One of the best strategies in today’s market for making money with real estate is flipping lots and spec building new construction. It is also the most overlooked strategy.
Most wholesalers and flippers have blinders on and are only looking for existing houses to flip. While flipping houses is a viable strategy for making money, it’s not where the greatest opportunity lies in the marketplace today.
In this article, I’d like to discuss why you should be flipping vacant lots and building new construction spec homes.
Custom Vs Spec:
First off, there are 2 types of new construction and it’s important to understand the difference between custom and spec. Custom building is when an end-buyer purchases a lot and hires a builder to build them a house. Spec building is when an investor buys a lot, builds a home and puts it up for sale.
During the last real estate recession, new housing came to a screeching halt. In markets like Florida, Arizona and Las Vegas, entire subdivisions were abandoned and left uncompleted with brand new homes sitting vacant with six feet tall grass in the yard. New housing developers, builders and investors were hit the hardest with the downturn and were stuck with over-leveraged land and new houses and no one to buy them.
Fast forward, 7-8 years to today. Now we are in a recovering market. Most of that over-leveraged inventory has been sold via short sales and foreclosure. Today, values are continuing to steadily increase and some predictions are that the some real estate markets are on tract to reach pre-bubble values in the next year or two! Buyer confidence is strong and demand for new housing is back. The problem is most of the new housing developers, builders, and investors are still licking their wounds from the last down turn.
Sure custom home building is going on like wild fire because there is no risk in custom building. The builder is getting paid a fee to build a house. The pain is still too recent for much speculation development. Now, that is changing of course as the markets continue to recover but my point is that the supply has not yet met the strong demand for new housing.
Opportunity is Knocking…
What does this mean for you and me as investors? This means we have an opportunity to provide the market what it wants – New Construction Housing. As one of the early adaptors, I saw this opportunity already a few years ago and immediately transitioned from rehabber to spec investor and have now built and sold dozens of spec homes and we are even in the process of doing several land development deals right now.
Check out one of my recent New Construction homes we sold on the first day on the market for $1,000,000:
When it comes to making money with new construction there are two primary ways. Flipping lots and building spec homes. Let’s briefly discuss each:
Flipping lots is no different than wholesaling houses except in my opinion a lot easier. As a lot flipper your buyer could be a builder, end buyer or investor. Just like with houses, the key is getting a lot in a desirable area and knowing what a your buyer is willing to pay.
Recently, I flipped a lot in Georgetown, TX that was brought to me by one of my lot finder students. This was a high-end development, gates sub and had lots of building activity going on. My analysis was that subject lot had a value of $90,000 t0 $100,000. So I bought it for $67,900, sat on it for a little while and then turned around a sold it to a builder for $90,000 cash.
Good luck trying to buy a house for $67,900 and wholesaling it for $90,000!
Flipping New Construction:
New construction is a similar process as rehabbing a house except in my opinion much easier.
Step 1: The first step is to design the right house. I learn everything I can about the homes in the neighborhood or market. I research the most desirable layouts, floor plans and spend a lot of time with my agents, designers and architect to come up with a custom plan.
Check out this $800,000 home I’m in the process of Building:
Step 2: Once plans are drafted, I take them to 3-4 builders to bid out. Unlike rehabbing, there are no surprises so a builder can get exact prices to build the entire house.
Step 3: Once I know my cost to build and before I ever start building, I verify all the numbers work. I confirm my sale price based on the most relevant comps and calculate my lot cost including any lot improvements, cost to build, and of course I factor in soft costs such as, commissions, property taxes, staging, insurance, etc. as well as carrying costs (financing).
I shoot for an 18% (of sale price) profit on each deal. With rehabbing, my minimum profit is 20% but again I have less risk with new construction because there aren’t any unforeseen repairs like with rehabbing. So on a $1,000,000 spec homes I shoot to make $180,000 profit.
Step 4: Once I confirm my numbers, I choose a builder. I typically get a builder to do the project for a flat fee between $20,000 to $30,000 to oversee and build the entire home from start to finish. Once plans are submitted and approved, the builder steps in and starts building.
Step 5: The goal is to build the home in 4 to 6 months and then sell it in 1 to 3 months, making the entire project a 6 to 9 month time frame. Since I do luxury homes (you can check out some of them here: http://nortondevelopment.net/), I always stage them.
New Construction Formula:
When analyzing deals, I follow a similar process as flipping houses.
+ sale price
– cost to build
– soft costs 10%
– carrying cost 5%
– profit 18%
= lot buy price
The formula is:
(Sale Price x .67) – cost to build = lot buy price
Lot Flipper Program:
Because I have refined the process of flipping lots and building and selling new homes and because I believe there are markets in every state that are prime for new construction, I have developed a finder fee program where people can bring me lots that meet my criteria and get paid an $8,700 finder fee. To learn more about how to be a lot finder for me go here to watch a short video and register for an upcoming webinar where I will go over all of the details.
Leave a comment below and let me know if you have any questions about getting started with flipping lots and/or new construction.
Until Next Time Happy Investing,