This is part seven of my real estate series which chronicles our adventures selling our house For Sale By Owner, using a rebate realtor to buy a teardown, and building a custom home in the DC metro area. This installment covers the steps for getting a contract on a teardown property.
So you’ve read teardowns 101 and you’re thinking you should jump in. But where to start? This post will give you an idea of how to get from thinking about doing that teardown all the way to making an offer.
Closing on our teardown lot was enough of an adventure that I’m going to cover it separately in Teardowns 103. If you’re reading for the personal real estate drama, you could skip to the Our Story sections under steps 4, 6 and 7.
photo by Classic Homes
Step 1: Retain a realtor.
Whether you choose a rebate realtor or a traditional realtor, you should explain to them your teardown hopes. You should also decide whether the realtor will represent you for the purchase of the teardown lot and the new construction, or just the teardown purchase.
We definitely wanted to go realtor free into the new construction process so that our builder would have more flexibility to pass discounts on to us without having to pay our realtor’s commission. We considered hiring a realtor as a private consultant for an hourly fee rather than hiring a commission realtor to represent us, but after talking to enough friends and reading online, we felt like even that wasn’t necessary.
Step 2: Get financed for a Construction-to-Permanent loan.
A “construction to perm” loan pays out in installments to cover the purchase of the lot, the demolition work, the new construction, and the paving. When the keys are turned over, it becomes your mortgage.
Before the great recession, you used to be able to get this kind of loan around here with like a photo ID and a note from your mom. No longer. With the uncertainty of the economy and the beating that the housing market has taken (less so here than most places), financial institutions have tightened their lending restrictions to the umpteenth degree.
What that means is you may need more cash for this type of loan than you would for a traditional mortgage. Some big national banks we talked to still offer construction to permanent loans. However, the big banks wanted 25-30% down plus an additional reserve of 2 years’ worth of mortgage payments. Some banks even require a cash reserve that covers all your debt payments (projected mortgage, school loans, car, etc.) for a year or more in addition to your downpayment. One bank in particular required proof of the equivalent of 60% of the loan value in cash before they would lend to you.
The trick is to talk to local lenders. The DC metro region didn’t tank as hard as other places and has been growing quite nicely especially this year. Moreover, tons of families and builders are doing teardowns, so the local banks are very familiar with this type of loan and not nearly as skittish. Which is to say, you can find places that will loan to you if you have 20% down plus another 6 months of mortgage payments in reserve–and pristine, stellar credit.
Step 3: Choose a builder.
- Talk to people who have built a home about their builders.
- Study potential models and think about how you want to live.
- Go to open houses.
- Call builders, meet with them and request pricing information.
We technically did not sign with a builder until after we were under contract on a lot. This was the wrong way to do it, and I would never advise anyone to do it that way. We started the process of choosing a builder over two years ago. I began by talking to people who had built new houses in the area. Special thanks to Alex Bates (who reads and comments here sometimes) and Jana Farrel who were my teardown mentors. I also spent Pinterest-scale hours of my life looking online at builders’ house plans. I went to many, many open houses. I called builders and started talking to them, though I refused to sign at the initial meeting, much to Stanley Martin’s displeasure. Then I had that magical, “This is the one!” experience walking into a model that was so perfect I cried three separate times. Even then, I didn’t sign. Maybe I should have. But I’ve read Wait. Or rather, I had heard the author sum it up at least 3 times on his book tour, so I delayed. We had narrowed it down to two builders and priced out models with both when we had to act lightening fast to put an offer on a lot.
My decision to wait to sign caused me excrutiating anguish later when we were trying to close on time. More on that in Teardowns 103. Suffice it to say, you should probably sign with a builder before you make an offer on a lot.
image by Classic Homes
Step 4: Choose a model. Choose structural and design options.
This step goes hand in hand with the previous one. When you sign a contract with a builder, you will be agreeing to a tentative price on a model. Most commonly, the initial contract contains only the structural options–the square footage type options–but leaves out the finish upgrades like the cabinets, flooring, countertops, trim and so forth. Builders generally will negotiate the price of the initial contract with you, but they usually do NOT want to show you how much the finish upgrades are going to cost until you are already under contract and they can charge you full price with no negotiation.
