Successful Fee Based Builders Can Save Distressed Subdivisions for Developers
January 23rd, 2009 categories: New Construction
Across the country, roughed-in and unimproved subdivisions lay fallow as developers and banks twiddle their thumbs, hoping builders and homeowners will turn up in droves to build out their fancy new subdivisions. Unfortunately, because of tightening credit lines, oversupply, and less demand, subdivision developers watch as their land sits empty while they (and their banks) bleed cash. A successful Fee Based Builder could turn all that around…
Developers must continue to develop to survive
An empty lot that doesn’t sell does a developer zero good. Same goes for a bank that holds the note. The developer needs the proceeds that come from the sale of the lot to continue and prosper. The bank needs principal and interest paid every month to stay solvent and out of trouble. Developers that are in a cash crunch cannot afford to get in the home building business and roll the dice on an unproven product that only throws them further in debt.
Enter the Successful Builder
There are a small number of builders across the U.S. that have continued to sell homes through thick and thin. These builders have the manpower, connections, savvy, and reputation to sell their already proven product. They can enter a distressed subdivision, determine what the market needs, and build accordingly. Quality homes in new subdivision sell, lots do not. Here’s how this helps the developer, investor, or bank…
A case study for fee based building
A developer or investor sitting on lots in subdivisions can create an immediate revenue stream when building begins by creating an LLC and selling the lots from the developer to the LLC, taking a lot draw. If the lot appraises, the developer can take the full draw of the appraised value, getting their return for the property up front before it is even finished being built. This creates liquidity and action in the subdivision.
By the numbers…
Based on the prices, this example won’t be accurate for many areas but you’ll get the general idea.
Take the plans for a 2,000 square foot home
This home costs the successful builder $124,000 in materials, labor, and fees to build.
Let’s say the lot the home sits on sells for $40,000. We’re up to $164,000.
Aggressively price the home for $192,500. Take out 6% commission of $11,550.
We are left with:
$180,950 money at closing minus
$164,000 cost of the house
$16,950 Net
That gives the developer some wiggle room for concessions and the like. The developer has sold the lot and made over $16,000 on the sale of the house!
Please tell me how this is not a good idea. A successful builder can move stagnant lot inventory by building homes on a fee basis for the developer using tried and true building and sales techniques.
Developer wins. Investor wins. Bank wins. Real Estate Company wins. Builder wins. Buyer wins.
Everyone wins.
The catch is that only a few builders across the country have the resources to pull this off with the ability to work on a national level. I happen to know one of them. Contact me for a private consultation and I will get you in touch with a builder that can help you as a developer, investor, or bank. I look forward to hearing from you.
