The long awaited construction cost and profit projections are finally in!

When asking for a construction loan from a bank, they will often ask you to come up with a projections for your cost and your net profit. So over the past week or so, I spent some time getting some bids in for certain portions and talking to my mentor about certain costs and this is what I’ve come up with.

On the conservative side we’re looking at a net profit of $65,000 over the course of 6 months. Not bad in my mind, but many ask do you really think its worth the hassle for 6 months to construct and sell a residential home only to make $65,000 on it.

Here’s my answer to that question: HELL YES!!! Because for me the goal is not only to be doing 1 of these a year, but to get to a point where I’m consistently doing this with 5-10 properties a year! I’m not trying to be a small developer who does 1 property a year, nor am I trying to be the next Toll Brothers or Pulte Homes - I know what my limits and boundaries are and will stay within them, so I don’t stretch myself to think and end up foreclosing on my properties.

Attached is a cost|profit projection sheet including all the costs I will encounter with the exception of my interest paid during the construction phase.

All my numbers are fairly conservative, so if I do this right I should make a minimum of $60,000 and if do it like a Champ I can make upwards to $100,000.

Lets wait and see!

construction-projection.xls

As I may have mentioned before, there is a lot of paperwork involved in getting approved for a construction loan.
Here is a list of all the information you should have ready when looking to acquire a construction loan:

• Complete Credit Application - provided by lender
• Complete Personal Financial Application - provided by lender
• Previous 2 years of Federal & State Tax Returns
• Copy of Deed or Contract of Sale
• Name, Address & Phone Number of Applicant’s Attorney
• Description of specific project and overall development
• Present use of site; status of existing construction project
• Preliminary building and site plans with construction specifications
• Approved final plans for project *** (See note below)
• Projected cost breakdown, including direct building cost, land site preparation, paving, interest, taxes, professional fees (and other “soft costs”), brokerage fees, etc.
• Name and address of general contractor (if not applicant)
• Name, Address & Phone Number of Architect

*** I still haven’t submitted my plans to the City of Newark for approval. In order for me to do so - I must be able to present a Certificate of Liability Insurance. For me to present a Certificate of Liability Insurance I must show the insurance agent that a bank is going to approve my loan. Its crazy how every little thing is directly correlated to another!

So its about 2AM and I’m writing this post out of frustration and challenges that were faced earlier this week. Back in October I did some due diligence and researched several local banks with regards to finding a construction loan. I knew rates were going to change between then and now, and I knew getting the loan was going to be a lot of paperwork. What I didn’t know was all the challenges I would face.

When we bought the land we purchased it in my and my two cousins names, knowing we were looking to apply for the construction loan in my uncles and my name. What I didn’t know at that time, because I didn’t have a guide like the one I’m writing for you all, is that when applying for a construction loan the land has to be in the name of the person applying for the loan!

Despite my name being on the land, my uncle can’t co-apply for the construction loan with me, but if it were a regular mortgage it would be fine. You might be thinking, what sense does that make, well I don’t know it doesn’t make sense to me either!

Now I have a few options:

• Option 1: Apply for the loan in my name and one of the other land owner’s names. My credit is excellent and strong - but my financial power is not as strong, so that would be dependent on the other applicant.
• Option 2: Transfer the deed to the new LLC name. This is a viable option, but if I do this, I have to also file the appropriate paperwork to make my uncle a partner in the LLC. This again is a tedious process and cost about $125.00 + the cost to transfer the deed.
• Option 3: Transfer the deed to my Uncle’s name or add him to the deed. Again a tedious process and cost additional money.

Currently we’re going to attempt Option 1 and see if me and one of my cousins get approved for the construction loan.

The estimated price including land and construction that this project will cost is approximately $300,000. Below is how much has been spent to date:

• Land: $95,000
• Closing Cost: $4,031.83
• Architectural Drawings: $2,800
• Plumbing Permits: $3,200
• Business License : $125.00
• City of Newark Contractors License: $125.00
• New Home Builders License: $205.00

Total: $105,486.83

According to my total project estimate with cost of land I’m 1/3 of the way there! Lets get ready to roll!

As a builder it is required that you hold two types of insurance:

• Workers Compensation
• Liability Insurance

The yearly price of these insurance policies is dependent on 2 factors:

• How many homes a year you are building
• What percentage of the work is done by sub-contractors and how much is done by employees.

The higher percentage done by sub-contractors the higher your yearly policy costs, because Insurance agent have to presume your sub-contractors don’t have these types of insurance policies on their own. And if something happens during the construction process on one of your sites while you don’t have these types of insurance policies, the sub-contractor can come after your personal assets. The approximate price it will cost for both these insurance policies for me this year is going to be about 8 - 10K.