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A developers' start... - LoanUniverse Community

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A developers' start...


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#1 ricegod

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Posted 23 September 2004 - 12:15 AM

I currently have about 175 000 dollars to invest. I have blueprints done for a 16 unit condo. approx cost 1.1 million dollar after all fees deducted. Appraised market value is 1.8 million which leaves me approx 5 to 7 hundred thousand in profit. In my city, it'll take about a year to sell 16 units. Since i have no history or experience with construction, my guess i probably have to presell 50%(900,000)of my units before i can get a closure for a loan. Preselling units will indeed take a bit longer but i have no other choice. i have done quite a bit of work to get this far but i'm getting tired.

my question is with the amount of money i have should i continue to invest in condo development or should i just buy approx ~ 5 -7 condo units and rent them out instead? please give advice.

#2 loanuniverse

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Posted 23 September 2004 - 08:23 AM

Ricegod:

Here is my feedback:

1- I would like to know what you mean by ” approx cost 1.1 million dollar after all fees deducted.”. What fees are you talking about? If you are talking about financing, marketing, permits, survey, inspection, and commission fees, they all get counted as part of the cost. They along with a bunch of other stuff is what is called soft costs

2- ”… which leaves me approx 5 to 7 hundred thousand in profit. Yeph, construction can be very profitable. As of right now, I got a request in my desk to build a couple of hundred townhouses where the developer is going to pocket about $10 Million on $39.8 Million of revenue. I am certainly in the wrong business.

3- ” I currently have about 175 000 dollars to invest. I have blueprints done for a 16 unit condo. approx cost 1.1 million dollar after all fees deducted. Appraised market value is 1.8 million…” You have too little equity. Lets say for argument sake that the institution where you apply has a maximum loan-to-value for these types of projects of 75% and a maximum loan-to-cost of 80%. In that case, you would need about $450,000 of your money in the project to pull this off.

4- ” Since i have no history or experience with construction” My guess is that this eliminated you from 90% of the banks that do this type of financing.

5- ” my guess i probably have to presell 50%” Good guess, but it might be a little more. I would want to see enough units presold to qualified buyers to cover the loan and give me a cushion.

6- ” should i continue to invest in condo development or should i just buy approx ~ 5 -7 condo units and rent them out instead?” Right now, developers in most areas of the country are making a lot of money because there is a lot of demand for new housing. If you could get into the business, it might be worthwhile. Then again, I do not know what kind of experience you bring to the table. I hope that at least you have some construction experience. Maybe starting with something smaller would be a better idea.


Good luck

#3 ricegod

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Posted 23 September 2004 - 11:15 AM

so you're saying that i STILL need 450, 000 on a 1.1 million dollar project even if i do 50% preselling? Is it possible that someone has that type of money and all they have is a piece of land... and sold 100% of the units and then the bank will give them a loan?

#4 ricegod

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Posted 23 September 2004 - 11:52 AM

sorry i was in a hurry... in the last post i meant a person that doesn't have that type of money.

anyways to answer your questions....

1. all fees deducted = part of the cost

2. I am certainly in the wrong business. I have a science degree, worked a couple years and now i realize that no matter how hard i worked in school, there will always be a cap in my salary. let me quote yourself my saying "i am certainly in the wrong business". Thats why i must change now before it gets too late.

3,4. I understand that since i have no experience i have to gather a couple person into this project. I had in mind an architect and autoshop owner.. architect would allow the team to have a view of this whole construction, while the autoshop would allow the team to have an experience in business generally. Would that be enough? Or must i drag my uncle along ( small construction owner). i know that if i drag my uncle along it would definitely be a lot easier because he has 20 years of construction experience but I really don't want to interfer with his business. Well, the main point i worried about is if he is part of the management team, and something goes wrong, i don't want anything to happen to his company.

5. "my guess i probably have to presell 50%Good guess, but it might be a little more. I would want to see enough units presold to qualified buyers to cover the loan and give me a cushion.

you're saying that %50 sold to QUALIFIED buyers, which is 900,000 out of 1.1 million dollar project still isn't enough? wow....

6. So you're saying to me that if i could i should be a developer instead of some lousy landlord.

And by the way thanks for the luck! Thank you for your advice!

#5 loanuniverse

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Posted 23 September 2004 - 12:36 PM

” so you're saying that i STILL need 450, 000 on a 1.1 million dollar project even if i do 50% preselling? Is it possible that someone has that type of money and all they have is a piece of land.…..” LTV and LTC percentages vary from bank to bank, but yes you would need about $450,000 of your own money for a project as outlined. Any less than that and the bank can find itself at an unacceptable loan-to-value down the road.

If you have the land it might be doable, if the land is worth $450,000. The bank would consider that your equity contribution.

” architect would allow the team to have a view of this whole construction, while the autoshop would allow the team to have an experience in business generally. Would that be enough?…” NO

” i know that if i drag my uncle along it would definitely be a lot easier because he has 20 years of construction experience but I really don't want to interfer with his business.” Easier, but not necessarily a done deal.

”you're saying that %50 sold to QUALIFIED buyers, which is 900,000 out of 1.1 million dollar project still isn't enough?” Maybe on your third project. On your first project, I was seeing a shortage {$1,100M - $175M = $925M}. You are short $25M just to cover construction. I would like to see at least 75%, but then again I am not the one that needs convincing on the structure. I would just put a little blurb in the analysis saying the presales are not enough to cover the loan, which would be considered either a “critical issue” or a “weakness” depending on the person approving the loan. By the way, you are taking into consideration financing costs also, right?

” So you're saying to me that if i could i should be a developer instead of some lousy landlord” Don’t knock landlords… Most of the rich people’s financial information that I analyze got there either through renting or owning their own business.

#6 ricegod

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Posted 23 September 2004 - 02:12 PM

thanks a lot for the information....
sorry i dont mean to knock on landlords.. i just had a few bad one thats all.

One last question...
let say the project is on its way (construction started ..75% presale =loan+interest ). And there's nothing more i can do to that project except wait for the remaining units to be sold. Me, as a company have to start on a new project while that one is being built, how will i be capable of doing that without any equity? Do i wait until all units are sold so i can use that as my money..? Could the remaining 25% of my units be used towards my equity Or is there any possibility?

#7 loanuniverse

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Posted 23 September 2004 - 02:43 PM

Do not confuse a pre-selling with the act of actually selling the unit and a closing where you actually ”sell” the unit. After a pre-sale, you still own the unit, and you still owe the money to the lender. There is no way that the lender is going to let you access your equity until he gets paid. That would be like double dipping.

pre-sale in real estate construction definition:

A pre-sale is a contract where the developer agrees to sell a unit to a customer at a predetermined price once construction is finished. As compensation for this, the developer requires usually something between 5% and 10% of the purchase price as a deposit. This deposit will also usually be used as your down payment at closing.

A bank can put a lot of restrictions as to what it will consider an eligible pre-sale.

- It can require that all buyers be approved by the bank, which is actually a good idea if you want to get a lot of that residential real estate permanent financing at the end of construction.

- It can limit the number of units pre-sold to a single person to one or two {most times they will count buyers buying two units if they are side by side}

You need equity contributions for each project that you go into. As a last resort, you could get permanent financing for the remaining units if you decided to keep them as rentals and use the proceeds of that loan to fund your next project, but then you need the tenants first.

#8 Newcomer

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Posted 23 September 2004 - 05:05 PM

RiceGod,

Please Email me with a number to give you a call and discuss this. I may have a few ideas to share.


- Newcomer
joshuaandrews@gmail.com





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