Teardown Post

Cher just put an interesting article with recent new spec homes sales in Greenwich.  I couldn’t help myself not to look in to its economics, i.e. estimate expenses associated with those projects and see how well (or bad) the builders did:

My assumptions of costs associated with these projects were; 7.5% interest rate for financing, 5.0% for real estate commissions, and  $280 - $350 per square foot for construction costs (I made $/sf estimates based on the MLS description and the photos of each project):

Well, spec. building nowadays is no longer a “no-brainer”.  In order to make money the builder has to:

• buy land at the right price, i.e. not to overpay for it factoring appreciation
• know who your buyer is; put the amenities that meet buyer expectations without going overboard
• make sure that every dollar spent on construction creates value
• price the new home to sell since the accruing interest can quickly erode profits as the house sits on the market

Yes, you still can make a $1.00MM on a project, but consider yourself lucky if you broke even in the current market.Â

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You have an idea on what the front elevation will look like.  You have an idea for the layout of the kitchen.  You even know what kind of appliances you want.  But do you have any idea if you can afford it? 

Most people go through the painstaking steps of sitting with an architect designing their home before knowing how much they can afford.  Most even take the next step of meeting with builders and getting quotes, still not knowing if they can afford it or not.  Hard costs vs. soft costs…most people don’t even know what soft costs are let alone include them in their overall cost of the project.

Hard  costs are easy to define…demolition, concrete, lumber, labor, appliances, windows, cabinets, HVAC, plumbing…everything that goes into building the home.  However, soft costs are often overlooked and can add thousands of dollars to the overall cost.  Actually, they don’t add cost because that implies that you have a choice or are making an addition to existing costs. 

WRONG!  Most soft costs are required for the project, but oftentimes never appear on the budget.  Samples of soft costs include the aforementioned architect fees, permits, surveys, real estate commissions and even soil testing.

You need to get preapproved for the overall project; hard costs, soft costs and even the cost of the land itself.  Shop for a Construction-To-Permanent loan.  It’s a construction loan during that phase and conveniently converts to a permanent loan.  With this type of loan, you qualify and apply for financing only once which means only one set of closing costs and one loan settlement.  With one loan, you save valuable time and your costs are cut in half.

Before you can stay within your budget  you have to know your budget.  Get pre-qualified for the loan and set that as your budget.  Communicate that to the architect and the builder.  Stay the course.  If you don’t, all that money paid to the architect will be wasted.

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Is this another issue to add to our current economic concerns?

http://www.youtube.com/watch?v=hsYz6xwFVTQ

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Something interesting that came across my desk.  I just double-checked; Countrywide is still doing CTP’s.

INDYMAC’s INTERNAL COMMUNICATION:

“To all Mortgage Bank Employees,
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Today, Indymac Bank is announcing the suspension of residential Construction to Permanent loan production effective February 1st.  As you may know, Indymac has been committed to the CTP product for 13 years, and it has been and continues to be a well-performing product for us, both in terms of profitability and credit performance.  However, given our need to carefully manage our balance sheet and preserve our strong capital position in light of current market conditions, we need to limit our loan production almost exclusively to products that are immediately saleable into the secondary market and, therefore, have independently decided that this is a prudent step to take at this time.  Importantly, we are not being compelled to curtail CTP lending due to any performance issues or external pressures, and when industry conditions ultimately stabilize, we look forward to restarting CTP production in the future.
 

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