Builders make the highest margins on structural options, so generally they would be happiest to build everybody a big empty white box–acres of square footage with builder’s grade everything rather than anything smaller that includes high end finishes they have to pay subcontractors to put in.
I liked that our builder, Classic Homes, was willing to let me go through the design center making preliminary finish selections and to include them in the contract for our price negotiation.
I wonder whether I could have done better negotiating the price of the house if I hadn’t been completely pressed for time since I waited until after we had a contract on a lot to get into this negotiation. Since they seemed to have a strict 6% policy, I really doubt it. And yes, I sleep better at night telling myself they were never going to go further than 6% and I was lucky to get any movement at all. I’m going to keep on thinking that whether it’s true or not.
A friend did tell me that he and other builders try to gauge how much trouble you’re going to be to them when they give you a price. He told us of one case in which the builder thought the homeowner was going to be all sorts of high-maintenance and quibble-prone, so he charged him about $30,000 more for the house than he might someone else. Then, when when the homeowner turned out to be a breeze to work with, the builder wrote him a surprise $30,000 check at key transfer and explained the situation!
I don’t know how big of a jerk-tax I was charged, but I’m sure it was something. I’m a terribly nice person, I swear, but I definitely wanted customization.
photo by Classic Homes
Step 5: Retain a site engineer.
You’re going to need a site engineer to do a couple of things. After you are under contract on a lot, she will thoroughly research the lot by investigating easements, soil type, building restrictions and so forth to make sure you will be able to build what you want on it. This is called the a “feasibility study”. If your site engineer gives you the go ahead on the site, you should immediately ask her to prepare a grading plan. That grading tells your demolition and construction companies what they have to do. Demolition companies use the grading plan to give you an estimate on your site prep work. You MUST have at least a preliminary bid from both the demolition and constructions companies to provide the bank well before your closing date on your lot purchase so they can prepare the loan on time.
You may even need a site engineer to do an urgent “lot fit” drawing discussed below, so you definitely want to have your engineer at the ready. Often a builder can refer you to site engineers they commonly work with who have their model specs on hand.
Step 6: Start lot hunting.
Your builder or realtor will usually be able to give you guidance on what kind of lot you will need. As you know, I was working with a rebate realtor who only takes 1% and outsources the finding process almost entirely to the client. Consequently, I was the one in charge of finding a lot. We knew from talking to builders that in the areas of Vienna we were looking at, we would need a lot at least 4 times the size of our house’s footprint since the structure including paved driveway can only cover 25% of the total lot. Using model drawings of the homes of the top three builders we were interested in, we knew approximately what size lot we needed.
Commonly, different zones will have set-back requirements such as a stipulation that the structure must be 12 to 25 feet set back from the lot borders or street. The buildable area of the lot is called the “envelope”. Even if your lot has enough square footage, if it’s a wonky shape, the house may not fit within the housing envelope. If you have retained a site engineer, you can have her do a “lot fit” drawing for a couple hundred bucks to make sure your house will fit on a lot before you bother making an offer on it. You might still uncover something during the “feasibility study” (that’s the research your site engineer does on the lot during the first week after your offer is accepted) which may cause you to void the contract, but at least you know your model fits before you make an offer.
As you’re looking at lots, keep in mind that site prep will suck money from your building purse, so ideally you would like to find a) a flat lot that requires only minimal grading, b) a small house that will be quick and easy to tear down, c) no wells or weirdnesses that need to be covered or removed, and d) no water or other RPA (Resource Protection Area) restrictions. You found a huge, fabulous lot that’s just been sitting there because nobody wanted a little tiny creek in the back of the lot! Don’t get too excited. The restrictions around that teeny tiny waterway may be so stringent that the building “envelope” is no bigger than the 900 square foot Cape Cod that currently stands there.
