Hello all- I just finished a 1700s.ft.spec house in a new subdivision. the developer of the subdivision liked it so much he wants me to build three more for him (different plans).
I have only worked as project manager for someone else once (a small house). It turned out OK- I charged 15% on top of all expenses, used my own accounts with all suppliers, charged hourly for my own labor when needed, and/but the homeowner held the pursestrings. He would cut draw checks periodically to my checking account, and I would pay the subs, and keep my percentage. We knew and trusted each other. The books were always open.
The rest of my experience is either in building specs for myself, re-modeling (usually with firm bids), or working for someone else.
How should I proceed? If I hire on as project manager- what percentage should I ask for, and on what terms? I don’t know this fellow very well, but he seems like a nice Christian person. 15% seems a little high in retrospect. Is that about normal? if I just hire on for a set salary, he is liable to get antsy, if things go too slow, and I would fell like I was cheating on him if I didn’t devote all my time to his projects. If he asks for a firm bid, I could get killed, even though I just finished a comparable house in the same subdivision ( I sometimes do a lot of odd “hands on” work myself- it usually saves money for me, but in retrospect usually makes it harder to estimate overall costs), and with materials prices looking unstable at the moment, it kind of scares me.
I am thinking of showing him the ledger for my own house that I just completed, and explaining things to him like I am doing here, and then giving a “ball park” estimate, and tacking on my percentage. What do you all think? All thoughts will be much appreciated. Thanks.
PS Any tax and or insurance advice would also be much needed and appreciated.
Replies
>I don't know this fellow very well, but he seems like a nice Christian person.
Religion is religion, and business is business. Don't let your thoughts on one cause you to treat the other casually. A great friend of mine was also a nice Christian person and built a number of churches, as well as residences, and had much greater trouble with payments on the churches than the residences. Don't let that cause you to use lax business practices.
I'm sorry that I phrased it that way. The subject is complicted enough without a religious slant. I will say though that in my past business dealings, I have always had better experiences with religious people, and all other things being equal, prefer dealing with them .
My experience is exactly the opposite.
When they begin explaining how good a Christian they are and discuss church etc. that is when I become highly suspicious. "Show me your religion by your deeds and not by your words" is what I think but dont say.
Been burnt and hurt many many times by them.
You said, "he wants me to build three more for him . . . "
What is his motive? You are a builder, is he? If he is not a builder, how can he make money doing spec houses, unless he hires a builder to build them? Is there enough margin possibility in this venture to support your need for profit and his? There had better be, or else you are both better off investing in good stock funds.
For him, his returns might be taxable as capital gains, which he might reduce significantly by loss carryforwards. For you, your gains are likely taxable as business income. Completely different stories.
Three houses, built sequentially, might be a good two years work, from initial planning through final punchout and closings.
Be wary of this. If he is just trying to cash in on what looks to him like a lucrative spec house market, you might be best off to arrange a two year employment contract that names you as general manager / project manager, and stipulates a salary and benefit package.
Think of the worst that can happen, such as the bottom falling out of the housing market in your region, with those specs sitting empty. What if he becomes a Muslim, or converts to Judaism?
Mr. Micro-
His motive is to squeeze more profit out of the three remaining lots he owns in the subdivision. He figures he can still make money by hiring a builder and sharing the profit on the sale of the houses. We haven't talked at length yet (we will meet next week), but I assume he will service the debt.
These houses are starter homes, in the $125-150,00 price range. Vinyl or stucco (or both) I should be out of there in 4-5 months.
Right now I am leaning towards charging a fixed percentage, say ten percent, of the sale price. If he insists on a fixed percentage of the labor and materials only- without factoring in the lot (remember he owns the lots, and his lot cost is below market, since he developed them) then that would warrant a higher percentage for me, maybe.
Also, I would ask for a small salary, maybe 100 bucks a week per house, for "walking around money"to be deducted from my share of the sales proceeds at closing. I like the idea of an equity stake in the houses, this allows me to shoulder some of the risk, and also will reduce his cost of carry- all positives for him. As long as I am proteced legally, my ownership shares should at least hold their value.
Obvious downside risk is that they might not sell- but under such a scenerio- even if they were re-po'ed by the bank (he may be working out of pocket-I don't know), I would at least have a second position, correct?
I am thinking aloud here- I anyone sees any holes- fire away.
cash.... 2d position on a bank repo would normally amount to nothing.. especially if there is no market..
