Chutzpah

True Story! A real estate developer died and gave his body to science. The doctors were curious to see what was inside the man’s head and quickly dissected his brain.

At the core they found unusually high levels of dopamine triggered by a baseball sized hyperactive gland called Chutzpah. (and the drum does a Ba-dah-Bump).

All kidding aside… 

Successful developers may have an equal balance of math skills, keen deductive reasoning, great spacial recognition, sound business instincts, and a smell for poor workmanship. 

But the truly really great ones have all that and more.

They’re a mixture of raw nerve, no fear, and 99% percent Chutzpah (hoots-pah).

Case in point. 

Real estate is driven by good and bad locations. Picking or choosing a great location is always the key to a successful project. Some developers might compromise on location and make up the difference with a well executed build. In the end, perhaps they’ll have the nicest home in an okay neighborhood. 

Others talk themselves into buying a larger plot north of the highway that offers more privacy, at a more affordable price point and hope to appeal to a segment of the market looking for this type of product.  

The danger in this approach is that it’s logical and makes perfect sense.   

Some might buy south of the highway, but choose a challenging parcel, or build a house that is short on amenities, undersized, or cut corners on high end finishes and features.

But then there’s the developer with a serious imbalance of hootspa, who swings for the fences.

He’s the one that buys in a great location, creates a smart and painstaking design element, and delivers on everything you’d expect in a high end home. He might even go the extra mile to furnish & stage the home from soup to nuts with furnishings ( indoor & outdoor ), beddings & towels, include some art work and/or stage the home with bikes, pool, surf and beach gear.

And after it’s all said and done, smartly landscaped, and staged right down to place settings… suddenly they lose their nerve. Like a parent that dresses their child in designer clothes for a muddy playground play date… decides that they don’t want the kid to get dirty and says the house is for show only, only for sale, and absolutely no rentals!

What if a project misses the year end buyers market in December. Then misses the February/March pre summer market. Then what? 

At this point some developers might put the product on a shelf and wait for the next season.

But don’t forget, active buyers and agents are checking the search sites looking at the number of days on market. They begin to assume there are issues with price, the design, neighborhood, evil spirits or whatever. We’re not suggesting homes are like fruit and become spoiled if left sitting for too long. But after a while they do become tainted, ignored and over looked by agents.

Here’s a refreshing old idea. 

The goal of a spec house is to get the product to perform, right? Performance should be defined as earning income via sale or rental.

RENT is not a 4 letter word.

It’s easy to forget, but the property was bought, built, staged to sell or RENT … and eventually someone will be living in this home.

Now let’s do some simple investment math: 

The rule of thumb says, the value of your home should fetch at least 5% on a seasonal rental. Real value should get you at least a 5% return on your investment. So if your home is worth say, $5.5m, we’ll say you could ask $275k for a Memorial to Labor Day “long-season” rental.

Or, it might look like this: $125k for July and $150k for August.

Now let’s examine cost: Say the house cost $4.75m to build, landscape and stage… that’s almost a 6% return on your money while you’re waiting for the market to catch up and devour your home at the appreciated value.

The house is not just sitting, and there’s no agent chatter about the house being inactive. For the most part, the project is seen as a living, breathing and working investment.

So what are the benefits of renting a spec house? 

Renting allows the builder to give the place a trial run. Your tenants can be your best sales and marketing Rep.

We recently noticed Joe Ferrell smartly improved his business model by staging, furnishing and now offering a rental option on a few of his completed homes: See the link below.

http://www.farrellbuilding.com/homes/423-parsonage-lane/

If a money manager said they could offer you a +/- 5% return on a fixed asset, and the best part is that you could still enjoy the property in the off season.. isn’t that a win-win? 

Then say you rent for 1 to 2 seasons, until the house appreciates in value to your target price… then this is indeed a great business model.

For the very well capitalized developer that can self-fund, or might be shifting funds from one 1031 exchange to another, the rental option allows your money to continue to work. 

Meanwhile in the absence of a sale, renting allows you to expense the upkeep, maybe providing some depreciation, all the while your money is held in a secure asset. 

In conclusion, you don’t need a lot of Chutzpah if you’ve got a well executed plan and a smart exit strategy.

What are your thoughts on renting completed construction projects? Let us know in the comments below.

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Founded by Dan Gualtieri & Noel Roberts. The editors deliver a unique blend of hard news, incisive commentary, detailed market reports, and exclusive interviews. When promising opportunities hit the market, we’re there to tell the inside story. Contact us if you'd like to submit a story or discuss a project.

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