Most builders around here say site prep runs $40k to $100k. The less site prep you need, the more money you can spend on the fancy finishes and square footage of the house.
photo by Classic Homes
The problem with looking for a teardown lot here in Vienna is there are over a dozen builders casing the place daily looking to build spec houses plus a slew of would-be teardown buyers like Kent and me. Competition is brutal. Even the builder we were leaning toward while we were looking admitted to having contracts with two other families who were looking for lots in Vienna just like us. The NERVE! Consequently, if a teardown lot has been on the market for 4 days without multiple offers, you know for sure there is something major wrong with it.
Kent and I made a list of features we wanted in a house and assigned them relative values. Then I started driving the streets up and down looking for teardown candidates, and both of us watched Redfin like hawks. We set email or text alerts to receive immediate notification from Redfin when something interesting came on the market. As soon as anything popped up, I got in the car and drove by to inspect it. I would also immediately call the listing agent to ask for a plat, (a scale drawing of the lot) and check the county website to verify the zoning of the lot and get the background scoop like previous sales.
After years of drive-by research, when we started seriously looking for a lot, I found one lot that was worth walking with my realtor. Unfortunately, I could hear the freeway from the house continually depressing the appreciation value of the property with its hum. A week later we had a lot fit drawing done for another which revealed we would have to shave 2 ft off the side of the house. Two feet doesn’t sound so bad, but that amounted to 350 sq ft off the whole house, so we abandoned that idea. And then suddenly magic happened!
A little background: Because competition over these teardown lots is so fierce, many of the people we know who have been able to get a lot before a builder nabbed it did so by employing non-traditional finding methods. Builders scoop teardown properties pre-market all the time (albeit not at the firesale prices of 2009-2010) so it can be done. Here I have to thank our friend Scott Murray, whose company Focal Point Homes builds the most gorgeous craftsman houses in McLean, for sitting down with us and explaining what he puts in the mass-mailing letters that get him teardown sales. (I believe he said his rate on converting letters to sales in about 1 in 600.)
Buyers can use non-traditional finding methods successfully as well. Two families we know approached the owners of rental properties and asked to buy those houses though they weren’t even on the market. Another friend wrote letters to every house on the street she wanted to live on and handed them out. Yet another family knocked door-to-door in a neighborhood they liked with their cute kids in tow asking if anyone would be interested in selling.
The crazy thing is, all of those people got their houses through those non-traditional finding methods. My realtor Khalil advised against such shenanigans saying that over 99% of houses sold are sold on market, that is, by listing on the MLS. You would expect that statistic though since 99% of buyers don’t employ any non-traditional methods.
I would be far more interested in finding out what percentage of people employing non-traditional methods like door knocking and mass mailings succeed in getting a house that way. In our experience, it doesn’t work for everyone. At least one family I talked to had tried sending out hundreds of postcards, but ended up buying a lot from their builder (at a mark-up) because they just didn’t get any serious responses. Oh, and then there’s us.
Unfortunately for us, we came a few years late to this party, so these non-traditional methods were standard fare. By now, every plausible teardown in Vienna has received at least half a dozen letters from builders offering to pay cash should they decide to sell their home, and many, many homeowners have even gotten the handwritten letters or door-knocking treatment from families as well.
Still, when I found a particular street in Vienna, I had to try something. It was just the perfect street that met all our criteria–and the name even seemed to go with the twins’ names! I’ll call the street Magic St. So I printed up a letter with a picture of my kids on it, dressed them all up cute and went to walk Magic St. knocking doors.
Of course, Peppers ruined the whole effect by wailing in the stroller the whole time like a demon from the netherworld. We barely got through 2 houses before I gave up and tucked the notes in people’s door jambs. There is nothing less appealing than a screaming toddler. Perhaps I should have left him in front of a great teardown property with a sign that said, “I won’t come get him until you sell me your house.” I’m joking of course, but it was pretty bad. And I was pretty irritated.
I waited a week, printed up a new letter with an even cuter picture and mailed it to the owners of record (which I found on the county website) of each of the houses on Magic St. Of the ten houses I sent letters to, I heard back from 4 people.
The first lady to call was a renter on Magic St. who thought my twins were super cute. She wasn’t going anywhere and didn’t own the house anyway, but she wanted to give me the scoop on the neighborhood and tell me who might be most likely to sell. She was awesome, and I really enjoyed talking to her.
