The Expert Podcast

So it's no secret that the real estate market is highly unusual by unusual i mean crazy there are buyers lining up over bidding on properties multiple cash offers offers over listing price and the reason behind it is structural it's that there are not enough houses to go around for what the market needs right now and even what they're gonna need in the next four or five years common wisdom is that there are four or five million few houses fewer houses than needed for the market so how can a normal person or a builder or general contractor or even an investor take advantage of this for profit.

Well let's first look at it from the standpoint of a builder or general contractor and then see how an investor or even a normal business person can piggyback off of that and by builder i don't mean like polti or lennar or kb homes or one of the major home builders they're not really builders as much as they are vertically integrated corporations that are in the construction industry i'm talking about a local builder local contractor even if you're not a full range builder if you're a contractor and have connections this is a strategy you could use and if you're a business owner business person investor you can leverage this to your advantage as well especially if you know somebody who's in the building industry.

So you're a builder and you do remodels maybe you do decks you do fences you do light construction but how can you take advantage of the housing market to maybe make a big score home run on building a house well here's where you can fit into a gap that's not being taken advantage of here's an article about how the middle class is being crushed by the housing crisis and a solution is in plain sight you're talking about vacant lots in chicago and it doesn't have to be chicago it could be anywhere in your town in your city in your area there is vacant property available they're infill lots maybe even in the subdivision there's an extra lot that never got developed maybe it's more rural where it's not in a subdivision just an empty lot that's available raw land empty land.

Even though it's desirable is not quite as liquid in terms of sales rate as a fully developed single-family home the reason why is because a single-family hill and a buyer can purchase and move in the next day they have a place to live they have a roof over their head an empty lot a vacant lot has a lot of steps between now and somebody turning a key in a door and those steps add value to a property you don't necessarily have to have a lot of cash to make that happen.

Here's an example you find a lot in some cases the lot will be very cheap in this story they talk about lots being sold for ten to thirteen thousand dollars 13 000 far below market rate the reason why is because even if it's a desirable lot it's not liquid in terms of somebody can't just move in tomorrow so the pool of buyers is much smaller you're not going to have bidding wars on an empty lot in fact you can normally get a discount.

In this scenario we're going to suggest not even trying to buy the property at all but do an option so if a property has a market value of let's say hundred thousand dollars maybe it's for sale for a hundred thousand maybe it was for sale for a hundred thousand the ideal lot you'd find is something that was offered for sale so you know that the buyer this the owner is interested in selling it maybe it was on the market for eight or nine months and they took it off the market there's an ideal prospect and you approach that person and say look you had your house on the market for a hundred thousand dollars i'll pay a hundred thousand dollars but what i want to do is that i want to do an option i want to give you five thousand dollars non-refundable for a purchase option for this lot for five thousand dollars i have an option for twenty four months to purchase this lot for your full price hundred thousand at my discretion if i don't follow through then i lose my five thousand you get to keep it during that time i have the authority to check out permits do design i can do whatever i want and even improve the property but i have that option.

And so as a builder what you do is you get a set of blueprints that might cost you a couple thousand you get permits approved for septic for utility hookups for impact fees and the applications for those probably won't cost that much to get approvals for those might cost another two or three thousand so you have a turnkey package for construction and then with that floor plan you can either estimate yourself or if you're a general contractor get bids from framers electrical plumbing other utilities septic if it's needed site work and you put together a cost basis for that house and so let's say your cost basis maybe it's 180 dollars per square foot times 2 000 square feet so it's going to be 360 plus 100 460 is your cost basis and maybe your market value for the house is 650 so you have a 250 000 margin from what the market value would be to your cost.
And once you have that package put together you don't even have to necessarily come out of pocket for any of the cost you as a builder or an investor can get a construction loan construction loans are available from many lenders at 90 95 loan to value so if the total cost is going to be 100 for the lot plus 360 for the development now you're in for 460 times 90 percent you might only have to come out of pocket twenty thirty thousand dollars and that's if the property owner wants full cash.

So if you're an investor you could put the same deal together with a builder that you know or even a builder that you don't know you can approach only with option payments you have some money at risk but your upside is huge if you have five or six or ten thousand dollars at risk that's the most you can lose your upside is two hundred thousand on potential sales a new two thousand square foot house in most markets it's going to be a six to 650 property you could also build it smaller you could maybe go 1500 feet or 1400 feet and be in for maybe 220 building costs plus your lot maybe 300 all in and sell it for 450. now you have 150 000 profit.

The key to it is doing the math on all the costs and not having a huge amount of speculative money out of pocket or cash it all out of pocket once you start the construction loan now you have some obligation because you have to pay that loan you're gonna have to complete the project but if you have done due diligence on what the selling price would be you know what your market is you have very little downside worst case scenario even if the market doesn't go up or you're wrong about your selling price you'll get your money out of it the most important thing is you're gonna have very little out of pocket you might have ten thousand out of pocket.

