licensed. Getting a GC license is in the plans depending on how this test home works out. With workmen's comp and general liability insurance rates being what they are, I simply can't afford to be a GC on just one project at this time. I would like to follow the KISS system (Keep It Simple, Stupid) but it seems that because of all the money outlay that it is required to stay in business as a GC, one would have to have 3-6 large projects going per year to spread out the costs. That doesn't make it simple at this point. I understand that as a GC around here, you're sub-contractors rates can be reduced significantly if they don't have proof of workers comp. I understand the onus is put on my shoulders in case of injury. The way the world is today I can't take that risk, so hiring non-covered subs is out of the question.
Here's my situation, we bought a lot in the old part of town (one of few remaining) and in a high demand area. We anticipate selling the home during construction. I have had people stopping and inquiring while I was undercutting brush, which is encouraging. The appraised value of the plans and lot are $303,000, 80% for loan purposes is $242,400. The lot cost was $69,000. $242400 - $69,000 = $173,400. $173,400 divided by 2525 sq. ft. living area is $69.36 a sq. ft. to build. How do you build for that, much less have a small income generated during the building phase. I am expecting the majority of the profit from the venture coming from the sale of the house. I plan on doing some of the work, flooring, painting, stucco, finish trim, etc. that I know I can do.
Now if I was a GC, building a home for a customer, and charging theorectically, 20% for my fee, that would leave $138,720 or $54.94 a sq. ft to build. I know all though it would be tough, a modestly appointed home could be built for that and even have a roof on it, but in the area where I am going to build, modest isn't going to sell. Nice kitchens, Master Baths are a must and the home's elevations will be patterned after the town's older homes. 1 and 1/2 story Acadian home with stucco and brick and a unattached 2 car/storage room garage.
Taking into account the costs of building are relative to the price of a house in your neck of the woods, could you guys do it and what would you realistically expect as a profit? I guess I am asking for some reassurance that my family won't starve while I am building this home. Homes are being built like this every day around here. Am I conjuring up skeletons in the closet before I even start this build?
Any opinions and personnal accounts would be most appreciated.
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Out here $100-$120 a sq foot seems to be typical for new construction. I believe there may be a big difference in profit generated per home when you look at a builder building 50 homes and a builder building a single home.
Mike, I would hope there is a huge difference in profit between 50 homes and 1 home. When it gets down to it, you can only build what you know the banks will lend to home buyers, or hope you get a buyer that wants to throw down 20-30% above the bank appraisal with their own money. It would seem though regardless of 1 home or 50 homes the profit margin has to be there for it to work on a large scale or small scale. At $120 a sq. ft. to build in your area, I am sure in the grand scheme of things that market bears that price. Here, the market is $105-120 appraised price. With that said, I am sure your sub cost is twice what mine is and possibly your lumber also. I know in the past year material costs have risen 20 or so percent here with no reflection of that increase in the eyes of the banks or appraised value. That tells me that GC's are building for free. What's the secret?
The problem with single project speculation building is that you typically pay too much for the lot. Although you can turn some profit by making smart building decision, the real profit in land development is in developing the lot. For single project speculation, the lot seller as already taken the potential lot value into consideration. Single project speculation is difficult.

We have done it a couple of times and I have come to the conclusion that it is much more profitable and risk free to build homes for clients than it is to put my money at risk.

