Luxury Single Family Residential Development

Stoo's picture
Rank: Orangutan | banana points 345

Does anybody here have experience with single family development of luxury homes? I am not necessarily talking about large scale developments, more so want to learn about people who buy a single lot or tear down and build a brand new luxury house on top of it.

Asked differently, are there any good resources out there for this type of development. To me it seems like this is largely a "mom and pop" industry that is dominated by local players who really know their markets.

My background is MF value-add and ground up development but I am really interested in the SF game as an option for myself down the road.

Comments (17)

Most Helpful
Sep 14, 2018

To your second point where it's largely "mom and pop" that dominate and intimately know their local market is correct.

I have a buddy who has done very well either getting GC fees for the overall project costs to build for a client or even tear down of existing houses to build a custom luxury spec home.

The construction aspect is not that difficult in my opinion, relatively speaking in regards to other asset classes.. there a certainly nuances if you are building a spec home for a client and them constantly changing their mind on what they want and things of the sort... but overall my buddy hires out all the subs and has no one in house except himself.. he focuses on 5,000+ SFR in million dollar neighborhoods.

It's definitely an interesting avenue to take on, he has killed it in the past few years as the resi market has been hot, but were at a point where he is only looking to do "GC client build" (no risk) rather than buying dirt on his own and having equity in a project,, due to where the market is at.

Work life balance is great in my opinion, he manages all of the projects himself, sets his own hours, and has made 700k+ net a yr in the past few years strictly from GC builds

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Sep 14, 2018

Thanks for the response. I'm not quite clear though, is your buddy a GC? Does he market himself as one, who also develops for his personal portfolio?

Do you know how he got started?

Sep 14, 2018

He primarily is a GC yes, that is his bread and butter. He markets himself as a "Custom Homebuilder" and typically has 4-5 projects going at a time that are for different clients who want custom homes built. Although I must say that is the biggest caveat in this niche, is getting the clients to pick you as their builder. It takes experience and relationships to be able to win the business, especially with many other mom and pops in the area that are bidding for the same project.

He has done projects that were investments for his own gain where he had investors/lenders and his own equity in the deal. But has only done a couple in the past few years where he had already owned the dirt pre-2008 and decided to build and sell rather then just sell the dirt. Both of those projects turned a nice profit for him. Since then he has been wary of doing his own projects for his own portfolio given the point we are at in the cycle and how luxury single family is susceptible to the this fact. Dirt is too expensive in the areas he focuses on as well as tear downs, the risk profile just isn't there for him right now, so he is just focusing on GC fee builds for the time being.

He got his start through being a project manager of another local homebuilder in the area for a few years and learned the ins and outs of the business, he knows construction and project management very well, he also is a great people person and can really win over clients when bidding a job. He is the type that will spend more on a quality product and eat into his own profits then go cheap and pocket profits, which is why I think he has won a good amount of business in the past few years.

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Sep 14, 2018

Yup.. he basically summed it up pretty well. ^^

Sep 14, 2018

+1 to @10xmult summed it up.

Would add that if you are doing spec, focus on what style works in the community. There is a group that does a number of projects in my area and have seemed to have a good deal of success with beachey/craftsman style builds (I am in coastal socal) - selling for good premium over existing product and moving quickly. But I know of a spanish style home they did that sat on the market for a bit longer - and they did a beautiful job on it. Also a couple of ultra-modern ones done by other groups that have sat on the market for a very long time and gone for discounts to original asking.

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Sep 14, 2018

There's a guy name Mike Close at Spinnaker Development doing some really high end shit in te greater Newport Beach / Corona Del Mar area in SoCal.

Check out: spinndev.com

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Sep 14, 2018

Very nice. Don't know much about SFR dev, but the product looks great. I'd imagine it goes over well with the OC demographic.

