A few months ago I got approved for a construction to perm loan to build a house. The appraisal was for approx 100k, I already owned the land, so the bank approved me for approx 70k. Of course I’m happy to get the loan because I’m thinking this could be the key to me getting to the next level in business. But as I work the numbers, it’s no where near enough money. Initially I hoped I could do it for around the 100k it appraised for. I have learned that 125k is a more realistic number. That doesn’t include the 8k I already have in the lot, plus my liability insurance premiums and other overhead. I don’t mind putting in my share but I’m just getting started and it looks like I’m already sunk. So far I have only cleared the lot to get a better view of the situation. I am currently trying to finish another project that should give me approx 30k but I’m still short a lot of money. To top it off, look at the difference between the appraisal and the cost. I can hope to get a better appraisal after completion, but if not, I’m stuck trying to sell a house for more than it’s worth in a rural southern community. I have a potential buyer from out of state who may pay more but I’ll count that money when I get it. Should I give the loan back and start over? Take on investors (if I can find any)? Continue dumping all of my money in until I bust? I like math but I hate these numbers.
Replies
if the numbers don't add up i wouldn't go any further, in this economy with house prices potentialy falling as forclosures increase and undermine property values you could get left holding the bag.
this is not the time to sell, nor the time to build and try to sell, it is the time to buy! do not put any more money into development and put all of your money and resources into finding and aquiring the bargain properties that are out there and put your math skills to work figuring out how you will be able to carry the paper for a five year window.
six years from now when you have money coming out your ears because you listened to me remember you heard it here first.
>>this is not the time to sell, nor the time to build and try to sell, it is the time to buy!<<<Although I agree completely in buying when the chips (and prices) are down.....IMO, they have not fallen nearly enough. Maybe they have in your neck of the woods....but in many areas, where prices are up...100....150.....200% over the last 5 years...... having come down 5 or 10% in 1 year does not mean "time to buy"....again....that's my opinion and it will vary depending on individual regions.
i couldn't agree more, regional thing and even in regions you may well have microregions that act different, in fact in my area when i saw it starting to come down i felt right away that if it didn't pick up significantly this summer that it would be even lower next winter.
i am not going to predict further out than next winter for now, but i will quote others as saying it will not be going back up significantly for 4-5 years.
that being said, even though prices will be lower some in a coupla years, you may find a killer bargain from a guy that built a spec house and has to get out from under it at a tremendous loss just to preserve his credit rating. these may appear this winter, but after that they may be gone as everyone figures out a declining market is no time to buid a spec.
i think we both agree that buying at bottom is the best, and by sharing opinions i hope to get a better idea of when that is. it could be that looking back 5 years from now we realize jan/feb of 08 was time to buy in as that was as low as it got.
>>you may find a killer bargain from a guy that built a spec house and has to get out from under it at a tremendous loss just to preserve his credit rating>>>Excellent point. I really wasn't looking at it that way (buying from a possibly distressed spec builder). Spec building, overall, will be tough the next few years. Unless one is extremely confdent that he can spend a year building a spec home and still make a profit (even if the market comes down more over the next year), it's way too risky. The last few years it was easy to do that...in some cases....the longer you took to build or waited to sell..the more you made.If prices stabilize or go the other way...it could mean financial suicide though. :(
>>you may find a killer bargain from a guy that built a spec house and has to get out from under it at a tremendous loss just to preserve his credit rating>>>
Excellent point. I really wasn't looking at it that way (buying from a possibly distressed spec builder).
Last time things went this way i ended up making 300% on some land I bought from a guy set on building specs who ran out of money and needed to sell EVERYTHING to keep his own house.
jcrew.... my second year in business I built one spec house.. sold it right away
third year in business I built another spec house... owned it for 7 years and sold it 6 months BEFORE the market turned in '83
that was the last spec house i ever did or intend to do
return the loan
and build a business that allows you to work with OPM
(Other People's Money )
I'm breaking ground on a spec house next week. I spent about 3 months getting everything to add up...go over your numbers some more before you hang it up...I really hate custom work<G> Outside of the gates the trucks were unloadin',
The weather was hot, a-nearly 90 degrees.
The man standin' next to me, his head was exploding,
Well, I was prayin' the pieces wouldn't fall on me.
I second that emotion.
There are fast carpenters who care..... there are slow carpenters who care more.....there are half fast carpenters who could care less......
Build a different house.
jcrew,
I've got a few plans on my desk.