You have to be careful not to put too much value in saving money by doing trades yourself. You could invest in a lot and invest in the building at cost, with the intent to sell. However you might find that the profit margin of building for profit is higher with much less risk.
I know alot of guys that do single lot rebuilding. Not development. They make good loot on it, as far as I can tell. Now I can see those profits dwindle if you have to run new sewer electric gas etc... If the hook ups are already there from the previous house you tore down the expense doesn't usually need to be repeated unless you are moving those connections.
Then agin the word "profitable" is relative to the person saying it... like saying it's "cold". 70 may be cold for you and 50 may be cold for me.
You are trying to establish yourself as a small business. There are no shortcuts that will magically get you there unless you have a bankroll. Then your just out there guessing on the right move. Your gonna have to build the business, spec homes, custom built, or remodel. I'm not trying to be a downer here but you have to give to take.
Paying yourself as the site manager or whatever this first time around is really not a good idea. Keep a job, any job. Do the work you can. Sub the rest. You'd be better off sub'n the whole thing and getting it done fast. If I am correct I dont think you can offer the home for sale until the final inspection is complete. Then you can sell it but taxes eat your lunch if you dont live there a year. Besides, the bank doesnt make those construction loans for free and the clock is ticking.
The 20% to a GC is the equity you are trying to cash in on, and what a homebuyer loses for having it all taken care of. Cant get paid twice for a job.
Just some things to consider.
Man I always hated people telling me it couldnt be done... now here I am giving that impression. Thats not what I meant to do, I want you to know it just takes some serious planning, effort and sacrifice. Patience and perseverence will always pull you through.
Best of luck with your venture whatever course you take.
I am following your advice and keeping small remodel jobs going. I have made an arrangement with my framing crew to be able to be part of his crew. I know I can make more money doing outside jobs, but to me square and true framing will make my job with the floors, doors and trim out that much faster and better. I have had to come behind a number of framers who threw things up so fast to make a buck just to get the frame half arze straight. This won't happen if I'm there. This kid is good (I've inspected a home he's building) and also just starting out on his own so he is hungry. I am o.k. with spending my own money until I can pay myself a percentage of what a sub would charge me on labor doing the jobs I have planned to do. I can also keep small jobs going and work on the building in the evening and weekends. I do have options and will cross that road when I get to it.
My question is how does a GC make money when he is contracted to build for a customer who owns the property? The profit at the end isn't there from the sale and the banks will still only loan 80% of appraised value. If he subs out the whole job, he would have to take his cut out of that available money.
It only seems logical that he would cut corners where he could get away with it and use very inexpensive material and very inexpensive labor to build and hope seven years flies by so that his liability to the house expires.
"If I am correct I dont think you can offer the home for sale until the final inspection is complete." Maybe true for your area, but not true for mine.
Grumpy, you can have a purchase agreement during the build process predicated on final inspection by the city inspectors, not the customer. I would probably commit murder if the final inspection were left up to the customer. If it were I would kindly tear the agreement up and wish them a nice life. I don't mind a punch list after I've completed mine, but if a buyer's remorse sets in and the sale was predicated on the customers final inspection, I would be on the next segment of COPS. ;)
Grumpy said:
"If I am correct I dont think you can offer the home for sale until the final inspection is complete." Maybe true for your area, but not true for mine.
I see no reason why I can't sell a building which isn't complete, and has no certificate of occupancy. The certificate is up to the new owner to procure.

I don't understand why the customer would be doing the final inspections? Perhaps we are both discussing something else. I also don't understand why you would predicate the on any inspections.

Now I am speaking of second hand knowledge and you might be right but then again you might be talking abotu your local laws, and I about mine.
I have no idea if that is true where you live, but most states have some owner builder restrictions in place regarding building homes for retail.
Does your state require GC's to be licensed?
No GC requirements... only liscenses for roofers, plumbers electricians. We're the only contractors that count anyways ;)

I know a few guys who put their houses on the market well before they are done. Usually once the dry wall goes up the house is listed.
Grumpy, are you serious? No GC license? Go for it! I'd come up there and go for it except it's really starting to get cold up there. Heck, it's getting cold here, high 60's the last few mornings.
i feel bad for you. try not to catch a chill :cheesygri
Teetorbilt said:
it's getting cold here, high 60's the last few mornings.
I'd go for it if I had the money. I have a couple plans, but one thing at a time.

I'm used to it, it gets cold every year... and the snow kills the roofs! We are gonna have a very bad winter this year. Yay!
No GC state license in Colorado either. It's the wild west out here baby!

License, we don't need no stink'n license!
Can I get me a license here?
-John Kerry in PA last week
The cool thing about what I do mostly, roofing, is that a liscense is required. I currently use my subs liscense, but once I get my own (waiting on test results) I am going to do what I did before.

I would play it off like I was liscenced for siding or liscenced for windows. I wouldn't necessarily lie but I would say I was liscenced and allow the consumer to blieve what ever trade they wanted to believe. Compare me to someone who doesn't do roofing, they won't be liscenced. I have a leg up now :)
If you work somewhere that requires a license, you had better have one. Working without one will negate your insurance and leave you open to civil suits which could cost you your home and cut into your wages at your new 'burger' job. "Would you like to supersize that?".
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