$100 / week/ house = $300.... is that walking around money ?...
if you can't express this deal on one sheet of paper.. you shouldn't be doing it
your financial partner apparedntly has no housing experience..
you don't sound like you have much background..
and you 're about to throw down on a 3 house parlay... hmmmmm
i wouldn't want to be involved..Mike Smith Rhode Island : Design / Build / Repair / Restore
Hey Mike- What would you do if you were in my position?
well...
i'm trying to read between the lines and figure out just what it is you do..
it looks like you build houses..
what was the basis of the house you just built ?
why can't you build 3 more on the same basis?..
instead you're trying to get into a different line of work which you apparently know very little about
maybe yu want to be "project manager" but since you don't know what the % fee is, i also assume you don't know what the hidden expenses and pitfalls are..
Construction Management is a specialized form of contracting.. i never liked it.. i could never see where the owner got more value from a CM than he would from a regular GC..
what i would do is build on what i already know.. so what do you already know ?
how to be a GC?... give him a price...
or structure the deal so you get paid.. but % of profit is bogus.. who defines "profit"
and if the market goes south .. what profit ?
Mike Smith Rhode Island : Design / Build / Repair / Restore
Mike.
There is nothing between the lines in my posts. I spelled out what I do in the first post of this string.Thanks for your help.
yeah... well, i'm dense.. i still don't know what you do ..
are you a builder?
did you build the house for yourself.. are you living in the house ?
i've read your first post 3 times and i still don't understand
one more thing
a % of the sales price has no basis in cost..
but hey, whadda i no ?Mike Smith Rhode Island : Design / Build / Repair / Restore
I'm with Mike here ...
what's with all these posts about becoming partners and working for sale price percentages?
Why complicate things? There are 3 houses that need built ..... you sound like you could build then ... so look at the prints .... figure a cost / give a price .. and just build the damn things!
I'll bet someone involved doesn't have the money to get this outta the ground till they get that last check at closing .....
JeffBuck Construction Pittsburgh,PA
Artistry in Carpentry
I'm seeing it the other way. The "developer" sees more profit opportunity in spec houses than on just the land, and wants to cash in. He's not a builder, and needs someone to build these houses.
Or it is possible that the developer has more than just three remaining lots to sell, and liked what he saw in value enhancement to the subdivision by the house he has seen this guy finish, and wants to do a double whammy . . . make money on three nice specs, and jack up his remaining lot prices.
I'm with Mike on this one, now. I cannot tell who is what in this scenario. If the guy is really a builder, he would estimate, quote, make his deal, and simply begin. Some information is missing.
How many remaining lots does the developer hold in this subdivision?
How many houses have been built and sold?
Has the builder's spec house been sold?
Is the developer from out of town, or local?
Does the developer have any experience as a GC?
Does the builder have enough money or backing to pop out three more of these, simultaneously at worst case, sequentially at best?
Will the developer pay "full retail" for these houses?
Mr. Micro,
Your intuition is good.
The developer could make could make x amount of dollars selling the lots only, without lifting a finger.He could sell them to me and I could build more spec's... the same as before.
His motivation is to enhance his subdivision value, he prefers my style of building... I usually add a special touch to my products (chippendale railing, tiles set on diagonal instead of "checkerboard" "fishscale" vinyl shakes on gable ends, etc. these value enhancements are a way that a one man show, like myself, can compete with the big operations)...AND his primary motivation is to make an extra profit by selling the houses.
We simply have to find a mutually beneficial business relationship.
There is no point in me shouldering all the risk, i.e. funding the project... I might as well just buy the lots, and be in complete control.
MY origional spec has been sold
The owner lives nearby
these are the last lots in the subdivision, but there is a new phase to be opened
The developer does not have GC experience, and as I stated before, I have little myself, (if I did, I would not need to be asking such questions to strangers.)
What would YOU do?
Thanks
There is no point in me shouldering all the risk, i.e. funding the project... I might as well just buy the lots, and be in complete control.
Risk really is the major point, yes? You apparently want to minimize (eliminate?)yours while sharing in the profit, if any. Seems to me that somewhere you need to decide if you want to be 1) independent taking all risk and all profit, 2) partner sharing risk and profit, or 3) gc employee having no risk or profit from the sale.
Your decision should be determined by your ability and inclination to carry the risk. If partnership is your choice, level of risk is normally offset by profit share. There are a great many ways of defining partnership, only limited to what's agreeable to the principals.