The second lady to call was selling her house! I had actually spoken to her already on one of my drives down the street. She remembered me and called me as soon as she listed her house. I got all excited thinking this was it! She was asking a pretty high price on the house though and working with a realtor. I very well may have bought her house if her realtor hadn’t been a total d-bag. I talked about him in the “Can’t you just buy a house without a realtor at all?” section of this post.
The third homeowner to call left a nasty gram on my voice mail which I saved and transcribed verbatim for your enjoyment. The homeowner was:
not interested in selling, and the little bit of money that you want to give me, I would put that in the trash can. If you give me $900,000 we might would talk, not for the little trash that you’ve given me. Thank you, good bye.
I had the self-control to call back immediately, say thank you for the call, apologize for the offense, and hope that “If we’re ever neighbors some day, there will be no hard feelings.” To which the person replied, “You’re welcome.”
The fourth person responded by email to say basically that my family was cute and that she’d put my letter on her pile of “other letters [she’d] received” and notify me if she decided to sell the property she was currently renting out on Magic St..
So I didn’t get a house by knocking doors or sending letters, but the exercise was not in vain as you will find out shortly.
photo by Classic Homes
Step 7: Make an offer.
If you have your pre-approval letter and your realtor, and you find the perfect lot, it’s time to write an offer. To write a winning offer on a teardown around here, the offer needs to be “clean”. That means no appraisal contingency, no home inspection, no termite inspection, no sale of buyer’s current home contingency, etc. The lender will still order an appraisal when they are determining whether or not to finance the purchase, but if the total value of the appraisal (for the entire new construction, not the teardown house) is less than the loan, you have to make up the difference out of pocket rather than trying to negotiate a lower price with the teardown seller.
Of course, we had to have a financing contingency unlike builders who usually offer cash. The other thing we had to write in was a “feasibility study”. This allows the buyer to have a site engineer study the lot and make sure the buyer can build the structure they want to. If within the study period (typically 7-10 days), the buyer finds the lot unsuitable, then she can void the contract. Sometimes builders can do their own version of a feasibility study before they even make the offer, so they won’t include that contingency making their offer even “cleaner”. I would never advise a buyer to skip the feasibility contingency though. It’s just too dangerous.
To recap, a clean offer means:
- No appraisal contingency
- No home inspection contingency
- No termite inspection
- No financing contingeny (if you can possibly pay cash instead of getting a mortgage)
- No feasibility study (I would advise all buyers to put the feasibility study in even if it means losing a bidding war.)
- No sale-of-home contingency
In the middle of our move to the rental, while my kids were playing at a friend’s house, Kent was in New Jersey for work, and I was hauling boxes to the rental, I got an email alert on a property that had been posted for sale on Magic Street. I knew instantly which lot it was. Huge, rectagular and flat with a tiny house in terrible repair! The perfect house for a teardown!
I instantly called and then emailed my realtor with the subject line “We want to put an offer on Magic St. 1234”. Since any nice teardown that lists is going to attract multiple builder offers of all cash and no contingencies, we wanted to make our offer as “clean” as possible. That is why we had sold our house before making any offers. Or had we? You see, we hadn’t actually closed on the sale of our townhouse and wouldn’t for another 4 days! We definitely did not want to put in a sale-of-home contingency since we already would have a financing contingency cash buyers do not. Our realtor advised us to leave out the sale-of-home contingency since we were putting in a feasibility study. If the sale of the townhouse fell through, we could still pull out during the study period. Phew! Squeaked that in.
I told the realtor to call the listing agent and prepare the offer. All of this took place while I was literally hauling boxes into the rental holding the phone to my ear with my shoulder. When Kent got home that night, I told him he had made an offer on a house. That was a little premature, since the agent was still drafting the offer, but it was very nearly true.
My rebate realtor Khalil really earned his money on this one. He sat down with the listing agent at Panera Bread Co., and hammered out what our offer would need to look like to be accepted. He found out a number of things. First, the place had been prematurely listed by accident and the listing had been taken down immediately. I only saw the listing because it pinged the email alert I had set.
