We are excited about the progress of construction and wish to share this good news with our investors.
- Crews have completed $223,986 in construction out of a total construction budget of $538,459 on properties closed to date.
- There is another ~$300,000 construction budget for deals we have in escrow.
- This puts us about 41% through existing job sites and 26% through the total construction budget for both closed and pending properties.
This week has been slow as the crews were given the opportunity to return to their families for Thanksgiving, but most are returning this weekend to start strong again this coming week.
4 reasons why we have been re-sequencing construction.
We have spent more than 100 hours recently to reorganize labor sequencing to maximize return on investment. We thought we would share with you our thinking on four key issues that have driven some of these logistical changes.
Tis’ the season
As Californians, we are accustomed to fire and earthquakes, but Texas has its own set of challenges. Hailstorms, dropping temperatures, and other factors cause November through March to be a slow time for Houston real estate. In general, the holidays are a good time to fix the homes but not a good time to sell them. However, some homes are more subject to this seasonal slowdown than others, depending on price point, neighborhood inventory and other factors. As a result, we have prioritized the rehabilitation of homes which have a greater chance to sell in the slow season even if the Fund closed these homes more recently than other homes.
Rent versus flip quality.
As you may remember, we anticipated many more properties to be rentals than flips when we began putting them in contract. The idea was to bring the houses to the same quality standards that existed pre-Harvey, rent them out for 6-24 months, then determine if further upgrades would be appropriate to maximize the sales value of the home. However, as we have become more bullish about the prospect of selling rehabbed homes shortly after rehab, we are upgrading some “fit and finish” (cabinet finishes, lighting, plumbing fixtures, etc) aspects of these homes. We have walked the job-sites of our first three closed homes to adjust the construction scope and budget to maximize exit price.
Time is NOT necessarily of the essence.
We imported much of our labor pool from California where wages are higher than the standard rates in Texas. And, thanks to Harvey, the local labor is temporarily at absurd prices we refuse to pay. That means we are paying more for rehab jobs than a typical homeowner would have paid pre-Harvey, but much less than other owners who are using local labor. However, we see the first signs of a shift. We are observing that as the volume of flooded homes entering the market diminishes, local labor demand and pricing is also starting to decrease. We have local contractors beginning to call our signs to seek work, a clear sign that cheaper labor is on the horizon. This dynamic is challenging us to tack away from the usual “fix and flip” model, which is to scale up the construction and knock out every house as soon as possible. Instead, we are sequencing construction in the bet that, especially for some of the pricey rehab line items, we will be able to take advantage of this anticipated reduction in local labor rates to deliver more value to our investors.
Because flooding was limited to certain areas of Houston, some of the flooded houses we bought are in close proximity to other homes we bought, sometimes on the same exact street. Because each resale creates a comparable which impacts neighborhood values, we have determined it is in our best interest to complete and sell the ‘nicer’ home first to enhance values of our other Fund assets on that street or in that neighborhood. We have re-arranged the construction schedules to reflect this new priority.
At the personal expense of the managers (not the Fund), we had our truck wrapped and marketing signs installed in front of each Fund house under construction. Last week, a neighbor saw our sign, called, and as a result, we secured a deal which promises to be one of our best so far – our price is $250,000 UNDER the Broker Price Opinion for the property. Getting deals does not get any more organic than that!
As always, we look forward to hearing from any of our investors who have any comments, concerns or questions.