Real Estate Real Fast EP6 (with Greg Naughton, 22+ years experience in construction and 10 years experience as an investor and builder)

Episode overview

New construction builds are becoming more challenging in the current real estate market. With shortages, shifting demand, and more, there’s a lot to consider when building new homes.

What can you do to have better margins when it’s time to sell a new house? How can you better prepare for any cost and demand changes?

And if you’re feeling tight on budget, how do you balance cost vs quality?

We’ll dive into how newer builders and investors can navigate the changing market with Greg Naughton, Owner of Magnets REI with 22+ years experience in construction and 10 years experience as an investor and builder.

Episode highlights

• What are the primary challenges of building new construction in Austin
• How long does the process to build a new home in Austin typically take after you acquire land
• Here’s what you should be doing as an investor or builder in the current real estate market
• What factors do you need to consider when balancing cost vs quality while building new construction
• How to approach marketing new construction to get it sold
• What should investors and builders focus on in new construction to appeal to buyers
• What is the most challenging new construction Greg has faced in 10 years as a builder
• What are some ways new builders can secure their construction sites against theft or vandalism
• Why the acquisition part is most important to margins as a builder and how you should strategize acquisitions
• Why home size can make a big difference on profits for new builds
• What Greg is doing now as an investor and builder compared to his strategy when he first started 10 years ago
• How Greg approaches and thinks about partner deals

Episode links:

• Follow ListingSpark on LinkedIn, Twitter, Instagram, Facebook, and YouTube
• Connect with Aaron Jistel on LinkedIn
• Connect with Greg Naughton on LinkedIn

Key takeaways

[00:03:46] What are the primary challenges of building new construction in Austin

In Austin, the biggest challenge for new construction builders is dealing with the land development process with the city of Austin. Even though there have been challenges with COVID, shutdowns, shortages, reduction in workforce, etc., the land process with the city is still the biggest challenge.

“First of all, there’s the whole COVID era the last two years, which has added a level of challenges above and beyond what you would normally run into and face—shutdowns, factories, reduction in workforce, and so on.

But you know, I’d say all of the challenges here, could be rolled up into one major category. And that’s navigating the process, the build process, the land development process with the city of Austin.”

[00:05:14] How long does the process to build a new home in Austin typically take after you acquire land

The timeline for new builds can vary depending on the time it takes to acquire permits. To have the right expectations, go into new builds thinking it will take the process about one year. The two biggest hurdles are waiting for the demo permit and waiting for the building permit.

“Just trying to get a permit with the city can take anywhere from a few weeks to a few months. So if you’re buying a property or you’re going to scrape it, first, you have to go through a demo permit process. Once that’s acquired and you get past that then you submit for your building permits and it’s another wait time.

So I would say the normal expectation right now, I wouldn’t plan on anything less than a year. From start to finish. If in that scenario where you’re buying a property and you’re gonna have to demo.”

[00:07:14] Here’s what you should be doing as an investor or builder in the current real estate market

Even if you’re a seasoned investor or builder, make sure you have a mentor. Things change in the real estate industry all the time including building code. You need to have strong mentors in your network, people like good architects, good engineers to help you keep up with constant changes.

“My recommendation would be to get a mentor, which is what I did in the beginning, even though I had the modeling experience. I hooked up with a couple of local builders and just kinda shadowed them around and got some of the inside baseball tricks with the city. Now, that’s an ever evolving thing, so it’s hard to keep up.

Even for seasoned builders, it’s hard to keep up with the changes that happen with the city. The code is old, it’s way overdue for a rewrite. You’ve probably seen some of that in the politics in the public sector—Code next. I’m sure you’ve heard of. So what we’ve got is a really old code that’s very difficult to navigate.

Takes a lot of expertise and you need to have, you know, good architects to work with good engineers, people that live inside of that, that code and the city’s processes on a daily basis that can help you.”

[00:09:27] What factors do you need to consider when balancing cost vs quality while building new construction

Even if you’re trying to balance costs, you never want to cut corners. Focus on always delivering a quality product that you can sell. In terms of upgrades or high-end finishes, it depends on where you are building. You should look at the market you are building in and see what buyers are looking for there.

“I’m a firm believer in a quality product. I would never sacrifice that. So I would tend to stick with the high end finishes. Knowing what your buyer pool is looking for is important.

On the east side [of Austin], a lot of our homes get sold to younger people in the technology market. So, you know, having good wifi connectivity, you know,something simple like an outlet for your electric car is important. There’s a lot of things that I do that I’m not going to change.”

[00:13:16] How to approach marketing new construction to get it sold

Greg says that marketing a home before it’s built is a matter of preference but he likes to wait until the product is almost finished or finished. The issue with pre-marketing a home is that buyers may want to make a lot of changes. They don’t really know the difficulty of making changes and other external factors which could result in a lot of disconnection for buyers.

“That’s a matter of preference. We mostly wait until the product is finished. We have on occasion done some pre-marketing before it’s quite complete.

But it’s mostly complete before we do. It’s hard for a lot of people to see the finished product and if you show them something that’s incomplete, it might raise some questions. That’s a double edged sword as well with bringing a client on at the end of a project and having to manage the changes.

