Joint Ventures on Spec Building
One way to invest in real estate is to joint venture with property owners by building a new home on their property for resale. Buying a building lot and constructing a home on it for resale is called investing in a spec house because you are building it on speculation that it will sell for a profit.
To do this, you want to look up all the vacant properties in the neighborhood of interest and find those that are paid for free and clear. Then contact the owner and propose the idea of joint venturing with them on a project on their property. Ask them to sell their property to a joint venture partnership for a reasonable price. You will then build a house on their property and sell it, and after paying them the agreed price, split the remaining profit. As the managing member of the partnership, you will obtain a construction loan to pay for the house building and the owner will subordinate his or her home to the construction loan. Through this process an investor can start a project with zero monetary invested and make half of the profit. An example is as follows:
Owner’s property: $100,000
Construction cost to build house: $150,000
Price of the finished home: $350,000
Taxes, insurance, closing costs, commission: $35,000
Total Profit from Sale: $65,000
Split 50/50: Each partners share: $32,500
Not a bad profit for not investing any of your own money. Your job is to line up an architect to design the home, get a general contractor to build it and procure the construction loan. The owner’s job is to put up his property as collateral for the loan and, in doing so, make the agreed upon purchase price and the additional profit. Of course the more expensive the project, the more money that can be made. Imagine the profit in a multi-million dollar home still with no money out of pocket.
Banks are completely willing to do these loans when the property is free and clear because their loan will be less than 50% of the appraised value of the home when it is completed. Of course, if you are a general contractor, you can build the home yourself and make an additional general contracting fee. If you are a real estate broker, you can make an additional commission for listing and selling the property.