Builders – An Excellent Source Of Buyers To Have On Hand

We always hear how it is important to get a solid Buyers list whether large or small but ultimately of people that can perform. One such Buyer that is relatively untapped for wholesalers are Builders. These are in many ways some of my favorite Buyers because they can oftentimes pay higher prices than investor Buyers who have to hire them. Let’s take a look at why this is:

• Builders can choose whether or not to pay themselves during a build process. If they choose just to get paid on the end profit, this averages a savings of 15-20% that an investor Buyer would have to pay to them.
• Builders can save on their construction costs by not marking up anything. Investors are often billed a markup for these materials costs since they or their subcontractors have to source and pick up the materials.
• Builders save on the overhead of timing. Time is money and a builder has less people to coordinate with to accomplish building a house whereas an investor has to manage more people.
• Builders may do some of the labor themselves. Some of them just love to get their hands dirty no matter how good their crew is.
• Builders may have their own capital. Many investors leverage private capital but a well funded builder may have their own capital, thus saving on interest fees.

When you start mixing some of these potentials savings together, you can see how they can pay more for a house than an investor can thus making the difference in having a deal done vs having no Buyer. Let’s look at a specific example.

The market in Atlanta has been hot and new construction is picking up momentum so now is a great time to leverage this information to wholesale your deals to these Buyers. You can get some handsome profits as a result. Let’s dive deeper, shall we?

Let’s say, we want to build a 2000 sq. ft. house on 123 Main St. The projected ARV of the house is 500k. Using 70% of ARV for a safe number to be within, that give us $350,000 to work with max.

The land can be acquired for $80,000 by an investor that perhaps wants to try building a house. How would these numbers break down for the investor and a builder?

Let’s start with the investor:

• Land price: $80,000
• Closing costs: $1800
• Prep costs for survey, site planning, architectural costs, engineering, permitting – $13000
• Construction Costs for Moderate Finish Home – $90 sq. ft. x 2000 = $180,000 – includes 20% for profit and overhead for the contractor
• Total subcost for project: 274800
• Private capital at 12% for one year for everything: $32976 (274800 x .12)
• Total project cost: $307776

While with an ARV of 500k, these numbers are certainly attractive, however not every investor is ready to take on a significant project of this magnitude nor have the track record or private capital available to pull it off. So what if the investor wholesales the deal? What would the builder’s numbers look like?

• Wholesale Land price: 125000 – builder pays with their own capital
• Closing costs: $1800
• Prep costs for survey, site planning, architectural costs, engineering, permitting – $13000
• Construction Costs for Moderate Finish Home – $70 sq. ft. x 2000 = $140,000 – contractor absorbs this upfront and banks on profit potential
• Construction loan at 5% for one year, plus 1 point interest from a local bank for everything but the initial purchase: 9288
• Total project cost: $289088

Notice how the savings on private capital and construction costs allow for the purchase price to be higher yet the total project cost is still lower. There are numerous ways to calculate these numbers as every Builder is different however the key point is always the same. Builders, especially funded Builders whether by their own capital or leveraged can almost always pay more for a new construction project than an investor can. In the process, the wholesaler can make a hefty $45000 fee and still leave over $125,000 in profit potential for the builder. With that kind of room, the builder can do things to make his product move faster, add touches to further its value, add incentives for their Buyers and so forth. A true win for everyone!

As a wholesaler, I would strongly recommend reaching out to Builders and get to know the ones that buy for investment purposes. Keep them close on hand when you have a deal that fits their criteria. Some very handsome profits that create nice win-wins all around are very achievable as a result!