When's the last time you did an investment for ten thousand you probably have ten thousand dollars in more in a stock that you purchased you may own starbucks stock for ten thousand you may own um ibm for ten thousand you may own a builder for ten thousand you certainly don't have a 10x or 20x profit potential on that stock in a course of a year and you have downside with your ten thousand dollar cash outlay you have very little downside now is this more active investment certainly it's not a passive investment where you just pay the money and you hope the stock goes up or your bitcoin goes up this is a more active investment project however if you are already a building contractor you already know some of this you can do most of this arrangement and structuring of the workflow if you're not a builder but you are a business person you already know about workflows you know about project management.

We recommend doing backgrounds on anybody that's involved with this builders contractors make sure you're not dealing with any you know financially defective people but the bank will also help you because they're all only going to do draws on your building project as the work is done they're going to give draw payments to the builder and not pay them a lump sum all at once where they can just walk away you can also require that your builder or your subs get surety bonds bid bonds for their portion so if they do fail or disappear then you have a bond a surety bond that will make you whole and surety bonds don't cost that much you know forty fifty thousand dollar surety bond is a few hundred dollars if you can require your contractor your sub to provide that even if they bake it into their cost you have some protection with a surety bond and this is a way to structure a deal where 10 000 cash outlay can result in a 10x or 15x return on investment.

If you are aware of what the vacant land market is like you can leverage that to your advantage a lot of sellers on vacant land have high hopes for their price high hopes for their potential of their land and that's great however they also have recognized the liquidity of that people aren't coming in just buying land like they are houses but you can make a piece of land into a house a turnkey single-family residential right now is like gold it's like money in the bank they can't make them fast enough the market is 5 million property short so all you got to do is add one more and you have 4 million 999 000 people begging for that house so it's almost kind of a no-brainer that it's going to work as long as you get the house finished once you start once you dig the first shovel full of dirt now you're in for 10 to 12 months worth of making sure that project gets done but certainly when it is done now you have something that's liquid it can get.
The key to the whole thing is having some simple math done so that the lender can see that there's no risk at the same time you probably can structure it with the seller of the property of the land so that you don't have to come out of pocket cash for that either you can have them put the deed in escrow transfer in escrow pending the final construction loan to permanent or construction loan to closing because they have nothing to lose their property is actually improved in value their land is in escrow if you walk away from it they have a house that's built on it they have site improvements so they're not losing any money in fact once you have your contract with the builder with the lender you could probably the property owner you can negotiate them to get an extension on your option so instead of having a one-year option you can say look i'll give you another five thousand in cash and extend it to two years or no money because you already have improvements maybe you have ten thousand insight improvements so if i don't follow through on this closing you get a property now that has septic installed or site work installed or permits done.

The key is not coming out of pocket a lot of cash keeping your cash outlay four figures or less seven eight nine thousand once you get to ten thousand maybe that's your hard limit but having an upside of six figures or more so out of pocket 10 000 or less upside 100 000 or more so you're at least a 10x in 12 months 14 months and if you do it right you might be able to even get a 200 150 200 000 upside you may have to share some of that with a few key stakeholders depending on how you structure your deal with the builder they might get the bonus for getting it done early you're going to have a sales commission you may actually be able to get the property owner to give some concessions by having them participate in the profit but your investment is a relatively low amount of cash some management and oversight if you get a good builder good general contractor they can do some of that key management of the building part of it you still might have to do project management for the design arranging of the permits financing but those are deals you do all the time and unlike a long-term business this is a project with a finite amount of time associated with it it's a 12 to 14 month project and at the same time you're benefiting the housing market you're putting another dent in the shortfall of homes that's needed.

You're investing in a demand level that is not going anywhere like if you're in business selling widgets if the widget market falls off the cliff next month you're out of business or you you're slow on sales if you're in the home building business that has such a slow sales cycle or slow production cycle five million homes is not going to get swallowed up by the time you get done no matter how long it takes no matter what happens in the market 5 million 5 million home deficit is not going away anytime soon and your house is going to be a drop in the bucket of it anyways even if half of it somehow magically gets produced in a year there's still two million 2.5 million deficit in homes that's needed so it's a very low risk for market the risk is project management.

So if you have a knack for managing a project or have a general contractor that can manage a project this investment has a very high probability of return and a healthy return with a very low risk it's not completely passive you do have to put some effort and pay attention to details but it's not like you have to swing a hammer if you put a little effort into managing a project which you probably like doing anyways it's a way to flip ten thousand into a hundred or close to it.