They are for retirement,(I'll still have to work when Uncle Sam cuts me loose with my pension, and I'd like to return to somethign I like).
Guess what? When it comes to Spec houses...................not all plans add up. Some stuff is destined to be built for a customer who wants it and is committed to it.
Also, I've for a long time thought that if I could build a single family at an entry level price point I could sell them as fast as I could build them. Hell, how come no one else thought of it?
Well, I've run plenty of jobs from footing to turing over the keys. But I never handled the money. My dad is on the money end of things and he's always said that there's not enough margin in that low end market on a small scale.
So after I put pencil to paper, I learned he was right. In my area anyway, the 1600 sqft starter single family I was convinced I could sell by the bucket load? I would have to sell by the bucket load just to make a salary.
If you can't borrow every dime you need and then some....and if you can't afford for the business to cover ALL the carrying costs from break ground until you sell......................you aren't ready. And don't bet on selling it within a month of the last coat of paint.
Go back and regroup.
Don't bet your future on MAKING the numbers work. If they don't work? Then they don't work. You can't force them to work. I've got more than one friend sitting on a Spec who will loose money even if they sell THIS month for full asking price.
I'm an appraiser. I work for a national lender. We have been seeing a lot of markets all around the country where builder's are having severe difficulty selling new homes. We are seeing extended marketing times and large price reductions. I've seen some developments in Florida where the builder has reduced base prices by $100K since last year. A lot of investors who bought new homes are stuck because they can't sell them without taking a loss.
The best thing you can do is talk to a local realtor who has experience selling newly built homes in your market. Go to http://www.realtor.com. Do a search for your zip code. Look for new home listings and call the listing realtors. They can tell you what is happening in your market because they are in the trenches working with buyers and sellers.
Good luck.
Why did your numbers change?
Tim
I have seen some cities here in the south that wont let starter home development because of lower property tax. the problem is the policeman, teacher, waiter in the service industies must drive 60 miles for their low paying jobs. ans no it not about wages but about money, property tax money. if you raise wages then you raise property tax and then the teachers are still on the lower end of the scale.“Ilsa, I’m no good at being noble, but it doesn’t take much to see that the problems of three little people don’t amount to a hill of beans in this crazy worldâ€.
the problem is the policeman, teacher, waiter in the service industies must drive 60 miles for their low paying jobs
In this part of the South, I can't imagine an $8k lot. Been decades since that was a possibility. Subdivision approval here generally requires "affordable housing" inclusion. Major developer problem when lot prices alone approach what they consider "affordable".
Teachers and police are generally used as examples here too. I recently wrote to a local reporter who wrote a detailed article on how a beginning teacher couldn't come anywhere close to affording the median house here. Duh...
Totally ignoring that for almost everybody, 2 incomes are required. Snippy reply that they were aware of the 2-income requirement (but chose not to include it in the article). With 2 incomes, the difficulty largely evaporates. The major problem here is journalistic acceptance/promotion of public employees' propaganda in lieu of actual reporting.
Probably your teachers don't start at $37,695 plus benefits. PAHS Designer/Builder- Bury it!
Youre right .
I talked to a guy yesterday that lost his wife which was a two income family.
He told me after paying his bills he was broke . He went through all his expenses and I said you left out food and emergency expenses. He said exactly. Im slowly going broke and if somthing happens in an emergency Im going down quicker than I thought . He didnt have money for auto insurance either .
Anyway, he said if he had nearly any type of secondary income he could fly easily.
Now the problem Ive always heard is also the arguement . What if a woman gets pregnant? The way family living was taught in school was to use her income as the addtional income for savings instead of staples. The unnecesary things .
Of course that is not followed and we have women as primary income producers in the family. Or as you suggest a dual income approach which works as long as there is savings . I think anymore two incomes as you say is necesary to count until sh^t gets paid for then one can be used. By that time the kids are gone so whats the use ? In the trades working self employed , it helps with kids to be flexable when she may not be . Even then the employers I know excuse women when they have to take off for the kids as it should be so as long as the double income isnt maxed , it does work and I think we are finding that the norm so times have changed.
Tim
Wasn't that long ago here (before I gave up my real estate license) that I promised to show any 2 income couple how to buy a house. Minimum wage included. Almost never happened due to ..... car/truck payments. Oops, still gotta qualify. Yeah, I explained the facts of life but never, ever got a couple to fix their payment schedule.
