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First time spec home

6064 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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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.
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