The developer presumably has similar motivations, minimize risk and maximize profit. That's where the horse trading begins. If you can convince him to take all (or most) of the risk and still substantially share the profit, you win big. Unlikely.
One builder, that I ran a cabinet shop for, was accustomed to the developer fronting the lot, paid at closing. The builder financed the house and took all profit (if any- once was a substantial loss), paying the pre-agreed lot price at closing. The developer fronted the lot as incentive for the builder to enhance the subdivision (and getting the lot sold). How's that sound? PAHS Designer/Builder- Bury it!
<The developer presumably has similar motivations, minimize risk and maximize profit. That's where the horse trading begins. If you can convince him to take all (or most) of the risk and still substantially share the profit, you win big. Unlikely.
VaTom, exactly. The developer seems willing to take some risk-I do not know yet how much. Frankly, I am squeamish about building any more specs in this same area, but would be willing to invest my time, provided that it produced some balance of immediate cashflow, and some equity.
Frankly, I am squeamish about building any more specs in this same area, but would be willing to invest my time, provided that it produced some balance of immediate cashflow, and some equity.
This is getting straightforward. You're willing to help the developer finance the project with some of your time, compensated at closing. As this shouldn't be a major cost factor in the house, and zero risk to you, your share of the sale profit (with no potential loss) would be a gift from the developer. Doesn't mean you can't swing it, but if I were the developer it wouldn't happen.
Sounds more like you have an opportunity, as a gc, to get 3 houses to build. Any profit will rely on your expertise as a gc, not on the sale price. The gc payment schedule will depend on your negotiations and the developer's financing. The developer moves the 3 remaining lots, which may be more important than you realize, and speculate on 3 houses with potential profits particularly with volume discounts built in. You have an opportunity to further your education and profit, from the gc contract, by getting volume discounts on your costs.
Sounds like a plan. Tell the developer what you just told us and see what he says. Good luck. PAHS Designer/Builder- Bury it!
It's been my experience that as a developer you make very little on the land. Not even worth all the headaches you have into it!! Where you make your money is on the houses.
Sounds like this developer just figured it out.
It's been my experience that as a developer you make very little on the land. Not even worth all the headaches you have into it!! Where you make your money is on the houses.
That would be most unusual here. No problem with profitablility on the lot sales, assuming reasonable planning. Spec homebuilding is a disparate enterprise, largely unrelated to land development. PAHS Designer/Builder- Bury it!
You didn't say whether he wants this done simultaneously or sequentially.
Nor did you say whether he is willing to pay "full retail" for the houses. Tell him what you got for the one you have finished and sold, but don't divulge any cost or profit info. Ask him if he would have paid you that.
Remember that his cost basis in those remaining lots is a whole lot less, per lot, than what you paid him for the one you built on. He may see it this way: my three remaining lots will sell more quickly with good-looking houses on them.
Why don't you counter his offer by offering to buy the three remaining lots from him, on a time-phased deal, and telling him you will give him 5 percent more than his asking price.
Let's say the lots are 22K each. Offer him $23,100 each, with your cash payout to him as follows: $22,000 when the first spade of earth is turned, per house, the remaining $1,100 when each one sells. Your $22K first payment on lot #2 will take place after the house on lot #1 sells, etc. Build them 1-2-3 in sequence, not all at once. If you are OK with the floor plans and elevations he has proposed, by all means build 'em that way, otherwise, make your own design decisions.
If there are any other lots around town on which you can replicate your recent success, and make your full profit margin, then why would you give up any of that well-deserved "builder" margin for a guy who is not going to function as builder at all?
Mr. Micro,
I assume he wants it done simultaneously. I think he has pretty deep pockets. I just don't know how long his arms are ;-)
It would make no sense for him to pay the market price for the houses. This is not a go-go market, by any means, and there are a number of empty specs now already in this subdivision. He could just sell the lots alone and do fine, letting the spec builders take all the risk.
>>If there are any other lots around town on which you can replicate your recent success, and make your full profit margin, then why would you give up any of that well-deserved "builder" margin for a guy who is not going to function as builder at all?
Because he would be taking some of the risk if he funds the projects, allowing me the freedom to utilize my own capital elsewhere.
Jeff,
I think you are right. KISS.
I did just build one, and I know the profit margin.The simple thing to do would be to simply split the margin with the developer.
Questions:
What percentage split would you settle for? What terms? What are the pitfalls? Thanks.