Sep 14, 2018

I have seen his stuff, those are the markets I am in. He builds good shit

Sep 14, 2018

SB For that. Spinnaker does some great work.
If you're looking for the Greater Los Angeles Area (Bel Air, Beverly Hills, Hollywood Hills) check out Plus Development Group is cool.
http://plusdevelopmentgroup.com Same with Jay Belson.
https://jaybelson.com

Sep 15, 2018

I've built 10 single-family homes as a side hobby. I don't build luxury because 1) I've never had the capital and 2) I think it's borderline immoral to build a house over 4,000 sf for another jackass household of attorneys. This was crystalized for me when I was in high school and I went to my acquaintance's new house. Her parents--both scumbag lawyers--had built themselves an 8,000 sf house for the two of them (as the kids were 2 years from graduation). What you'll find is that it's rare for people to build/buy ugly, obnoxiously large houses for their large family--they generally do it just because they can. Hey, it's a free country--they can do whatever they want, and I'm free to criticize them for their choices.

As far as the economics, luxury home-building is definitely a niche business, and it is extremely risky. You're building a house, on spec, sinking in tons of capital and hoping that someone will spend $2 million for a house that you have designed and with finishes of YOUR own choice. It's a very risky prospect, and, frankly, it's not a very good business model. If it were, the major homebuilders would be much more heavily invested in the concept--they aren't.

Building custom is a lot less risky, obviously, but it's also borderline unethical the mark-up that custom homebuilders charge. Frankly, if you commission a custom home build you're 1) retarded or 2) have literally more money than you know what to do with.

As a person who would love to be a full-time homebuilder, I struggle with the balance between economics and ethics. To be a truly successful builder financially you have to sell people stuff they don't need (and what they really won't even care about)--the lion's share of the money you make in homebuilding is from up-selling buyers items they don't want. The mark-ups on buyer options are obsecene. If you don't up-sell buyer options then you won't make much money. It's a really difficult ethical balance--I still have no idea how to overcome this issue.

Sep 15, 2018

Interested in this as well. Do you guys know anyone who get into this without working for another builder? I am currently a project manager for a commercial developer and feel I couldn't make the switch to work in residential due to salary losses. Would pursuing a GC license be the right approach to move forward with this ambition?

Sep 15, 2018

Depends on your state. I operate in Virginia, which has insanely difficult licensing laws for residential builders (which are equally difficult for commercial builders, but if you've been working in commercial building you should be able to get by the experience requirement for commercial building). North Carolina is even harder, with West Virginia being equally as hard. Maryland is much easier, but requires an individual license in each Maryland jurisdiction where you work (which is ridiculous and only something that Marylanders could concoct).

Other than the testing (in Virginia), which is really hard (I passed on the third attempt), the difficult part is your experience requirement (most states would have this). You basically have to have a licensed (active) professional engineer or a prior boss attest to x number of years of RESIDENTIAL (SFH/TH/duplexes) building experience--so if you don't have residential experience, then you'd need a friend who would be willing to commit perjury on your behalf. Of the houses I've built, I've been the investor and basically the "apprentice" on all of them, and one of my best friends just so happens to be a licensed professional engineer, so I drove him by my work and he signed off on my experience without much pushback (if one of my best friends wasn't a licensed PE there's no way anyone else would have realistically signed off on my work). So just this year I was able to get my Class A contractor license with specialty in residential building contracting, which means I can build single-family, townhouses, and duplexes, but does NOT give me the ability to build apartments or condos.

I think your commercial work would give you the requisite experience to allow you to test and get licensed for commercial building, which should allow you to build multifamily residential.

But it really will depend on which state you plan to operate in. For example, it looks like in most Maryland jurisdictions, you could fairly easily bullshit your way to a license because you basically attest to your own experience. However, there aren't many states that have licensing reciprocity, which means, for example, you won't be able to BS your way into a contractor license in Maryland and then transfer it over to Virginia.

Sep 17, 2018

This is a good space to be in, if you can brand yourself locally as either the most cost effective, fastest, or highest quality luxury builder. Your success depends on being number one at two of the three specialties. The only thing to watch out for is when the economy slows. You will need to switch to renovation or have a tremendous pipeline of new construction buyers.

To get started, you could find an improved lot in a median income neighborhood for your first design and build project.

Sep 18, 2018

Yeah would love to do this on the side. I think you have to GC it yourself to make money now though. Pricing is something that would worry me. Working on that type of asset class - you deal with pretty much tiny sub contractors. Like the HVAC company is a guy and his van. The framer is a dude with 5 mexican cousins. I don't know what kind of firm, committed pricing you could get from these types of 'contractors' as you are developing your budget up front. The guys that do it in our little Bay Area town are doing house after house so I think by repetition they know where things should shake out.

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