7 Steps To Build & Sell Homes Like A Real Estate Developer

Our full 7-step process for building and selling a home as a developer, from picking the lot to closing the sale.

You do not need a general contractor license or a construction background to build and sell homes. Arthur has run 250+ doors and 1,000+ developed lots on the same seven steps every time, and the whole point of a repeatable process is that it removes the guessing. Here is the full sequence, with the numbers that decide whether a deal is worth doing.

1. 01

   Find a buildable lot

   Not raw land, buildable land. Three utilities decide it: sewer, water, and power. For sewer and water, confirm whether each is public or private, because private means a septic system or a well. Then confirm zoning, which tells you whether the lot holds a single family home, a duplex, a triplex, or a fourplex.

2. 02

   Underwrite it

   Locate the utilities, check the slope and what building on it would cost, then run the three numbers: what the finished project sells for, what it costs to build, and what that leaves for the land.

3. 03

   Plans and design

   Do not reinvent the wheel. Copy the product other builders in the area are already selling quickly. Your designer or architect works with a structural engineer to produce a full engineered plan set.

4. 04

   Permits

   Submittals are electronic now. Your design team assembles the plan set and the site plan and works the jurisdiction's checklist. Approval can take a day in a small county or six months in a big city.

5. 05

   Lock the financing

   Never plan to pay cash for the whole build. Get a term sheet, understand the interest rate, the origination fee, the closing costs, and the loan to value, then close.

6. 06

   Build it

   Arthur calls this adult babysitting. Hire a spec builder on a cost plus basis, not a custom home builder, and manage to the milestones.

7. 07

   Move in, sell, or rent

   The city signs off with a certificate of occupancy. Then you either occupy it, list it with a new construction agent, or rent it, stabilize it, and refinance.

The three numbers that decide the deal

Underwriting is three questions, in this order. What would this sell for finished? What does it cost to build? And based on those two, what can the land cost? The land should land at roughly 20% or less of the finished value, so a duplex worth $1 million supports a lot around $200,000 or less.

Construction cost is regional. Nationwide the working range is $100 to $180 per square foot: the $150s on the West Coast, the $100s around Texas, the $120s and $130s in the Southeast. Add the builder fee on top of that, then check the return.

Personal house financing versus investment financing

If you are building a house you will live in, the down payment is 5% of the total cost, and that total includes the land, the construction, and the builder fee. On a $700,000 build that is $35,000 down, plus around $10,000 in closing costs, on a project carrying $200,000+ of equity. The lender underwrites you: a W2 and a credit score, or two years of tax returns if you own a business.

If you would rather skip that and build as an investment, hard money and private lenders do not care nearly as much about credit, but they want more cash. Plan on roughly 15% down plus 3 to 5% in closing costs, so about 20% all in. On the same $700,000 project that is around $140,000 to make roughly $250,000.

Read the term sheet, especially the origination fee

The term sheet is the lender’s offer: rate, origination fee, closing costs, and how much they will lend against the value. Origination is where the lender makes its money, and on hard money it runs 1% to 3% of the loan. Arthur pays 0.75% to 1%. A first time builder should expect 2% to 2.5%. To get term sheets you need three things ready: the plans, the budget your builder helps you assemble, and the site plan.

Hire a spec builder, not a custom home builder

This one line changes the whole math. A custom home builder marks everything up and you end up at $300 per square foot. A spec builder charges cost plus a fee: $150 per square foot plus either a flat fee or 8% to 15% on top. On a $400,000 build a 10% fee is $40,000, so you are at $440,000, not $700,000. The builders you want are the ones who already buy lots, build, and sell.

Step 7 is three different exits

If it is your personal house, the certificate of occupancy comes first, then the appraiser verifies the finished home and the loan floats down to the current rate as a 30 year mortgage. If you are selling, work with a new construction agent, because they specialize in these builds and carry a different buyer base. If you are renting, rent it first, stabilize it, then refinance with a traditional bank or a competitive lender.

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Common questions