Over the years, many of our student builders have asked relevant questions, such as what size house should I build; I am giving; where do i build it? Looking back, it’s easy for me to make these decisions now, but when I started building in 1975, these were trial and error situations. And my hindsight is very clear. It’s so easy for me to look back and see things I wish I’d known when I started building. That is what you are going to learn in this article.
You will learn the ins and outs of being a speculative or spec maker (as opposed to a contract maker). If you’re not familiar with those terms, a spec builder is one who will select a site, choose a design, build a home, and then sell it to a client. A contract builder is a builder you hire to build a home for you. By the way, I suggest you start with building specs rather than building a house for someone else. I’ll explain why later.
I’ll start by showing you how to be one of the top spec builders in your area, even if you’ve never built a home before. I’ll expand on this information by discussing points that are unique to build specs. In what follows, I will discuss the points that are unique to contract construction and the points that are relevant to both spec and contract construction.
A word of caution
I want to emphasize that when starting your construction business, you must separate your business from your personal life. In the early 70’s I was in commercial real estate sales. I barely survived a major recession. Almost everything I owned was in my name and most of it was repossessed. If I had known then what I know now, I would have kept that big house, that Mercedes, and that plane.
In the construction industry there are many things that can happen to you, some of which you have no control over. According to the 2008 Annual Report of the National Center for State Courts, in 2007 Americans filed more than 90 million lawsuits, more than a third of which were civil cases. This does not include volumes of legal disputes that were resolved before a lawsuit was filed. Based on the myriad of legal disputes that arise, in and out of court, it could be said that most Americans are at risk of being involved in a legal dispute at some point in their lives, for many people, more than once. time. This is especially true for those who work in professions with high demand vulnerability, such as doctors, dentists and, yes, especially builders! You should invest in hiring professionals to help you protect your assets. It’s easier than you may realize. This is one time you can’t procrastinate. I can tell you some great horror stories, but I don’t want to scare you so early in the game. Anyway, don’t live in fear of what might happen. You only lose if you don’t play.
I. Speculative building
A. How to be one of the best spec builders in your area
Before you buy a lot, before you buy house plans, the first thing I want you to do is assemble your success team. I call this the philosophy of Henry Ford. If you read about Henry Ford, you know that some people considered him illiterate. He once sued a Chicago newspaper that he wrote an article in which he claimed that he was illiterate. In the lawsuit, Henry Ford emphasized that he did not need to know everything about everything because he hired experts to help him with everything he wanted to do. This left his mind free and clear to do all the things he really knew how to do. Well, I’ve learned that philosophy myself over the years. I realize that there is not enough time in this life to do everything. Now I hire experts to help me make decisions, and it has been a positive factor in my success building houses.
Your success team should include the following:
1. Real estate agent
2. Landscape Architect
4. Kitchen/Bath Designer
5. Interior Designer
6. Lighting Designer
I will discuss each of these team members in detail as we go through the course. Don’t worry. When you start, you don’t need the best. These team members are more affordable than you can imagine.
B. How to get your first loan
Let me tell you a story. And the further you get from this story, the harder it is to borrow money to begin with.
Suppose you have a paid job. If you are not employed, but are self-employed, you must have a high credit score or submit tax returns for the last three years to qualify for the loan. If you currently rent a house or apartment and want to build a house for yourself, you are an ideal candidate to borrow money to build a house for yourself. So, you get the money. You build a home. You put it on the market during construction. You sell it. You go to the bank. You borrow money under the same premise. You get the money. You build a home. Put it up for sale. sell it. Do it over and over and pretty soon you walk into the bank and the banker looks at you and says, oh my gosh, you should become a home builder. And you.
Now, that’s the easiest way to start. Most builders I know started out in the industry this way. This method will also provide you with the least risk. Why? Because if you don’t sell the house, you’ll just move into it. In turn, this will make it easier for you to sell because a furnished home will typically sell faster than an unfurnished home. Eventually you will sell it and you can start the process all over again. The bad news is that you may be moving a lot. I remember a couple who wanted to own a free and clear house. They used this method on five houses, reinvesting their earnings in each house. His sixth house was built entirely with cash. They were free and clean owners and they got out of the construction business. They simply wanted to do what it took to own their home free and clean.
The further away you get from the above scenario, the more difficult it will be to get the start-up loan when you’re just starting out.
For example, let’s say you currently own a home and want to borrow money to build another home for yourself. A banker will generally be negative. They tend to look down and might comment something like this. “That sounds great, but you currently own a home. What are you going to do with your current home?” His response is: “I’ll put it up for sale during the construction of this new house and then I’ll sell it.” The banker comments, “That sounds pretty good, but what if you don’t sell your current home?” The banker usually sees the negative side, that is, you will have to pay two house payments. If he can show that he can afford two house payments, he may well get the money.
You always have to have a successful conclusion to your story that you tell the banker. Never look at the banker and say, “Well, my God, I’m only borrowing 70% of the appraised value. If the bank were to foreclose on the house, the bank would have a bargain. The bank could sell the house and make a good return on your investment. Never use this kind of logic with a banker. Bankers don’t want to be in the business of homeowners. Never hint or think in your mind that this will happen.
If you don’t have gainful employment or have a problem with your credit or cash, your next best approach is to find an investor to venture into a project with you. I’ve done this on many large projects when I didn’t have the finances to pay for it myself. What he typically did was structure the investment so that the joint venture partner put up little or no money. Investors really like that! What he needed was his solid financial status. Understand that there are many investors, like doctors, who have tremendous financial statements but very little cash. So if you can structure the investment so that it requires little or no cash, it becomes a relatively easy investment to sell. When I worked with a joint venture partner, after the investment was sold, the investor would receive a refund of the cash he had invested, plus a fair interest rate agreed to in advance. All remaining profits would be split 50% to me and 50% to the investor. Normally, in a situation like this, the investor would let me deduct any out-of-pocket expenses but understandably wouldn’t let me take any salary.
You wouldn’t believe some of the wild, crazy, ridiculous investments that require large amounts of cash that I’ve seen these people put money into. Many of them have the same luck in the stock market that I have. These people should feel blessed that you have come into their lives with a viable real estate investment. I have found these people by talking to friends, attending investment seminars, and placing ads in the newspaper.