A prominent Hollywood writer once described herself as the instigator of human condition. She said her screenplays, when transformed into films, evoked a predetermined response from an audience in a movie theatre, on cue.
Building and renovating is very much like being a Hollywood writer. A great home begins as a draft plan – similar to a movie script, and within months it is converted into a structure, which can induce similar and perhaps more potent emotions.
Unlike many Hollywood productions, however, a properly planned real estate project can assure you of at least some profit.
What steps can you take with renovation or infill construction projects to achieve both profit and a Hollywood ending? Acquisition strategies, financing options, and potential sale price upon completion, along with your management skills will dictate you level of success.
THE PREMISE: Compared to a renovation and flip, a tear-down is a longer project, involves several transactions, complex permit process, longer timeline to completion, and generally requires more experience. WARNING: Though a new build could seem like a saga, a poorly planned modest reno can also turn into a nightmare trilogy. You can learn a lot from a renovation, risking less, and still profit.
THE STAR PROPERTY: The property you want is a wounded animal. They give off signals to a trained eye. Your Realtor can search on MLS for the following terms: “As Is”, “Vacant”, Properties with more than 120 days on the market. These could be an indication of an owner in trouble.
I also recommend properties with expired, terminated or suspended listings. Check that each time they return to market, there is a large price reduction. These are the Monsters that keep coming back. Each resurrection brings more screams in the theatre. Find these properties by searching for listing that include: “Reduced Price”, “Power of Sale”, “Motivated Seller”.
Pay close attention to properties with more than one such category.
BUDGET: Before you call “Action!”, know your financial snapshot. Cash and lines of credit are a preferred, cheaper way to finance projects. Mortgage Brokers specializing in construction financing should be part of your team, even if you think you can finance the project on your own. Think safety net.
“STAY ON TARGET”: I always work from a very detailed budget spreadsheet which I make available to my clients online. Budgets are never arbitrary. If you don’t know what something costs, get on the horn. A budget goes hand in hand with your draft plans.
CAST AND CREW:
Start with an Architect and a Project manager/Contractor. They will help make your project viable, get approvals from the city, and stick to your budget. Some Architects can help with the permit process. Others mostly work with experienced builders and only focus on plans.
NO “CLIFF HANGER”: Sale price of your completed project should not come to you as a surprise. Start with the “Best Educated Valuation” first, then get into acquisition, drafting and planning.
CAUTION: Do not rely on currently listed prices of properties that seem similar to what you are planning. A professional constantly reviews the most recent sales and adjusts the target Sale Price, if necessary. Place little value on the highest sales. Avoid being the most outrageous project on the street.
NEW BUILDS: As in a renovation, working backwards from a well estimated sale price is the right approach to New Construction. Lenders use that value to prevent overleveraging in your project. Shouldn’t you? For a proper Valuation, I direct my clients to a highly competent list of Appraisers that most construction financiers accept.
Take the appraised value, subtract the cost of Architecture, permits, city levies, construction, financing and mortgage broker fees, real estate fees, and 10% of budget for contingency, then see if you would be left with a sufficient profit to go ahead with the project.
HOLLYWOOD ENDINGS: Can you make a profit if your sale price was in mid range of comparables?