The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: archben82 on January 25, 2015, 11:11:59 AM
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Hello everyone, just joined a couple days ago and have spent WAY too much time on this forum, but am truly enjoying it.
Like many people I've contemplated renovating and selling (flipping) houses, and while that seems appealing on the surface I can see how it can be a complicated process with many unknowns. Plus, it requires finding deals on houses which seems to be a dwindling supply of recently. My wife and I renovated our own house and I did enjoy it, but we took our time and were not as budget conscious as we'd need to be if trying to make a profit.
Lately the idea of designing, building and selling a home on spec has been on our minds. Has anyone out in MMM land been through the process of building a spec home? Almost always it's a contractor that finances the project and sells the home hopefully for a profit. In our case we would finance the project, but hire a general contractor to build the house and manage the sub contractors. The BIG question is, would there be any profit left after the GC takes his cut for overhead and profit? We could act as GC, but with a full time job (for now) I just can't see us managing it well enough.
I'm an architect and my wife an interior designer so the design costs are really how much we value our time. So the other costs are land, taxes, insurance, etc. plus the actual construction cost, which in our case we'd finance about 80%.
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I wouldn't do it if I were you. There are plenty of houses out there that are beautiful and would be priced way lower than what you could build for. I know plenty of people who built beautiful high end houses and have had to sell them for way less than it cost to build them and that was years ago.
If you like flipping houses, than I would suggest starting small and buying something way under value, fixing the problems (hopefully not extensive and expensive!) and having your interior decorator wife stage them for sale. Try to buy in an area that is nice and buy the worst house on the block.
Just my opinion though, based on having a rental and a friend who is a remodeler/builder.
Miss Prim
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I did it for a living, since the mid-2000s and stopped about a year ago. It in a tough way to make a living, and in my market area, the answer to your question is no. However, that is in a depressed market where there is very little spread between new spec. homes, and clean newer resales. I generally grossed 13-18% of the sale. This is a result of being the GC, electrician, plumber and tile setter. Two other factors weigh heavily, I provided all of my own capital, free of interest costs, but at a steep opportunity cost. Second, realtors were a necessary, but costly part of most deals.
There is no right answer to the question. There are some markets where there is a total killing to be made, and others where you're going to get your ass handed to you. The one point that is nearly universally ignored by newbees in this adventure, is that being a builder is a very complicated dance of relationships with subs. and suppliers. Once you have cemented those relationships, you will have a relatively smooth journey as you continue to build. Starting the whole thing can be a real bitch. There is very little portability in the process. As a builder from the northeast, I wouldn't show up in CA. or CO. to announce that I'm the next big thing. Nor would I expect to make a profit for a year or two after relocating. Every location is a whole new planet, in some respects. New codes, techniques, cost structure, market and marketing, subcontractors and all the issues they bring to the table, etc...... all of these factors require time to explore and develop a knowledge base so that you can run a smooth, profitable company for the long hall.
I could be wrong, but my overall gut feeling is that when it comes to both owner-builders and folks who decide to "dabble" in spec. building, the majority do not do well. They may succeed at a great cost to themselves, emotionally or financially, or they may flat out fail, but IMHO, the majority of them walk away saying "never again". A great example of this was a few years into the recession. My local rural municipality found 135 new homes under construction, that had failed to request an inspection for over a year. They started to contact owners of record to determine what the situation was. The majority of the homes were owned by folks who were building spec. homes as a sideline and got in over their heads. I like to call it HGTV syndrome. "It's easy, and there is a ton of money to be made. I saw it on TV" Not that applies to the OP, given your background, but it's a real common and expensive delusion for many.
The one thing that tripped a lot of these folks up was the subs. The same sub that shows up at my job, with a day's notice and charges X, will end up asking for 50% down, place the new spec. builder at the bottom of his priority list, and charge 150% of the going rate for the same work. It' all fair and done for a reason, but it takes time, paying bills promptly and developing a good rep. before you get past those issues. You are doing the right thing by learning before you leap. That said, generally, unless you are a sharp, aggressive, workaholic, in a hot market, I would pass.
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The name says it all: "Speculative."
This is a high risk venture, so like all speculative investments it carries the potential for large rewards and also for ruin. I'm not into high risk investments, so I'd stay away and stick with nearly guaranteed, long-term wealth-building approaches (spending far less than you earn, maxing out 401k/IRA, index investing, buying and holding real estate in good markets, etc.).
I've known at least two or three professional builders that took baths on speculative housing -- each lost hundreds of thousands of dollars.
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Thank you everyone for sharing some insight, and you've definitely brought up some things I had not thought about before. I think the idea of building a spec home came about because it's been very difficult finding distressed houses lately, and the thought of creating our own opportunity, rather than wait for it seemed enticing. Paddedhat, I completely agree with your thoughts on the nightmare that can be handling subs, and judging by my past experiences with several I admit that's not really my forte. The other aspect of spec building that worries me a bit is that the process could take 1+ years, vs a remodel that might just take a few months and would free the money back up for the next opportunity.