How to Build from the Ground Up

There are few things as exciting as cutting the ribbon on a new property or development that you have nurtured from the ground up… from raw land into a viable and profitable real estate venture. But land development is not only exciting and lucrative, it can also be freighting and draining. On the one hand, as a developer, you are free to imagine whatever your budget will allow, from an elaborate single-family home to a cohesive residential community or more. On the other hand, land development requires extensive time, access to large amounts of capital, and often includes many unexpected challenges. Becoming a successful builder-developer requires you to be equal parts focused, prepared, and ballsy. (Maybe a double dose of that last ingredient!) Not everyone is cut out for this track in the world of construction.

Mastering land development requires years of hands-on training. In addition to learning about the various geographic differences in soil composition and building materials, it also takes time to understand market requirements that shift from location to location, not only related to client interest but also laws and ordinances. As you fine-tune your skills, hopefully, you can minimize the common challenges that many non-experienced builders encounter. 

I’ve learned many of those costly lessons the hard way across many years in the industry. That’s what led me to develop this four-part insider’s guide, which is focused on demystifying industry secrets, clarifying necessary processes, highlighting essential documents, and providing guidance on how to understand the thinking behind the most successful building methods & approaches. As you read along you will be able to make the land development process more enjoyable and your builder dreams a reality.

PART ONE: CHOOSE THE RIGHT PARCEL OF LAND

Every developer starts their project by choosing a parcel of land to build on. Like everything in life, it’s never that simple though. To be successful, here are two key areas you should consider as you determine which piece of land to purchase and develop for your new project:

1. Zoning Classifications. Land parcels are plotted on zoning maps which are created and managed by local municipalities (city, county, or state) which oversee the construction of development projects. The purpose of these maps is to ensure the municipality’s growth and building development are in alignment with the needs and vision of the community. For example, an area zoned for schools is usually not placed adjacent to an industrial zone. Zoning classifications will help you determine the type of building project that is allowed according to your parcel’s designation. 
   

   These are the most common zoning classifications:

   • Single Family Residential

   • Multi-Family Residential

   • Commercial

   • Light Industrial

   • Industrial

   • Agricultural 

   • School/Church

2. Soil Suitability. Before a problem takes root, make sure to start any land development project with a thorough understanding of the soil composition of the parcel of land you want to build on. Understanding the state of your soil will enable you to construct with the right materials in the right location, providing long-term value and benefit. 
   
   To determine if you have strong soil, suitable for building, most local municipalities require the use of a soil engineer. The results of their many tests are usually required to some degree before getting a building permit as well as a certificate defining the source of clean drinking water (potable).
   
   Start with a Percolation Test (aka PERC Test) if you need a septic system. You want to make sure that the soil on your land can properly support a septic system. This means determining if the field is sufficiently permeable to absorb liquid flowing into it. You don’t want waste or sewage seeping back up and pooling on the surface.  A soil engineer will use a much deeper hole, often 7 to 10 feet or deeper, as they look for a high-water table and the presence of rock ledges or impermeable soil that could block water absorption. Keep in mind that a failed perc test means you may not be afforded the right to build. Make sure your purchase is contingent on passing this test.
   
   Once your parcel is deemed suitable to support a septic/waste system, the soil engineer can proceed by preparing a topographical survey (known in the biz as a “topo”) to determine the natural flow of water and the potential risk of pollution. The building department is especially concerned with this test as it will provide valuable information regarding the possibility of water run off to neighbors.  Should your new development pose negative water distribution issues a solution can usually be achieved with newly placed retaining walls, drainage swales and a variety of other natural and human-made structures.  Keep in mind, the solution will add unexpected expenses to your project.
   
   A contaminant test may be required, especially if you are in an area which is know for various toxins. The soil engineer can also verify that there are no toxins or contaminants (like lead, arsenic, or cadmium) in the ground. The local Department of Health and Environmental Control can usually provide guidance relative to which contaminants, if any, are prevalent in your project area. 
   
   Ultimately, once safety is accounted for, a good soil composition test will help you determine if you will be able to properly support the weight of the buildings being planned. Unsuitable land areas are usually pretty obvious: swamps, bogs, or parcels that are near nuclear power plants or chemical retention ponds. A good building site has soil that doesn’t shift, expand or shrink drastically. Typically, this tends to be a mix of gravel and sand, which offers great stability and handles the presence of water very well. These tests are important pieces of information that will impact how you build your foundation. 
   
   PRO TIP: Here’s a do-it-yourself soil test that can give you an early indication of your soil's suitability for building before you do any professional testing. Simply take a ball of damp soil in your hands from your proposed parcel and see how it crumbles. Soil heavy with clay will most likely retain its shape in your hand, indicating high water concentration which is bad for foundations due to its tendency to shift around as it dries or moistens. If there is too much sand the soil will have trouble retaining its shape, foreshadowing the kinds of problems your foundation is likely to face. Soil that crumbles in bigger chunks tends to indicate the right mix of materials.

   While land development takes a lot of money, time, and risk, the payoffs are usually massively satisfying.  I wish you happy building!

