The idea of build to rent hit me back in 2012 as Equity Funds like Blackstone rushed into Atlanta and other cities, and embarked on a campaign to buy thousands of houses for residential rentals.
Unless you were at the mortgage foreclosure auctions yourself like I was, you would never know the feeling of being an individual buyer and being outbid by $10,000 to $50,000 on a house as various funds battled head to head to obtain particular properties.
The worst thing you could do was to get into a bidding war with the bidders they hired for $150 per day. The bidder wasn’t the buyer. I think it drove some investors crazy as these faceless companies wiped out the mortgage foreclosures as a viable way to obtain undervalued houses.
It took about three months for every other investor like myself to realize that we could not compete with the faceless bidders who had unlimited resources. They could overpay on houses because it wasn’t their money.
So I decided to change my strategy from the rehabber that I was-I had rehabbed and sold well over 1,000 houses in the past 32 years covering 50 cities and in 12 states – and move to a built-to-rent plan because I knew there was a demand for rental housing.
In my mind, the build-to-rent model would provide my investors with new opportunities and it would keep me flush with houses to sell. Seems like a good plan right? I thought so. I also thought it would be extremely lucrative if I acquired the best lots at the lowest price in areas where demand out stripped supply.
So I began buying steeply-discounted, vacant, former builder lots left over from the housing crash in subdivisions in the Atlanta metro area.
And here’s the funny thing: I am the same guy who used to write about builders coming back into the market and how their cost to build would go up due to the increased cost of materials and permits.
Never did it cross my mind that I would change hats and become a developer and builder. In fact, I didn’t want to become a builder because I knew that I didn’t know enough about building.
So this is where I got lesson number one in the build-to-rent model: Know you builder inside and out and get everything in writing.
This is obvious isn’t it? I was introduced by a nice church-going Realtor to my first builder.
He was a handsome, friendly, young, jovial guy who was an experienced builder in the category of high-end houses over $500,000. We discussed the first set of eight lots I had bought in a nice subdivision with a golf course, pool and tennis courts. I bought the lots for only $5,000 each and they already had the pads poured. We discussed the finishes we wanted and his bottom line cost to build.
I realized early on it could cost the same amount of money to build a 2,400 square foot house as is does a 1,800 square foot house. Since the pads were poured, we were stuck with the plans that were on file with the county. We agreed that I would provide the lots (deed them over) and subordinate my position to the new financing being obtained by the builder to build the eight houses. I did not want to take the risk of being on the construction loan.
I held a promissory note secured by a recorded security deed (mortgage) and I agreed to subordinate to the new construction loan. This means I would be second position.
This didn’t bother me as I assumed the most I could lose was the $40,000 I had paid for the eight lots total.
I made it my business to get to know the builder better from a social standpoint and we did some social activities together. I really invested a lot of time with the builder and felt like my plan was well thought out.
I had pre-sold the first eight houses on the first eight lots in that nice subdivision I mentioned above to an investor from Australia for $125,000 for the three bedroom homes and $135,000 for the four bedroom homes. So things were looking good as the building got completed and we headed to closing. The Aussie investor had an assignment clause in the contracts to purchase and they assigned their interest in their contracts to the new investors from China.
I thought I knew this builder well enough and that the paper work between us was good enough. I was wrong.
The way we structured the paper work was that the builder would sell direct to my Australian investors, collect the funds, and then the builder would pay off the lots and cover my lot cost, plus give me 50% of the profit.
It didn’t work out like that. While I made $40,000 on the entire deal, I should have made a lot more.
When I asked to see all his receipts, the builder would never show me the canceled checks. He would only show me an excel sheet with figures that were grossly overpaid. We discussed prior to building that he could confirm with me on prices in case I wanted to get my sub-contractors an opportunity to bid. He never did and he never showed me his cancelled checks.
I should have checked his references, looked at houses he had already built and I should have been much clearer in our agreement.
Build to rent is a simple concept to understand but in actuality, it is a bit difficult to implement. It requires additional skill sets for a rehabber like me and on my first go around, the builder ate my lunch.
A lot of mistakes were made along the way and the wisdom I’ve gained has benefited me tremendously and I want to share it with you in this upcoming series on what you need to know about build to rent.
Up next in Lesson Number Two we are going to talk about home warranties and what you really need to get in writing.
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