Second, Khalil found out the sellers wanted to move quickly and would possibly take the first full price offer they got. Kent and I really wanted the property so we wondered if we shouldn’t include an escalation clause that went all the way up to our maximum willingness to pay. Khalil advised against it. He had established enough of a relationship with the realtor that he felt confident he would be notified and given a chance to outbid any other offers. That advise saved us at least $30k.
Khalil also found out that the sellers would prefer to sell to a family rather than a builder, so he advised us to write a personal letter to include with our offer. Cue the usefulness of my previous two letters which this seller had not ever received! I was able to put together this letter immediately:
June 25, 2013 Dear Mr. _____,
We are so excited for the opportunity to buy your home on Magic St. We want to settle down in the neighborhood to raise our three young children. My husband works in Bethesda, and I am an opera singer, though these days I mostly stay at home while the kids are little.
We have been hoping to find a place specifically on your street so that our 2-year-old twin boys, Salty and Peppers could grow up on Magic Street. Salty is the thinker, and Peppers the athlete, and between the two of them, they really need a bigger backyard than our current town house has.
We have been looking for a place for our family’s home in Vienna ever since we found out we were having twins. Now more than two years later, when we saw your listing go up this morning, it felt like a blessing.
We love Vienna and the neighborhood. We can already picture our little guys running around in the wonderful, big back yard. If you accept our offer, you’ll be making one family’s cherished dream come true!
All the best to you and yours.
Sincerely, Heather Craw and Kent Kemeny (plus Fluffy, Salty, and Peppers)
Now I don’t blame you if you threw up a little in your mouth reading that, but it still makes me a little teary because it was so sincere and heartfelt for us.
Khalil drew up the offer so we could send it in that very night, but when I reviewed it before signing, I saw it had nine (9) mistakes in it. Some were little things, but others were huge like including both an appraisal and a home inspection contingency as well as a jurisdictional addendum which applies to HoA’s which this lot did not have. Yikes! The flaws in the contract made us wonder if we were rushing things so badly we were barrelling headlong into a disaster, so we decided to sleep on it. The next morning we were sure we wanted to proceed. I asked Khalil to fix all the mistakes which he did, proofread it again, signed and set it over.
Then we waited all day. Nothing. That afternoon the listing went live again and our hearts sank. Everything looked like they had decided to wait for a bidding war. We asked Khalil if that was the case, but he said he thought they were just ironing out some ownership complications on the other side.
The next morning we had tried to prepare ourselves for the worst, but Khalil called to say they had signed back a counter offer that he was going to pick up. When he had it in hand, he said there was only one change: the seller wanted to use a different title agency! That’s it? Accepting our offer? No way!
Khalil took it back to the office to send it to us to docu-sign. He said we needed to sign it immediately so that they would stop entertaining other offers and requests to walk the lot. Predictably, they had already gotten a ton of interest and had received at least one other offer $25k higher than ours. Fortunately for us, the higher offer had a sale-of-home contingency, but I still felt we hadn’t a moment to lose.
Big problem: I was right in the middle of moving. I didn’t have a computer or internet access set up in the rental or the townhouse! This is when several of you received urgent phone messages from me begging to borrow your computer. This is when Jenny McArthur of the awesome birthday cake let me come to her house to compulsively refresh my gmail account at her computer until the contract came through. I signed it and did a happy dance! We had a contract on a lot. And not just any lot, a seriously amazing lot on my Magic St. It seemed too good to be true.
And there were many, many times in the next 35 days that I really thought it was all going to come tumbling down. (See next installment.)
Fast forward 34 days. When we finally met the seller on the day of closing (there were techinically two sellers who were brothers-in-law: one who was clearly in charge of the sale and who met with us for the final walk-thru, and the other who had been occupying the place), he immediately took my hand and said, “I loved your letter. Loved that letter.” He mentioned the letter twice more during the walk-thru. I don’t think we would have gotten the house without that letter.
But I’m getting ahead of myself. There is still a feast of meat on the real estate drama bones between contract and closing on this sale. But for that you will have to wait for Teardowns 103.
Photo by Classic Homes