The Decline of Upward Mobility & How Knowing Your Clients Helps

Admit it… many of us of a “certain age” grew up with the idea that one day we would make more money than our parents. Some of us (*cough*cough*) even said this out loud once or twice. It drove us forward, motivated us to study, to get a good job, to reach a certain stature in life.

People that study this kind of thing call this idea “upward mobility.” It defined the American Dream for many people… the idea that by earning a higher income than our parents we would able to climb the economic ladder and live a better life.

Don’t mean to burst your bubble, but that idea may no longer be true. Well, at least not in the way it used to be achieved for most Americans.

Source: Visual Capitalist

Research is showing that fewer people in the lower and middle classes are climbing the economic ladder. In fact, if you were born after 1980, your chances of out-earning your parents by your thirtieth birthday stand around 45%, compared to 93% for those born in the 40s. Quite a change, right?

Source: Visual Capitalist

But this isn’t all bad news. It’s an invitation to re-write the formula for the American Dream.

KNOWLEDGE IS KING
The process begins with knowledge building. As a builder and developer, when you are aware of these kinds of economic changes you become a stronger partner to your clients. You are able to help them better plan and prepare for maximum value in their next real estate venture. In some ways, you are providing them a new route towards their own American Dream by putting them on the right path towards homeownership.

Financial investment guru Suze Orman had it right when she said, “owning a home is a keystone of wealth… both financial affluence and emotional security.”

Not everyone will be able to afford a mega-mansion. But with proper planning and guidance, homeownership is more realistic than many expect. Your role is to know as much as possible about your potential client so that you can present them with their best options.

That’s why every real estate project needs to begin with a knowledge-gathering phase. Whether you have entered into a fast and furious fix and flip, or are on your way to building something wonderful from the ground-up, it should always start with the same important piece of information: who is your client?

Are they going to buy or rent? Are they first time homeowners or retirees? Have they owned a home before or only rented? What are they willing to break the bank on and what will they consider frivolous or ridiculous? Do they have big or small families? Will they be staying put for a while or is this a short-term investment?

IT’S IN THE DETAILS
Building out your client understanding provides knowledge that will guide you in making the best decisions when building and in providing the best guidance when selling the finished product. Keep in mind the following key insights I’ve found to be the most important factors to consider when building out client knowledge:

#1: Understand Buying Power
Now that we know that people aren’t climbing the economic ladder in the same way as they used to, we have to be conscientious of real buying power. This doesn’t always mean that people can’t afford more luxurious homes. It just encourages us to do a better job at setting expectations.

A new couple with $150,000 in buying power will not expect a steam shower or other high-end finishes in a new home, but a couple with $700,000 in buying power is going to expect numerous jets and maybe even an antique claw foot tub too!

You might have read my previous article that mentioned how shifting generational cohorts are changing the way people approach home buying. A lot of the first-time home buyers on the market today are Millennials with a lot less access to the 20% down payment needed for a home purchase. Their reliance on an FHA loan means they will have less cash upfront and need more of your guidance on how to maximize what they can get for their dollar.

This is probably true of many Gen-X buyers too, who tend to carry more debt and less savings.

Let’s face it though, every buyer wants to feel special. Defining buying power is one of the most difficult aspects of real estate planning. It’s our job as builders to incorporate the elements that will stand out in a build without breaking the bank (at least not too much!)

 Pro Tip: I make it a point to tour new construction homes and condos in upscale neighborhoods or new developments to know what new buyers find appealing. I ask a realtor friend to set up a day-long inspiration and education tour across Chicago’s upscale neighborhoods. I look for design trends that might help me infuse a little more pizzaz into my homes. I also look for unique amenities that people ask for as well as the unique building elements that are being used. This kind of research helps me price out projects for my clients with a stronger understanding of what their budgets might be able to afford.

#2: Understand Age Preferences

Preferences on the types of home desired are also distinctly different among generations. For Millennials, aesthetics and environmental impact are big deals. This means we have to keep building materials in mind as well as cool upgrades and amenities. They might appreciate less external maintenance too, so think about smaller backyards but perhaps find a way to incorporate a jacuzzi.

Gen-X buyers usually want a home that is designed to fit their needs, which means the focus isn’t on bells and whistles but more on functionality. They want to move into a home that works right away for families. Stage these homes to demonstrate their turn-key nature, highlighting things like an in-law suite, or a finished basement.

Older Boomer clients usually have a bit more disposable income and a lot higher expectation of being able to reap the benefits of a life of sacrifice. They’ll appreciate some sophistication and will look for quality materials. They might also appreciate having everything in a one-story ranch-style as they look for hassle-free living and money-saving automation.

Keep safety and security amenities in mind for this group too.

Pro Tip: I like to look ahead. I spend time surveying the community I’m looking to build in to see the population trends. Who is moving in with more frequency? How long has the community been around? Are the amenities in town targeting older or younger populations? Are there any civic projects coming up that might change interest levels of buyers, like a new highway or a trendy restaurant or coffee shop?

#3: Understand Family Structure
Knowing your clients means knowing their needs, even before they understand them themselves. This kind of knowledge will save you a lot of headaches and heartaches when it comes to selling your property. Think about the life stage of the client you are targeting. Are they single, recently married, parents, or retired? This kind of knowledge can immediately inform your floor planning.