The wish list that all of sudden comes out of the blue is a little bit different than when you started.”

[00:17:24] What should investors and builders focus on in new construction to appeal to buyers

There are no absolutes when it comes to what buyers want. Each buyer is going to be different. Some of the things buyers today are looking for are home office spaces, low maintenance yards, energy efficient homes, and smart home appliances among other things.

“That’s a very personal decision for a lot of people. When you get to be a little longer in the tooth like I am, you learn along the way what you like and what you don’t like.

And so it’s easier to come up with the things that you wanna put in your own house. Good functional spaces are important to have just in general. Nowadays a home office is almost a requirement. Low maintenance, exterior items are always good. Nobody wants to spend their whole life out in their yard, fixing it up, keeping it maintained.

Good energy efficiency is important. That’s not a very sexy thing to talk about but it can make a big difference throughout the time that you live in your home. So good insulation, good quality windows are really important.”

[00:20:24] What is the most challenging new construction Greg has faced in 10 years as a builder

One of the biggest challenges Greg had to face for one of his construction projects was arson. The project was fully framed and one of the houses burned to the ground. After dealing with insurance, it ended up setting them back three months.

“I have an East Austin Infill project with two houses. We bought that property in June of last year. Went through the demo process and finally got a building permit in February. So that’s six or seven months into it just to get to that point.

We were making good progress and unfortunately on July 11th, I had a fire at my site and both of my houses were fully framed and one of ’em burned to the ground.So that was a major setback to say the least. Going through fire and insurance investigations and whatnot. We have fully recovered now, but it’s set us back for three months.”

[00:22:39] What are some ways new builders can secure their construction sites against theft or vandalism

Security has become a more difficult issue for new builders over the last few years. If you’re a builder, consider adding in security cameras and a fence. Because the home is usually just sitting open, it makes it ripe for potential theft or vandalism.

“We have and that’s always been a problem. It seems to have ramped up here in the last year or so. Because of that, we put construction, temporary construction fences around all of our projects and we do use the security cameras. You know, that can help. At least it can maybe catch a license plate,but it certainly helped in this case with the fire because it caught the face of the person.

I would do everything you can to secure your site. Cause if it’s just left wide open, that’s a crime of opportunity waiting to happen.”

[00:24:31] Why the acquisition part is most important to margins as a builder and how you should strategize acquisitions

It’s tough to predict what homes will sell for after you finish building a new property. That’s why the price you buy at is most important. When the market was hot, it was easy to almost guarantee a return no matter what you bought. Now, it’s even more important to plan contingencies into your purchase because what you pay has a big impact on your margins.

“I do tend to be  a little conservative. You never know what’s gonna come up during the life cycle of a build project or any, even a remodel/fix and flip. So I like to say you can never see in a fix and flip. You can never see what’s under the floor, behind the walls. You wanna build in some contingencies, certainly into your projections to allow for those unknowns.

You make money on the buy so over the last few years or the last eight years, whatever you paid, it didn’t matter because the price just kept going up. But we we’re entering a new era now. Things are leveling off at best.”

[00:30:44] Why home size can make a big difference on profits for new builds

When building a new home, you need to pay attention to what the average home size is in the neighborhood. If you build a home that’s much bigger or much smaller than the average, it could sit on the market longer because that might not be what buyers in the area are looking for.

“The size of the house can make a big difference on what you’re able to bring when you’re ready to sell it. We’ve overbuilt in the past when we didn’t need to. We found out really there was a sweet spot, maybe somewhere between, you know, 16,00-1800 square feet where we built a house that was 2200 and it really didn’t need to be that big. And for that reason, it sat a little longer than we wanted it to.”

[00:33:43] What Greg is doing now as an investor and builder compared to his strategy when he first started 10 years ago

Greg has a more extensive process when selecting sites for new builds than when he started. He pays more attention to the buildable area, what’s sitting on the lot, and what’s in the neighborhood. He also tries to understand what limitations might exist on the property. Having a strong process can save you frustrations and dollars down the road.

“I maybe do a little bit more planning and I’m a little more selective on the property that I buy. I pay attention to things like ‘What are the trees that are on the site? How large are those trees? How many trees? What’s the buildable area?’

‘What’s the access in and out of the neighborhood and onto that specific lot. What are the easements on the lot? What are the limitations?’

So there’s a lot of things you can look at early on in the planning stages that might save you a lot of headaches and frustrations as you go through the process.”

[00:36:19] How Greg approaches and thinks about partner deals

Greg will occasionally do partner deals but is selective about the deals he chooses. If you want to do more partner deals, try attending more networking events. That will increase your odds of finding a right partner for any partner deals you want to do.

“I think that’s some of the advice that we always give to young investors—just get out there, find events. It was tough during COVID but if you go on meetup.com and just find investment meetups out there and start networking and, and meeting people like Greg and other people that have been in the business for a long time. If you’ve got a deal, somebody out there will fund it.

Somebody out there will probably partner with you. Somebody will find a way to make that deal work. That’s the hardest part really is finding the deal. But everything else, if it’s a good enough deal, everything else tends to fall in place.”