Major problem today, living too close to the edge. Like your guy.
I spent time today counseling a friend here who's fallen on hard times. He's having difficulty reconciling his past earnings with future potential. To the point of avoiding filling out job applications even though he's living on (substantial) equity in his house that ain't gonna last forever. Fortunately he's well aware. And he listens to me as I'm the guy who got him into his first house, after other Realtors said it couldn't happen.
Your acquaintance learned the hard way the importance of life insurance for all earners, particularly when you're cutting it close.
PAHS Designer/Builder- Bury it!
my lot was 7k 1/2 acre. But the town I was talking about is in the tampa, ft myers area. Also we have one like that in Gulf Shores. And couple weeks ago gulfport Ms denied a developer to build affordable housing project due to low property tax..“Ilsa, I’m no good at being noble, but it doesn’t take much to see that the problems of three little people don’t amount to a hill of beans in this crazy worldâ€.
In our paper this morning: we're no longer the number 1 area to live in, just the best in Va. Reason? High cost of housing. Median house price went from $177k to $349k in the past 3 yrs.
Makes everybody take notice. A major reason is tight zoning... and lots of new good-paying jobs.
Don't know much of anything about Florida, but new housing everywhere rides on the back of rising taxes for existing residents. Here, they recently calculated a $17k burden that every new house places on existing residents. Mostly due to schools. These are issues that every growing community should be talking about, arguing over.
I took issue with a misleading newspaper article. The article pointed out that they had 150 new teachers in the school system for next year and only 31 houses available in the area priced that a beginning teacher could qualify for. That they found 150 new teachers says something- which they didn't address at all. There's not a small amount of competition for those positions.
This area was routinely rated as the best to live in for several years now. When there's a problem housing teachers, police, salaries will jump, or zoning will be relaxed. This isn't Aspen, Colo.PAHS Designer/Builder- Bury it!
I suspect that this is going to hit a nerve with some of you, but I strongly feel that the answer to rapid growth is "IMPACT FEES".
New housing means new streets, new parks, new schools, additional squad cars, ............well you get the idea. These are all capital costs that would not be needed if new housing did not increase the population. So, should the existing residents have to pay for capital improvements? In my opinion, no. The impact fees should allow these new facilities to be built, sometimes without even having to put in bond issues.
Now, once the new school is built, it should not require an increase in taxes, as it costs $xxx per resident to support a student. Double the population and also double the number of teachers, and the taxes should also double. One person's tax should not be affected.
I agree with the idea of impact taxes. If in addition to this we changed our tax structures to depend less on property taxes, we could have much healthier growth. [I dislike property taxes because they tend to encourage communities to build the biggest possible houses on the largest possible lots to maximize their local taxes, but at the expense of all the ills and inefficiencies that come from poorly managed sprawl and McMansions.]
"
[I dislike property taxes because they tend to encourage communities to build the biggest possible houses on the largest possible lots to maximize their local taxes, but at the expense of all the ills and inefficiencies that come from poorly managed sprawl and McMansions.]"
I dislike property taxes (based on assessed value) because it's essentially a tax you pay on someone else's ability to pay it. When people move into a community to fill well-paying jobs, they bring kids who need schools. The cost of just one kid often isn't covered by the taxes on the house, and with two or more kids the town really is hit. Hardest impact is on the long-term property owners, often now retired, who see their taxes keep going up after their income has plummeted and the buying power of what they do get shrinks. The property tax is based on concept hundreds of years old and ought to be scrapped. We don't pay federal taxes based on what some well-to-do fellow would be willing to pay for our houses, do we? Why not a local income tax, and just flat-rate the residence tax to cover infrastructure? What's any of this got to do with the OP's dilemma anyway?
I suspect that this is going to hit a nerve with some of you, but I strongly feel that the answer to rapid growth is "IMPACT FEES".
Great for the established citizenry. Major problem for the newcomers, particularly younger ones, like new teachers, policemen. If they tacked that $17k on to each new house here it only becomes more unaffordable. Spreading the cost out over a wide audience has been easier to date. Just like it was done for those who are now established.
The reason for the ($17K) calculation was to start a process by which they could exact "proffers" from developers. Which amount to impact fees, as it obviously gets passed on to the new homeowners.
I expect it'll be a combination here. This area has been very successful in enticing retirees to relocate here. They're the only ones who actually do pay their own way. Unfortunately, they also raise assessments which uncontrollably tempts the local gov't into spending the difference (rather than lowering the rate).PAHS Designer/Builder- Bury it!
