Some thoughts on building the spec home

I had another short call with the developer about my lots.  As usual I’m torn between two options.

Option #1: I get the construction loan in my name against my lot.  The developer pays all the interest during construction and builds the home.  We sell the home and split the profits.

As an example let’s say that would get $100k for my lot (which is about today’s market value).  If the house costs $150k to build and we sell it for $330k. That would be a $80k profit.  We would split it 50/50 and we would each make a $40k profit.  I would also make a small profit on my land.

I seem to have all the risk in this scenario.  It’s my lot and my loan.  The developer is basically managing the construction and paying for the interest on the loan during construction (which isn’t much).  Is this worth 50% of the profit?  I think that in order for it to be fair the developer has build the house it for cost.

Option #2: What if I just go call a bunch of builders in the area and get them to bid on building a home on my lot.  I would get the construction loan and they would build me a house.  Then when it’s done, the house is 100% mine.  I can sell it and keep 100% of the profit.

The pitfalls to this option are that I have never built a house before and would be going at it alone, the builder has no interest in the home and may screw me with change orders, etc… and will probably charge a hefty mark up on materials and building costs (because he now only makes money on the build).

In the end the cost of building a house alone may end up being more expensive and costly than partnering up with a developer.

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My blog about living life to the fullest by generating passive income through real estate, business and online investments.
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