How many bedrooms and bathrooms will you need? Should you include a home office? Will a playroom drive up value?

It will also inform where you buy property to develop and how big or small your project needs to be. Think about things like proximity to schools or access to nearby hospitals? Are there good restaurants or gyms nearby, or is a more rural environment more beneficial for your targeted clients?

Pro Tip: During my day-long inspiration tours, I not only pay special attention to trends and amenities, I also make note of the different layouts being used and consider ways of adapting these spaces into smaller footprints or within multi-use spaces for the more affordable homes I like to build.

Instead of settling for cookie-cutter approaches, you’ll get stronger value if you take the unique needs of your clients into consideration even before you break ground. Pay special attention to the factors that will contribute towards maximizing your client’s financial capabilities, enabling you to deliver successful real estate outcomes.

LASER TARGETING FOR BIGGER OPPORTUNITIES
Knowledge-gathering narrows your field, which is a good thing. One-size-fits-all projects may be fine for the masses, but you can often find more success and expand your profit margin by building with the laser focus of fulfilling the dreams of someone very special. Scale your projects to match your clients’ at whatever level of success they find themselves as they pursue a recalibrated American Dream.

As I said, the decline of upward mobility doesn’t have to be all bad. It’s forced everyone to re-adjust expectations and, for many people, to steer away from material trappings. Hopefully, this means a new focus on experiences and relationships that have strong emotional value and places to live that are more about the quality of life and not always tied in directly to the hustle and bustle.

Do your research and don’t be afraid to develop projects that will attract the exact kind of buyer you know will love your new home. It’s time to learn how to charm a bird out of a tree to stop limiting your profits. Stop selling and start helping your clients find the home they’ve always wanted.

6 Keys to Managing Successful Subcontractor Relationships

Among the most valuable assets on a job site are your subcontractors. They are important resources with specialized skills and experience you use to complete projects. They help you stay profitable and you provide them much-needed jobs.

Managing your subcontractors can sometimes be a challenge though, particularly if you are not well organized. To help you stay on time, on budget, and able to deliver with high quality, here are six keys to keep in mind:

I’ve done some of the work for you already and put together a variety of documents that you can get for FREE to help you with this process.

KEY #1: CLARITY IS THE STARTING POINT

Clarity is crucial for success. Make sure everyone knows what the expected outcome is, and you are more likely to achieve that result. Eliminate the guessing games by providing realistic expectations and guidance that is supported with sample images when possible. A written scope of work with a clear timeline, milestones, and expected outcomes will make working with your subcontractor simple, clear and free of drama.

KEY #2: PROPOSALS NEED TO BE IN WRITING

Protecting your business requires making sure to memorialize agreements with the use of written proposals. By outlining the agreed-upon terms, and including signature lines for you and your subcontractor, you give yourself legal protection in case things go sideways. Make sure your proposals are dated, clearly spell out the cost of the work, outline everything that needs to be completed, clarifies which materials need to be supplied, and include the time frame for completion.

KEY #3: INSURANCE IS MANDATORY

This seems like a no-brainer, but insurance is mandatory to protect you and your hard-earned money. Every project requires a certificate of insurance. Make sure it comes directly from an agent to ensure legitimacy. Requirements may vary from state to state, but here are the minimum things that should be included:

• Minimum Liability $1,000,000

• Agent’s Information

• Subcontractor’s name and address

• Your name and address

KEY #4: HAVE A SUBCONTRACTOR AGREEMENT 

Using the data from your proposal as a starting point, flesh out the remaining details for everyone with a subcontractor agreement that also includes payment terms and working expectations, like end of day clean up policies, dealing with delays, inspections requirements, and warranties. Spell everything out to avoid unexpected unpleasantness which can creep up when you just assume both sides are on the same page.

KEY #5: ALL CHANGES REQUIRE A CHANGE ORDER

It’s inevitable… something is bound to change during a construction project. Perhaps something was incorrectly estimated, or you ran into unforeseen complications No matter the cause, whenever work is added or deleted from the original scope of work, use a change order to track things. Remember that any change has the potential to alter the original contract amount or completion date. Change orders should define the complication, outline the impact on the schedule, spell out implications to the cost of the project, and be signed by everyone.

KEY #6: NEVER PAY ANYTHING WITHOUT A WAIVER

Don’t take no for an answer when it comes waivers. Before you put a check in a subcontractor’s hand, require the contractor to complete and notarize a waiver. It’s just that simple. Tell them "no waiver, no check" and just watch how fast your subcontractor produces a notarized waiver.

These six keys are helpful to managing successful subcontractor relationships. Frankly, you can sum them up in one of the lessons we learned way back in kindergarten: play nice in the sandbox.

By leveraging clear processes, tracking progress via checklists, and putting everything in writing, you are professionalizing your business and minimizing hard discussions. Your subcontractors will respect you more as they see how much you value them and are working to protect the relationship, your projects will be completed faster and with higher levels of quality, and everyone will have a great time along the way.