Ive always wanted to live in a place like that . Mebbe I dont know sh^d about what I was wishing . <G>
Unsure what you meant. We mostly like it here, loved it until our future was threatened by growth and tax bills. Don't know if you caught my cell tower thread, which if successful will ease that. Watched a bear sniffing my van while I fixed my lunch today. Strikes me as a good place to live.
You're apparently living in a very different economy. I don't see a problem, so long as you don't aspire to move to a more expensive one. No different from me. Long Island or NYC, for instance, is out of reach for me too (in the style to which I've become accustomed). Fortunately I have no desire to live there. And there's always a cheaper place if you decide to cash out.
Pretty sure you understand that the only important thing is to be happy with your choice. We did a lot of looking before settling here. 13 months and a bunch of countries on the first trip. PAHS Designer/Builder- Bury it!
nother problem with "impact fees"
lot's of long-term owners have been paying property tax ( and often sewer & water too if it's in the street )
then after owning the land for say, thirty years, they decide to build their retirement home.. and get wacked with fees their neighbors never had to payMike Smith Rhode Island : Design / Build / Repair / Restore
Every time you change the rules, somebody loses. Which really isn't a good excuse to never change.
Last year there was a zoning interpretation change over land-use taxation (program for reducing farm taxation), originated by the county attorney, involving the state attorney general. I, and a couple hundred other property owners, lost. Parcels disqualified, complete with a large roll-back tax bill. The surveyor who was responsible for a majority got really hot under the collar. Cost me a bunch of money, but when considering the alternatives it was better to pay.
Another idea floated briefly here was a surcharge for school-age parents. They're the ones who're making the problem. Didn't go far.PAHS Designer/Builder- Bury it!
Impact fees are an interesting situation. Sure, it makes it more expensive to build new - everyone recognizes this. However, theoretically, it should cause the price of existing housing to go up as well, to stay in line with the cost of new housing, no?My community is dealing with impact fees right now, and there's never a dull moment, that's for sure.
yes... the appraised ( theoreticaly " market " ) value of the existing housing stock generally goes up with the market value of the new houses in the market / jurisdictional area
but ... so do the property taxes
anyways... i find it unjust to put impact fees on previously sub-divided lots.... they have been paying property taxes ( and sometimes sewer & water fees as well ) since the lot was created
i think impact fees should apply only to new subdivisonsMike Smith Rhode Island : Design / Build / Repair / Restore
Tom, your posts in this thread have been very informative. Regarding the newspaper article you mentioned, I would also ask how many entry-level professional positions pay enough to make homeownership affordable in your area. Your teachers may start out at only $38K a year, but that scale rises very quickly, I'm sure.
Fresh out of college, don't most folks have to rent with a few roommates and drive used cars until their payscale and savings allow home ownership?
By the way, in my rural upstate N.Y. area -- where houses over $100K are still rare -- experienced teachers make $80k a year, or more, and have premium health care and retirement plans. It's the teachers that live in the finest homes. And have the free time to enjoy them.
The rest of us are either farmers, or are faced with working minimum-wage jobs locally, or have to commute 100 miles a day to better-paying jobs.
Or we're trying to make a living working on all those teachers' fine homes.
Allen
Good point about what teachers live in and Tom has sparked a good discussion/arguement .
I wont enter the arguement although Ive got deep feelings over the subject.
What I will say is that I dont understand all the beef. My newspaper was complaining this morning too about teacher wages. Not about places for them to live .
In my state nurses have been under teachers for years while there have been a critical shortage in the medical profession. Nurses work their days off and pull double shifts quite a bit . Teachers take all student holidays and are of course off during the summer . They do have continuing education but so do nurses . Im neither one of them but the effect is different for me . The teachers are supported by tax dollars while nurses arent . That means to me that when we go to the hospital we pay out of our pockets for care but its different with students.
Tim
just as a note my wife started at 29000 and had to have a masters degree, My town averages around 750000 for a home but you could get a 3 bed 2 bath for 350ooo, Its wonderfull having insurance but we found we could never make it if we did not own already on just her pay, Being as i did not fill out my profile this is in Oregon
Regarding the newspaper article you mentioned, I would also ask how many entry-level professional positions pay enough to make homeownership affordable in your area.
