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My Realtor made an interesting suggestion today. We own 2 lakefront lots that we are trying to sell. We want them sold for the best price possible as soon as possible (obviously). Because in general lots take longer to sell then a home she suggested that we have a builder build a speck home on at least one or both of them.
We are interested in this as she said the builder pays for building the home and all the cost, he just uses our land. We then split the money after the sale in a manner we both approve ahead of time.
What do you think about this and have you or anyone you have known done this?
Is there some reason the spec home builder doesn't want to buy the lots from you before he begins building? Will the value of your lots increase with the spec home(s) on them? When it comes time to "split" the proceeds from the sale, how is it determined how much is apportioned to the lots and how much to the home? If your value on your lots is the same going in as at the end, then you're basically allowing the builder to use your lots interest free during the build/sell period.
Not knowing the particulars involved, but I think the spec home builder needs to buy your lots. You could always carry the note or do an installment sale to make it more attractive to him.
DMenscha, We will definetly get a performance bond if we do decide to do this.
Gretchen B, Our lots are at the high end for this area. Builders are looking for deals when building their homes. We would get more money (we think) if we had a speck home built on it. And the home would sell quicker then the lots (that's have been for sale for a year now).
We are in the beginning stage in this and it is an option for us.
If you can find a builder to get construction financing, then just have the builder's first draw be to pay you off on the lot and be done with it. I wouldn't go into this deal with a ten foot pole personally. Especially not in California.
With the information given I question building a spec home on Our lots are at the high end for this area. Perhaps my idea of a spec home is different than the norm, but wouldn't a high-end lot demand a "better" than spec home be built?
My guess is the builder doesn't want to purchase the lot because of the additional finance/carrying cost expense of the lot in addition to the construction. If you're thinking about this, you should have a real estate attorney create the contract, because there are several scenarios that you would need defined.
The problem will be how to obtain financing. Classically it is secured by the property. The bank advances money as the construction proceeds and is never too far out of bed - that is getting a property worth a good portion of the amount owed. How does this work if the underlying property is not a a component of the value securing the loan?
If you actually have a builder that can finance it without the land...well go for it. But if not than you effectively put the land into the transaction as the security...If you do that you should approach it as the builders partner and should get the value of the land plus half the profit of the building. You are the money guy...and they always get a least half. And keep the books for the builder....
Here they subrogate lots all the time to builders and collect when it's done as if they were partners. It was one way for the lots to get sold without the hassle of trying to finance dirt. Most builders here didn't or don't have the money to buy the lot outright and do the house and the landowner didn't have the money or ability to build a spec. Depending on the market (house type) it worked well.
With the information given I question building a spec home on Our lots are at the high end for this area. Perhaps my idea of a spec home is different than the norm, but wouldn't a high-end lot demand a "better" than spec home be built?
Spec = speculative. Meaning it is built before a buyer is secured. Some builders will tell you that it means "built to their specifications" (that's the marketing spin).
Here's a question: what happens if the home is 3/4's built, the builder goes bankrupt, has liens up the wazoo on the structure, built a junk home not up to code, and it's now sitting on your property? What happens if you can't afford to have it completed or demolished within a reasonable time, and you start getting fines from the municipality or the HOA? What happens if the hulking frame left to rot on your land becomes a playground/drinking hangout/meth den for neighborhood kids and they set it on fire, or God forbid, a kid falls off the 30' high roof and dies? These are the risks you could be taking on, so protect yourself.
I agree with Olecapt. Since you are taking on the most risk and providing the land, I'd want profit on the land and profit on the structure.
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A Great Idea