Hope I was clear. The article stressed that a beginning teacher couldn't afford to buy the median home, or almost any home. What it intentionally (admitted by the author) omitted was that when you have 2 salaries the problem evaporates. Which is common for professional salaries here. Teachers, nurses, and other professionals are paid such that it takes 2 incomes for homeownership.
Far as I know, that's the norm pretty much everywhere. And has been for a long time. As you point out, the median house isn't a realistic expectation for a beginning worker anyhow. The yellow journalism pointed out that for the 150 new teachers, there are only 31 properties listed that one beginning salary would qualify for.
Allen, experienced teachers here aren't paid anywhere near your $80k (must have a great lobby there). IIRC, it's more like $60's top. Nurses similar Tim, but there's a major teaching hospital here. I've got little opinion about salary levels, other than to observe that there is competition for these jobs. Housing's a problem for most. That, with accompanying tax ramifications, is my interest.
BTW, apologies to the OP for getting so far off his query, pretty well run into the ground. I'd certainly be looking for a distress sale rather than a spec. Unlikely here. Not that I haven't profitted handsomely that way in the past, just rare. PAHS Designer/Builder- Bury it!
Dont forget your lot may go up, Dont build and sell at a loss then you dont have the lot, maybe right now things are not moving but they might change and you will have a good lot ready, For years i told my buddy im a spec builder , He laughed and said i dont see anything being built on your lots, although lots dont bring in money they went up every year, I know im not in the rural south im in oregon but as an example,6 years ago i had a lot and my buddy did too both worth appox 35 grand, He built sold for 160000, Now the lots are worth 180000, I reminded him if he held on he would have had more money and did not have to work for 6 months either. This may happen to you but on a smaller scale, Just dont be afraid to hang on to a lot either
I think you'd be nuts to start building a house when you know you don't have the money to finish it.
I'm the unofficial resident expert on how to lose money building a spec house. Check out the Spec House from Hell thread and see what I mean.
When things go bad, as they did for me, you need cash reserves to wok with. You not only don't have any reserves, you don't even have enough to finish.
I really think you're asking for trouble. Even if you get another investor, your appraisal is about 25% less than your cost to build.
I can't come up with any reason to think this is a good idea, based on what you've told us.
We don't know one millionth of one percent about anything. [Edison]
There's been a lot of good advice so far. The warning signs are there. Pay attention.
The thing that makes the most sense is to cut your losses now. I've done some projects like that, where everything you have goes into the job, and it's not fun. (Actually, I've got a mortgage closing Thursday to pull cash out so I can keep going on some new stuff. Why? Because the last one got out of hand and drained me.) Every time this happened, I was lucky because I was either in a good market or able to wait for one. That's not what you do when you are in business. You look at the numbers first, and keep looking as you go. If the numbers don't work at the beginning, they aren't going to get better.
Since you have the creditworthiness, why not put the spec house on the back burner while you refigure it, or try to get a buyer first (with money up front) to make it a "custom" house. In the meantime, go for something different. Do a flip or 2 or 3. I would buy a house and make it a rental, but that might dilute your credit unless you can get it real cheap.
Once you can get the numbers in the spec house to work better, you can go back to it.
Don K.
EJG Homes Renovations - Rentals - New Construction
I sort of went thru the same situation, my advise is to get another appraiser and be picky with who you choose.
Appraisers can make a losing deal look really really good, and a winning deal look bad from the get go.
a lot of them I have found to be very biased and take issue with things that are normal to you and me in a certain market but completely out of character for the market they are used to appraising.
Also make sure your square footage is correct for the direct area and market.
My situation was I purchased two lots to build a couple of small but nice starter homes, my profit was small on each one but they would be built together and at the same time so to me it was worth it.
Got loan approval for the homes right up until the bank appraisal came back.
I had paid 53,000 for each lot, the app. gave me a value of 34,000 for each lot.a price unheard of for a residential lot in several years. I talked to my realtor and several other people in the business and all were perplexed by her appraisal.
I promptly got nervous and dumped one lot, for 65,000 (5 weeks 12,000 profit).To another contractor who had purchased a couple of other lots for 65,000. (App. told me there was no way it was worth what I paid for it)
I still have the other lot that the permits will come in at any day now to build my little spec home with help from private money (Ill save about 8,000 in bank fee's)
Sorry for the ramblings but hang in there check your options.
By the way, I'm in Oregon and housing here is still going strong in the market I will be in, and the location I'm in I have little compatition for a new home in my price range.